Necessity is the mother of invention: Mobile innovation in financial inclusion

Why developing countries are leading the mobile financial inclusion revolution

Much has been made of the fact that mobile penetration, coupled with advances in banking technology, holds significant potential to include more people in the financial sector. And, in contrast to other industries where developed countries lead and developing ones follow, some of the most exciting innovations in financial inclusion are coming out of countries where the technology, banking, and payments infrastructure is far less advanced—but where the need is undoubtedly greater.

Recent statistics show that more than 90 percent of the population in developing countries has a mobile phone. At the same time, nearly 40 percent of the world’s adult population lacks a bank account.

Unsurprisingly, developed countries are far ahead (statistically) on the financial inclusion side of things. The rate of unbanked people in the United States hovers around 7 percent, while countries like India can see rates of 40 percent or more. But while 7 percent still amounts to millions of people, there clearly isn’t the same level of focus on closing that gap as there is in countries that have a larger gap in the first place.

Below, we’ll dive into some compelling cases where mobile has been successfully used as a tool for financial inclusion.

The case in Kenya

Kenya’s M-Pesa is perhaps the best-known financial inclusion product, having become the undisputed leader in mobile money transfers among developing countries.

The context around what money earning and transfer looked like before mobile is important to understanding M-Pesa’s rapid rise. In Kenya and many Sub-Saharan African countries, breadwinners travel to urban areas for work, leaving their families at home in rural towns. With little or no banking infrastructure in rural areas, and a significant cost to use traditional banking services, workers had to travel long distances or entrust their earnings to a bus driver before mobile solutions became an option.

Then, mobile phones came on the scene. The most recent statistics show mobile penetration in Kenya to be 86.2%), and as phones became more popular, Kenyans started using them to find workarounds to their money problems. For example, they used mobile airtime as a proxy for money by transferring their top-up credit to relatives or friends back home, who could use or resell it.

At the same time, companies like Vodafone saw an opportunity to leverage the spread of mobile to give the unbanked easy access to financial services. Vodafone’s African associate, Safaricom, initially hypothesized that access to financial services such as loans was the most significant obstacle to financial inclusion, and decided to launch microloans accessible via a basic feature phone. In reality, though, it wasn’t accessing money that Kenyans were struggling with, but rather the urban-to-rural money transfer between families. So when M-Pesa’s initial pilot of microloans launched, users were actually taking out mobile loans and sending them to people hundreds of miles away—rather than using the money for themselves.

When the Safaricom team observed this behavior, they realized that they’d stumbled on one of Kenya’s biggest financial challenges—transmitting money across a significant physical distance.

The re-engineered (and current) M-Pesa product instead allows users to easily transmit money, leveraging “agents”—mostly existing corner stores—as physical places where people can go to load cash onto their phones. This cash can then be sent via SMS (for a very low transaction fee), and recipients can withdraw cash from their local agents wherever they may be, including in rural areas.

With significant investment in customer and agent acquisition, M-Pesa reached 1.2 million customers in the first year. Within three years, 40 percent of Kenyan adults were using M-Pesa, and 70% by the end of 2015. Now, M-Pesa serves nearly 30 million customers in 10 countries, and even offers access to loans and the ability to pay for services. Further, a recent study reported that 2 percent of Kenyan households have been lifted out of extreme poverty and an estimated 185,000 women have moved from farming to business occupations—both as a direct effect of access to mobile money services.

M-Pesa has seen such success for a whole slew of reasons, not least of which is having the backing of Vodafone, a global enterprise with the resources and infrastructure to scale quickly when necessary, from the get-go. But that’s not all; M-Pesa’s ubiquity can be attributed to factors including the hidden logistics system that makes the service work, the high cost of existing alternatives, and post-election violence that caused Kenyans with bank accounts to look for alternative places to put their money in 2008. It also probably doesn’t hurt that the Kenyan government (which can grant some regulatory leeway) receives tax and dividend money from the company.

Tigo and Tanzania

In Tanzania, only 15 percent of adults have a bank account—but the recent growth of mobile payments has meant that at least 60 percent of Tanzanian adults have a mobile money wallet. Most mobile offerings are very similar to M-Pesa (in fact, M-Pesa is one of the options available in Tanzania), but one mobile operator pioneered a way for a new way for consumers to actually earn money from their mobile wallet balances.

In 2014, Tigo Pesa (the wallet offered by the mobile phone operator Tigo) started offering its users profit sharing, a payout based on their account balance in past years. If convenience wasn’t enough of a reason for Tanzanians to start using mobile money, the opportunity to earn profit surely was, and other operators have since followed suit.

What’s interesting about the case study in Tanzania, however, isn’t that it’s a new mobile payment system, but rather the way different regulatory approaches can impact companies innovating in the space. If Tigo Pesa payouts sound oddly like interest on a savings account, you’re not far off. But most central banks in mobile money markets don’t allow for non-bank products that could be used as savings accounts because, presumably, savings accounts should be offered by banks. But the Bank of Tanzania has been a bit more lenient.

In deciding what interest payments on mobile money accounts should look like, the Bank of Tanzania actually invited proposals from mobile networks, encouraging ideas that would directly benefit the consumer. It approved Tigo’s proposal, allowing these payouts with the stipulation that mobile operators avoid certain marketing language (they cannot call their products “savings accounts”) and do not promise consumers any set interest rates (as past performance may not necessarily reflect future payouts).

And so far it’s worked out for Tanzania’s banking industry: After a year and a half, there was no indication that consumers were moving their funds out of traditional savings accounts, and the number of bank accounts actually increased over this period. While many central banks curtail non-banks’ efforts to offer what might be construed as equivalent financial products in order to reduce the threat of competition, Tanzania’s regulators have found a synergistic way to encourage innovation by new players while maintaining the strength of traditional banks—and ultimately benefiting the consumer.

