In its annual letter, the Bill and Melinda Gates Foundation states its latest views on how to help those in the world that need it most. This can range from increasing education to improving agriculture. This year, they have set their sights on mobile banking. Patrick Brusnahan reports
While the letter is usually a very bold read, this year has taken that a step further. The letter stated that ‘the lives of people in poor countries will improve faster in the next 15 years than at any other time in history’. No pressure.
In terms of mobile banking, the Foundation predicts that ‘by 2030, two billion people who don’t have a bank account today will be storing money and making payments with their phones. And by then, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance’.
The main issue stated in the latter is that current financial services for the poor are incredibly inefficient. People would rather save money by hiding cash around the house or buying commodities that quickly lose their value. Exchanging money between friends or relatives takes a day of delivering the cash themselves. Not having access to easy financial services keeps people poor and can even make them poorer.
Mobile phones are set to change this. The foundation predicts that by 2030, 2bn people who do not have an account today will be storing money and making payments with their phones.
Usage of mobile phones is booming in the developing world. Financial Inclusion Insights found that, in 2014, 86.4% of people in Bangladesh, India, Kenya, Nigeria, Pakistan, Uganda and Tanzania have access to a mobile phone with 54.8% of respondents owning a mobile phone. The problem was with awareness as 71.4% of people in these countries were not aware of mobile money.
When he spoke to EPI, Rodger Voorhies, director of the financial services for the poor at the Gates Foundation, believed mobile money to be crucial for development. He said: "In the previous five years, a couple of things had changed. One is overall network coverage in lower income markets. Cellphone coverage had grown up to 90% in most markets.
"We’re getting to a tipping point where mobile payments are going to become ubiquitous in particular markets and then, secondarily, these platforms are going to grow and be able to create environments for savings, insurance and credit. The economics and the technology have changed and the evidence base is now thicker in order to push into this market."
With the increased adoption of mobile technology, it appears to be the perfect time to raise awareness of mobile payments.
According to Financial Inclusion Insights, countries such as Nigeria, Kenya and Tanzania have high levels of mobile phone penetration with 90%, 74% and 67% of the population, respectively, owning a mobile phone. On the other hand, only 38%, 27% and 10% respectively own a bank account. In Uganda, 14% of the country own, or have access to, a bank account, but less than 10% of the country uses this service actively. There is a wide gap between the number of people with access to a bank account and access to a mobile phone. Therefore, it makes sense that people would be more likely to use their mobile phone for financial services than go through a bank.
This, unfortunately, is not the case. In Nigeria, only 0.3% of the population has used mobile money. The figure is the same for India, a country with over seven times the population, and only 0.2% of the population being a registered mobile money user and half of that number being active. It does not have to be this way though. In Kenya, 76% of the population has used mobile money, largely due to the success of m-PESA, with 68% of the population being active users (having used it in the previous 90 days). So there is a massive opportunity to be utilised.
As a matter of fact, the Gates Foundation has been working on this issue for quite some time. Voorhies said: "The foundation has worked in this space for probably close to ten years. It started out by looking at traditional microfinance. Then, based on the empirical evidence about what really mattered to low income households, we really saw that savings had a really big impact. So the foundation really doubled down on getting small savings to poor people.
"As we began to look at the evidence in what it would take to scale this, we kept running into a transaction cost problem. It didn’t really matter how great the service was if every time you served a poor person, you lost money."
So what steps needs to be taken to increase mobile banking adoption? One major hurdle is regulation. Voorhies said: "Regulations were designed, in many ways, to reach middle class people. They had requirements around identification, which most poor people didn’t have. Some locations had requirements around minimum balances or visiting a branch to go through a lot of paperwork. In some countries, it was taking over 35 days to open an account because everyone would review the paperwork.
"There were just a bunch of regulatory barriers that needed to change. It’s to make sure that regulatory environment creates a level playing field for new entrants in the market to create disruption. We think an economy that includes everyone benefits everyone."
The foundation has seen some of its work succeed. It founded the Alliance for Financial Inclusion in 2008 and it now holds over 100 financial institutions as members. All of the members of the alliance have also signed the Maya Declaration; a statement of common principles regarding the development of financial inclusion policy. However, making waves in the regulatory space is a different struggle altogether.
Voorhies added: "Regulators have this balances that they need to keep. They are responsible for the financial stability of the entire sector. What we would argue is that with 2.5bn people left out, that system is not enough to stay stable. They have to figure out how to bring the other half of the world in and stabilise that. We think that bringing this group in actually increases financial transparency and financial accountability. Let’s actually have proportional standards so we can bring people in and then control by monitoring behaviour on those systems.
"We have, in some cases, for example, Tanzania, 90% of the population is unbanked and they couldn’t meet Western standards. We thought about how we could actually think about the needs in those countries and how we could support them to move forward. The changes in guidelines have to be powerful enough to give poor countries the flexibility to apply them to the local context."
It is not only the Bill and Melinda Gates Foundation which sees the potential in this area. Sameet Gupte, Senior Vice President and Managing Director Europe for Virtusa, commented: "We can already see that in many emerging and developing economies, in particular in Africa, that consumers have leap-frogged internet banking and gone straight to mobile mostly due to the fact many do not have laptops and PCs or fixed line connections.
"Mobile offers communication at a lower price point of entry, and now that phones are much more capable, they are having an even bigger impact. According to a report from the World Bank in 2012, about 75% of adults earning less than $2 a day don’t have a bank account, more than 2.5 billion people around the world don’t have a bank account, with the poor facing bureaucratic, travel distance and cost barriers. Mobile banking can help to bridge this gap, and I expect that we will start to see mobile only banks in these regions."
Where opinion may differ is if mobile banking is actually a top priority for developing countries. With many other crises in play, such as hunger and war, mobile money could be the least of people’s priorities with emerging economies a better place to push this form of banking. Gupte said: "We need to consider people’s priorities within many of these regions. Would a person living in a war torn country with limited access to food and water be worrying right now about mobile banking? Probably not. Bearing this in mind, banks are probably best positioned to focus on emerging economies first.
"Currently half the world’s population lives in China and India, yet there is still limited uptake of mobile banking. For banks, these are the economies to watch in the short-term as there is phenomenal potential for penetration through mobile, particularly now that many rural areas are becoming more connected. Banks should therefore be acting now to determine how they can capture these unbanked people now, and mobile will be the most efficient and low-cost point of entry to do so."
When asked if he felt similarly, Voorhies recognised this issue and, slightly, agreed. He said: "In some ways, I think you’re right. It’s straight forward to the average person to say ‘Let’s eradicate malaria because we know it matters.’ Yet, financial services are a strange thing because we all have them and they work for us. They feel invisible.
"The person [Nachiket Mor, president of the ICICI Foundation for Inclusive Growth] who led the committee to change the finance regulation in India said that financial services work like noise cancelling headphones where there’s a lot of technology built into them, a lot of value that has driven them, but when you put them on, they seem easy and nobody notices all the work that has been put into them. I think we have that problem in our own lives.
"Poor people have none of this so they have to cobble together their own tools, which take a huge amount of cognitive bandwidth. So communicating that is one of the reasons Bill and Melinda put it into their annual letter that by 2030, they want to get 2bn more people in the system."
Voorhies concluded: "In the next fifteen years, these breakthroughs are going to cut poverty dramatically, as we’ve seen in the last decade. Those drivers are going to not just be a ghettoised one-off approach where poor people live in a system separate to the rest of us."