M-banking

Extending financial services to poor people

For many people across the developing world, storing or sending small sums of money is economically impractical. This is due to the high cost and inaccessibility of banks and formal financial services. Recently, however, telecommunications providers, banks, and other companies have begun offering a variety of financial services via a basic mobile phone handset.

Many are optimistic that these mobile banking or 'm-banking' systems will lower the cost of financial services to millions of poor mobile phone users.

M-banking systems offer three general capabilities. Users can:

• convert cash in and out of 'stored value' accounts linked to their mobile phone
• use this stored value to pay for goods and services
• transfer stored value between their account and other people's accounts.

Unlike simple airtime transfer features, m-banking systems support transfers of actual currencies. This means a person can walk into an m-banking location, 'cash in' as if he or she were buying airtime for a pre-paid mobile account, and then transfer that money anytime – often via text message – to merchants, utility providers, or other individuals.

M-banking reduces the need to carry cash, or to travel or wait in line to pay bills. It can guard against theft, replace costly bank cheques and increase the speed and reliability of transactions. In addition, people use m-banking services to send remittances home, quickly and inexpensively.

Some of the more successful m-banking initiatives in developing countries are in South Africa (WIZZIT), the Philippines (Globe), and Kenya (M-PESA). Each has a different set of actors and services. For example, some countries' laws require stored value accounts to be managed by a registered bank, which requires a bank partner. In other cases, no bank is involved.

The systems are not yet found in all countries but their take-up where they are available has been impressive. Some ongoing issues will impact how the services evolve:

• Providers generally must offer physical presence. The systems require points of access throughout the country with cash-in and cash-out facilities, and merchants need to be motivated to accept m-payments.
• The regulatory environment is complex and varies from country to country. For example, important money-laundering and anti-terrorism laws constrain what services can be offered.
• Most systems currently offer only stored value; credit features are rare. However, microcredit institutions may be able to use m-banking systems to improve their operations.
• Literacy and language barriers may prevent some people from using m-banking systems.
• Shared handsets complicate issues of security and account ownership.

The elegance of transactions via handsets and text messages hides the services' complex organisational and technical capabilities. However, it is this simplicity and affordability that is likely to make m-banking a valuable service for poor people.

There are many more mobile phone users than bank account holders in the world. If m-banking can continue to bring financial services to people who currently do not use them (the 'unbanked'), it will be more than a convenience – it will be an important new way for poor people to control their finances and their livelihoods.

Jonathan Donner
Technology for Emerging Markets Group, Microsoft Research India, 196/36 2nd Main, Sadashivnagar, Bangalore, India 560-080
jdonner@microsoft.com

See also

Micro-payment Systems and their Application to Mobile Networks, infoDEV: Washington, DC, 2006 (PDF)
http://infodev.org/files/
3014_file_infoDev.Report_m_Commerce_January.2006.pdf

Mobile Phone Banking and Low-Income Customers: Evidence from South Africa, CGAP/UNF: Washington, DC, by Gautam Ivatury and Mark Pickens, 2006 (PDF)
www.cgap.org/publications/mobilephonebanking.pdf

The Enabling Environment for Mobile Banking in Africa, DFID: London, by David Porteous, 2006 (PDF)
www.bankablefrontier.com/assets/ee.mobil.banking.report.v3.1.pdf

The Transformational Potential of M-Transactions, Policy Paper Series Number 6, July 2007, Vodafone, Nokia, and Nokia Siemens Networks: London, 2007 (PDF)
www.nokia.com/NOKIA_COM_1/Corporate_Responsibility/
Sidebars_new_concept/ Transformational_Potential_of_M-Transactions/VOD833_Policy_Paper_Series.pdf

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