M-Banking: A model for growth in the financial services sector
by Michael Nowicki, Joint Migration and Development Initiative, Brussels
Crises can often act as a catalyst for development and in the financial services sector mobile telecommunications providers have shown considerable innovation in the face of the global recession. Vodaphone and Safari-com, for example, have been able to use existing cellular technology to expand banking services to a potentially massive new client base that has up until very recently been considered “unbankable”.
According to Vodaphone and the Centre for Economic Research in the UK, mobile phone usage in Africa is growing faster than anywhere else on the planet, and although usage remains low in international terms, the prospect for increased access to financial services has run parallel to the popularity and ease of access of mobile telecommunications among Africa’s unbanked. The numbers tell the same tale across the continent. A survey conducted in 2005 found that 85% of businesses run by black South Africans rely on mobile phones for telecommunications, 59% of businesses in Egypt said usage of mobile phones had resulted in an increase in profits, and 97% of people in Tanzania could access mobile technology while just 28% had access to a landline phone.
One of the most successful business models for the marriage of cellular technology and increasing access to financial services over recent years has come from Kenya. Known as M-Pesa, (Pesa is Swahili for money), it is a money transfer service offered by the company Safari-Com in partnership with Vodaphone that allows all customers, prepaid or otherwise, to transfer money using their mobile phones. M-Pesa is specifically aimed at mobile customers who do not have a bank account, typically because they do not have access to a bank or because they do not have sufficient income to justify an account. To use M-Pesa customers simply register free of charge at an authorized agent by providing their Safaricom mobile number and identification.
In industrialized countries costly infrastructure established to access banking services such as automatic tellers and credit cards have muted the call for alternative methods of cash transfer and banking systems, however, in developing countries and in Sub-Saharan Africa especially, the mobile cellular infrastructure is already in place and expanding rapidly, while the banking sector has a limited presence. Mobile banking is a simple technology which is proving to be a leap-frog model for growth in the financial services sector in African and Asian countries, and has many positive repercussions for development in addition to providing a means of mobile cash transfer for its clients.
Mobile money transfer technology has existed for some time, initially developed as a way for migrant workers to send remittances home easily and cheaply, the service has grown exponentially since. Person to person transfers are made via text message without the need for a bank account, which has greatly increased user acceptance. In Kenya there are a number of cash in/cash out points all over the country where customers can pick up or purchase e-money. These agents may be Safaricom dealers but can also be small businesses such as supermarkets or gas stations. Transaction costs are kept very low in comparison to traditional banking charges, one of the reasons for this is of course because of the services’ target demographic, however another more interesting one is because Safaricom and Vodaphone never really intended to provide banking services to the extent they are now. It was a rather unexpected business success, the need was never really properly identified and its customer base rather than the corporations behind it has driven the growth of M-Pesa.
In the African context, mobile cash transfer systems are in their infancy but have already showed massive potential. There are however certain barriers that companies like Safaricom faced when trying to expand the service both within Kenya and across the continent. Fears have been voiced over the security of the system both from an IT perspective and with issues regarding government regulation, which at present is almost non-existent. The Kenyan Government has voiced concerns over the possibility of criminals using the service to launder money, and as of May 4th 2009 have ordered the Central Bank to audit Safaricom’s M-Pesa service. The move has been welcomed by the company itself, but has widely been seen in Kenya as a move by the banking industry to wrestle back their turf from the new upstart in the financial services industry. The banks’ argument is that that its exemption from Central Bank of Kenya’s (CBK) stringent and costly regulations has enabled the mobile phone operator to offer “banking” services on the cheap. Although Safaricom has categorically stated that it does not intend to expand its services into commercial banking, as they have equated the M-Pesa service with keeping money in a wallet, this seems to have done little to allay the fears of the banking establishment in the country.
The lack of depth within the financial services sector in Sub-Saharan Africa has up until very recently been considered a limiting factor for the development of the region. A United Nations survey in 2005 found that there were large differences in access and usage of banking services with developing countries far behind industrialized countries. For example, in some countries like Ethiopia, Uganda, Madagascar there was less than one bank branch per 100,000 people, whereas some developed countries (Portugal, Spain) have 50 or more. Similarly, in Madagascar there are only 14 deposit accounts and just 4 loan accounts per 1000 people, compared to industrialized countries where there are thousands of deposit accounts and hundreds of loan accounts. The difficulty of banking access extends beyond the physical presence of banks and branches, as many Africans who are now using the M-Pesa service do so because they simply do not have enough money to justify opening a bank account. This fact limits the opportunities for the success of starting a small business and also creates security risks that can be simply overcome by the M-Pesa transfer system. In this case the heavily regulated financial services sector in Kenya has failed the majority of potential clients living in that country as capital accumulation and transfer is a vital part of development, and the individuals in need of basic financial structures for development have lacked the service by which to safely accumulate and transfer small amounts of capital funds. This failure on the part of the banking sectors ability to supply Africans with services appropriate to their needs has created an opportunity that the telecommunications sector has effectively been able to exploit. However they have done so in the absence of the stringent government regulations to which the banks in Kenya must adhere. This is a situation that has caused friction between the two industries in Kenya and has now led to the involvement of the government potentially leading to taxation, standards and permits that could limit the success that the M-Pesa idea has enjoyed to-date.
Theoretical and empirical literature supports a positive causal link between a well-functioning financial system and economic growth. In particular, economic growth studies of the last decade show that depth and stability of a county’s financial services sector will cause economic growth and that it is one of the few robust determinants of the subsequent growth path of a country. The extent to which the growth of the financial services sector in Africa has benefited the poorest members of society is questionable, however one of the methods by which to increase access besides liberalizing markets and increasing competition is of course by encouraging innovation and technology. M-Pesa combines simple technology and observant innovation to provide a much-needed yet extremely basic financial service to the once considered “unbankable” with remarkable results. By allowing lower income earners to pool and collect funds and providing an instrument to mitigate risk, Safaricom is greatly supporting the growth opportunities for small and medium sized enterprises in Kenya.
The extent to which mobile cash transfer services will succeed with regards to providing simple financial services to the poor remains to be seen, as regulation develops and governments become more involved. Countries such as the Philippines that have adopted similar mobile transfer systems have shown the potential that such services can have as far as client usage and loyalty, and with the potential application for development clearly identified plans to extend similar services to countries like the Democratic Republic of Congo, India, and Afghanistan are currently in the works.
