Reaching the Unbanked: Mobile Banking and Microfinance
Mobile or “branchless” banking (m-banking) is the delivery of financial services outside conventional bank branches through mobile phones and nonbank retail agents. M-banking technologies include smart cards and mobile phones that can conduct financial transactions. Although m-banking has only been around for about ten years, it has developed rapidly as a service that allows the “unbanked” – low-income individuals who do not have access to physical bank branches – to access financial services with their mobile devices. At present there are 30 million mobile money users worldwide. According to the Global 2012 Global Mobile Money Adoption Survey, there are more mobile money accounts than regular bank accounts in Kenya, Madagascar, Tanzania, and Uganda, and there more mobile money agent outlets than conventional bank branches in 28 countries. Given that 2.5 billion people are unbanked but 75 percent of the world’s population owns a cellphone, there are promising opportunities for synergies between mobile banking and microfinance.
The earliest m-banking services were developed to facilitate the financial transactions of existing bank customers in high-income countries. Today, m-banking is prominent in the developing world as a tool that allows banks to both better serve existing customers and reach out to new ones who live in rural areas where the nearest bank branch may be hundreds of miles away. The mobile money industry is rapidly expanding in developing countries: in 2001, there was one live mobile money service for the unbanked; in 2012 there were 150 live services. M-banking services run the gamut from money transfers to conversion transactions to bill and bulk payment services. Many m-banking platforms also provide savings and credit services at a banking agent, usually a retail or postal outlet. Current data show that customers use mobile money services for P2P transfers, bill payments, merchant payments, international remittances, and micro-insurance premiums. The vast majority of the value transacted on mobile money platforms is P2P transfers.
Many microfinance institutions have adopted m-banking platforms as an alternative delivery channel to reduce costs, facilitate greater outreach to rural areas, and increase existing customer convenience. The financial services provided by MFIs that offer m-banking include loan repayment, voluntary savings deposits, and checking account balances. In countries with an existing mobile money network, m-banking gives microfinance clients greater flexibility to manage their payments and deposits, allowing them to save time and money and experience greater financial security. In addition to improving existing customer convenience, m-banking has contributed to greater financial inclusion in the developing world, especially among women, who disproportionately lack formal bank accounts yet are largely responsible for managing family finances.
Because high operational expenses and limited capacity continue to limit the scale of MFIs, mobile banking offers an obvious way to offer microfinance services more cheaply and efficiently. A recent Focus Note by CGAP outlines some of the opportunities for MFIs who wish to take advantage of mobile banking. MFIs can adopt m-banking services to facilitate loan repayments and savings deposits. It is also possible for MFIs to serve as agents on behalf of a bank or mobile network operator; this provides MFIs with opportunities for learning about the mobile money industry without incurring high investment costs. Absent an existing m-banking network, MFIs may take advantage of mobile phone penetration to have their clients use phones for non-cash purposes. A survey of MFIs that plan to launch m-banking services revealed that these MFIs seek to use mobile banking to increase operational efficiency by reducing costs of service delivery as well as provide a channel to cross-sell their other products. Among MFIs surveyed that currently offer m-banking, respondents noted that loan repayments was the most widely used financial service, followed by voluntary savings deposits.
While there are clearly many opportunities for overlap between microfinance and mobile banking, significant challenges limit the degree to which MFIs can adopt m-banking services. In countries where an m-banking infrastructure does not already exist, it is very costly and time-consuming for MFIs to set up a mobile money platform from scratch. Most MFIs lack the funds and technical expertise to do so, and mobile network operators are usually only willing to partner with financial institutions that have a large customer base so that they can reach scale. It is also difficult to launch and implement a mobile banking channel without first understanding the needs and behaviors of clients that use mobile money.
Finally, in part because mobile banking is growing so quickly, non-bank financial service providers like mobile phone operators are not regulated as safely as traditional banks. At the moment, m-banking clients that use retail agents for cash-in/cash-out transactions are vulnerable to money laundering and exploitation. There is increasing concern among policymakers about the need for the m-banking regulatory environment to strike the right balance between keeping administrative costs low for agents and protecting consumers’ savings. /CZ