Trends

Can Mobile Banking Save Emerging Markets?

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Mobile banking has been a blessing to anyone who values quick, painless money management. Here in the United States, the ability to check account balances and transfer money via mobile phone has reduced the need to bank at physical branches (never a fun task), or even sit in front of a computer. However, in emerging economies, mobile banking means something far more profound. While mobile banking is chiefly a matter of convenience in the developed world, for emerging economies it is increasingly the difference between banking or not banking at all. In our previous article on the future of mobile finance, Mint discovered that 36% of the people in India, for instance, “…earn less than Rs 5,000 a month [and] own a mobile phone, but do not have a bank account.”

Similar situations are found in other developing markets. TMCNet predicted in November 2008 that “…will grow at nearly 7 percent annually through 2013 and will exceed $200 billion by that time” and furthermore that “…the growth will be driven by emerging markets in nations such as Brazil, Russia, India and China, and on the continent of Africa.” Indeed, TMCNet continues, “…collectively, emerging markets will compose about 60 percent of the market share in 2013.” Gavin Krugel, director of mobile banking strategy at the GSM Association, goes a step further, claiming that, “…one billion consumers in the world have a mobile phone but no access to a bank account.” What is lacking in these countries are not mobile phones, but – until recently – mobile banking technology tailored to their unique needs and circumstances. Luckily, the mobile banking scene in developing markets is rapidly beginning to take shape.

Today, we’ll take a closer look at what mobile banking (in its advancing state) means for the developed world, both in the short term and down the road.

Helping The Poor

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One promising aspects of mobile banking is its potential to help the poor in developing nations. As noted earlier, the impoverished state of many of these nations is such that the average citizen has little or no access to real banking services. India, with its 36% of citizens earning less than Rs 5,000 a month and lacking a bank account, offers one example, but it is hardly the only example. GlobalEnvision.com cites The Consultative Group to Assist the Poor, which estimates that, “…80 percent of people in least developed countries are unbanked.” The Jakarta Globe makes mention of people in, “…rural and remote areas” of Afghanistan, Asia and Africa who can now “…get paid, send remittances or settle their bills” using mobile banking technology.

Thanks to such services, it has never been easier for citizens of an impoverished nation to receive money from friends or relatives in developed countries (which are often frequent transactions among these parties.) Even bill paying has long been cumbersome chore in many emerging markets. While those in the U.S. can pay with one click of a mouse (or even one tap on an iPhone screen), the Jakarta Globe reports a far more involved process in parts of Africa, where Fundamo regional executive Reg Stewart says, “…it takes one day to pay one bill” because Africans must, “…physically go to the bank, then you must queue, a long queue.”

Similar stories abound in just about every emerging market one can name. Simple money management tasks that are routinely taken for granted in the developed world often require painstaking effort elsewhere. Needless to say, such burdens make it difficult for the poor to participate in the economy or improve their own prospects in any meaningful way. Mobile banking technology has the potential to be trans-formative in this regard by expanding the sphere of opportunity of anyone who uses it.

Stronger Economic Growth

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The spread of mobile banking in developing countries has the potential to be the proverbial rising tide that lifts all boats. GlobalEnvision goes on to quote Jeremy Leach of FinMark Trust, who claims, “…what we’re finding from the evidence from economists is that actually greater access to financial services improves economic growth.” Nor is it at all difficult to understand why this would be so. It only stands to reason that when thousands (indeed, sometimes millions) of a nation’s citizens can only participate in the economy with physical currency, it will be difficult for the broader economy of that nation to grow with any regularity. In fact, this is a central focus of Hernando de Soto’s eye-opening book The Mystery of Capital.

The main reason, “…why capitalism triumphs in the west and fails everywhere else”, according to de Soto, is not corruption, insufficient compassion from developed countries or lack of entrepreneurship in developing ones. Far from it, as de Soto observes “…the inhabitants of these countries possess talent, enthusiasm and an astonishing ability to wring a profit out of practically nothing.” Astonishingly, de Soto states, “…if the U.S. hiked its foreign aid budget to the level recommended by the U.N. – 0.7% of national income – it would take more than 150 years to transfer to the world’s poor resources equal to those they already possess.” Rather, the missing link in many developing lands is a clearly defined property rights system and financial infrastructure. Lacking such a system, individuals cannot easily get loans by pledging their homes as collateral, for instance (since their ownership and creditworthiness are not officially recorded.) They are therefore left to rely on less advantageous sources of borrowing or, more often, simply not borrowing at all.

While mobile banking alone cannot create the, “…formal, unified property system” de Soto argues is essential to lasting prosperity, it is a bold step in the right direction. As ForeignPolicy.com explains, “…now, anyone with access to a cell phone has a place to keep his or her savings without needing a traditional bank account.” If a nation’s citizens can receive payments from remote senders, take out loans, and build a credit history using little more than the mobile phones they already have, there will be far less standing in the way of their playing larger economic roles.

Reduced Corruption

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While corruption is not the sole cause of poverty in emerging markets, it is undoubtedly a large one. Interestingly, however, mobile banking has already displayed its potential to reduce corruption in the nations that adopt its use. The Jakarta Globe relayed a hopeful anecdote from Afghanistan, whose national police are paying its officers using services from Roshan as part of a test to limit corruption. It works as follows. Every month, Jakarta Globe reports, “…officers receive a text message in the language they prefer informing them that they have received their salaries.” Because, “…a lot of them are illiterate and cannot read”, voice mail alerts are also dispensed containing the same information. Once a text or voice confirmation has been received, officers are then able to collect their pay from an authorized Roshan agent. But the benefit is not simply, as Jakarta Globe says, “…that police officers don’t have to carry cash anymore” and can now “…send their money home, buy items, and take hwatever cash they want from an agent, or to store for the future.”

What the Roshan system has done is help ensure that officers who were being scammed out of their full salary get all the money they were promised. According to Zahir Jhoja (Roshan’s head of mobile commerce), corruption in officer pay was substantial and widespread, with many officers reporting being “…very surprised that they earn so much money.” Prior to Roshan, when payments were made in cash and nothing was documented, the very same officers, “…were receiving 25 to 30 percent less” every week, according to Jhoja.

The implications are clear. Much of the corruption in the developing world persists because of manual payment processes run by corrupt people. Such a system opens the door to bribery and all manner of dishonesty and fraud. Automated mobile systems like Roshan’s, however, offer streamlining that makes it more difficult for unscrupulous individuals to game the system.

Recap

To recap, we have learned that mobile banking has much to offer the world’s emerging markets. Chiefly, the ability to tie a bank account, investment portfolio or credit report to a mobile phone empowers poor people (many of whom have never participated in a formal banking system.) Consequently, these people are better positioned than ever before to increase their standards of living via easier access to debt financing and other financial services. Finally, mobile banking is displaying the early potential to discourage certain types of corruption that are rampant in developing nations. All told, there is much to look forward to with respect to mobile banking technology in the world’s emerging markets.