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Cellphone ideal to give bank access
Banking regulators still don't get it: The best candidate for making access to finance truly universal in a developing country is the mobile phone.
- By Andy Mukherjee
- Published: 00:21 May 20, 2008
Banking regulators still don't get it: The best candidate for making access to finance truly universal in a developing country is the mobile phone.
A report last month by the Washington-based Consultative Group to Assist the Poor shows that in several nations of Asia, Africa and Latin America, more people have mobile phones than bank accounts. The notable exceptions are China and India, though even they won't buck the trend for very long.
"Rapidly growing mobile penetration in both countries means that it is probably only a matter of time before they fit the pattern," the CGAP study noted.
India offers a good example of what's possible. There are now about 260 million wireless-phone subscribers in the country, more than in the US. Given the rate at which new users are being added, most Indian households will, in the next decade, have at least one mobile phone.
By contrast, the spread of banking services is rather limited. According to a survey of 100,000 households by Invest India Market Solutions, only two out of three shopkeepers and half of self-employed farmers have bank accounts.
To attempt to reach bottom-of-the-pyramid customers by building new branches will be prohibitively expensive. Seeking to recoup those large fixed costs from farmers whose average annual income is Rs60,000 ($1,400) is a non-starter of an idea because it will make banking services unaffordable. It's the same story throughout the developing world.
Mobile banking
Pakistan's Tameer Microfinance Bank estimates the cost of setting up a branch in a shantytown of Karachi at about $42,000; add operating expenses - $28,000 a month - and it becomes clear why so few of the poor people use a bank. That's where wireless technology comes in handy.
A typical banking transaction automated via mobile phones costs 50 US cents to a bank in the Philippines; routing the same through a branch would be five times as expensive. Globe Telecom, the second-biggest Philippine phone company, has 1.3 million customers for G-Cash, its mobile-payment and remittance service.
Globally, mobile phones will handle $587 billion in financial services by 2011, UK consulting firm Juniper Research says.
In many developing countries, mobile-phone companies are miles ahead of banks in using technology to cut the cost of processing a transaction. In India, for instance, phone companies have a 100-fold cost advantage.
Text messages in most countries are now inexpensive enough for regulators to favour their use in promoting basic banking services such as transfer of funds from one account to another. A survey last year showed that Chinese consumers are likely to switch lenders to gain free mobile-banking services. Yet, regulators insist that those offering such services follow the same "know-your-client" norms as mainstream financial institutions.
Telecommunications companies conduct their own checks before they take on new subscribers, yet their due diligence isn't always acceptable to the banking regulator whose concern is to prevent money laundering and the financing of terrorists.
Strict KYC norms present a big hurdle: The very people who have most to gain from mobile banking are excluded because they don't have identity cards, proof of address and other credentials. One way to deal with this problem would be to allow "KYC- lite" that restricts the amounts per transaction to minimise risks while ensuring that the poor aren't left out.
The other regulatory concerns are provision of liquidity and containment of fraud. If a mobile-banking customer who wants to withdraw money visits an agent of the telecommunications company for that purpose and the latter happens to be temporarily out of cash, does that shatter the consumer's confidence in the solvency of the country's banking system?
CGAP researchers say the evidence from Kenya is that customers "seem to appreciate there's no guarantee of cash availability." Even so, providing adequate liquidity in this alternate-banking channel is something that weighs on the regulators' minds when designing policies. Market participants are getting impatient.
"Mobile banking is the future," Vikram Akula, chief executive of SKS Microfinance, recently told Wharton School of Business's online journal. "The problem is the regulatory environment. The central bank in India hasn't understood mobile banking and its full potential and therefore the regulations get prohibitive for us to do this."
For now, banks in India are taking the lead in offering mobile banking to their existing customers as a value-added product. ICICI Bank, the country's second-biggest lender, started its iMobile service in January.
Real breakthroughs in financial inclusion may only occur when telecommunications companies lead the effort.
- Bloomberg
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