Rural China

China is an interesting case of mobile payment success—but there’s still work to be done on the financial inclusion side of things. While Alipay and WeChat Pay hold 90 percent of a market that spent $5.5 trillion in 2016, these services still require a connected bank account, doing little for China’s more than 20 percent of unbanked adults.

But the Chinese government is actually the driving force when it comes to banking the rural unbanked, with initiatives that have expanded The Postal and Savings Bank of China, allowed microcredit companies and banks in rural villages to serve the unbanked, and delivered government subsidies through bank accounts. In addition, the largely state-owned banking sector has relinquished some control in recent years, allowing privately companies—including Tencent’s WeBank and Alibaba’s Mybank—to offer traditional banking products without the need for branches. In fact, a MyBank spokesperson indicated that rural China is the main target of the bank’s services because consumers need only a mobile device to access them—quite different than the requirements for opening a traditional bank account.

In addition, new technologies enable Chinese people living in rural areas to access their bank accounts remotely using a SIM card overlay, which doesn’t fix the problem of not having a bank account in the first place, but means that rural consumers no longer have to travel great distances to a bank branch.

As such, mobile isn’t so much leading the way to financial inclusion in China as it is facilitating it. While mobile money services in Africa created an entirely new way to store and transfer money, China’s banks and tech giants are expanding access to traditional banking products through the use of technology—and mobile is a crucial piece of how that works.

Companion cards in Latin America and the Caribbean

Mobile money accounts very similar to those in Africa are available in the majority of Latin American and Caribbean (LAC) countries, though uptake numbers are significantly lower than what is seen in Sub-Saharan Africa. Where LAC countries shine, however, is in companion cards—physical cards offered by mobile money service providers that allow access to ATM cash withdrawals, merchant payments, e-commerce payments, and P2P transfers for mobile money accountholders. In other words, these cards can be used just as any other credit or debit card and are a stand-in for a traditional bank account.

Across LAC countries, nearly a third of mobile money services offer companion cards, compared to 16 percent in East Africa. In higher-income countries, the number rises quickly—in Brazil, Costa Rica, Panama, and Mexico, for example, where there are millions of merchants with the infrastructure to accept card payments, closer to 80 percent of mobile money services offer companion cards.

That the uptake and availability of companion cards differs across countries is compelling because it can largely be attributed to payments—not banking—infrastructure. Unsurprisingly, less-developed LAC countries with fewer card-accepting merchants see fewer companion cards, while countries with higher card acceptance rates are more likely to offer this option. Contrary to what we’re seeing with the proliferation of mobile in other developing countries, companion cards are essentially bringing mobile back to the physical world.

The lag in developed markets

Given the wide array of financial inclusion innovations in developing countries, it seems that more developed financial systems can make the shift to alternative solutions, such as mobile, more difficult.

One study by GlobalData found that countries with a greater percentage of unbanked adults have a more positive attitude toward mobile payments. This suggests that the fewer citizens there are with a traditional bank account, the better a new technology is able to fill gaps in the market.

In contrast, many adults in developed markets are unbanked because they choose to be. Unlike in countries like China and Kenya, where the primary roadblock (prior to mobile money) was accessing a bank branch in rural areas, a significant number of unbanked people in developed countries are making a conscious choice not to have a bank account, no matter how close they live to a bank. According to a World Bank survey, 49 percent of unbanked Americans report not having enough money to use an account, and 44 percent cite lack of trust in banks as a reason they don’t use one. In the United Kingdom, where 1.5 million adults are unbanked, barely more than half of those individuals even want a bank account, and about half of those with basic bank accounts actually prefer to manage their money in cash.

For better or for worse, the unbanked in many developed countries do have access to workable (albeit imperfect) alternatives, such as prepaid debit cards, cash, and payday or auto-title loans—so there’s no dire need to get mobile money (or other alternatives) off the ground. These substitutes for traditional financial services that may not be ideal, but they get the job done. In the U.K., for example, it is estimated that 2 million people took out a high-cost loan in 2012, and the payday lending market grew more than 10x between 2006 and 2012. The banks, for their part, aren’t necessarily prioritizing these low-income customers, because, unlike with mobile-money providers in developing countries, they haven’t figured out a hugely profitable way to help the unbanked access their services. In countries with more established financial system—complete with payday loans and prepaid cards—there is simply less of a reason to invest in and develop even more alternatives for the unbanked population.

That’s not to say that developed countries are ignoring the unbanked, but what’s worked in developing countries probably won’t be their golden ticket. And technology does hold some potential, but it will need to adapt to the unbanked markets in developed countries. Amazon, for example, recently launched Amazon Cash, a no-fee way to load cash onto Amazon accounts with nothing more than a smartphone—no bank account required. PayPal offers a similar service, and Apple recently announced Apple Pay Cash, a virtual debit card where funds to be used for P2P payments will live. Governments aren’t ignoring the problem, either, as many developed countries have formal initiatives focused on banking the unbanked.

Looking ahead, there’s no doubt that we’ll continue seeing innovations in financial inclusion across the board. But while mobile is leading the financial inclusion revolution in a number of developing countries, the same revolution may not be happening in developed countries because a slow build toward offering fair financial products and removing their deceitful counterparts from the market takes time.

Related Articles

The rise of prepaid cards in America

What’s making prepaid cards one of the fastest-growing financial products in the country

4 Min Read

Related articles

Cashlessness in the UK

6 Min Read

The bank account's the thing

3 Min Read

A global look at the rise of mobile banking

6 Min Read
More Articles