By Catherine Bolgar*
Imagine paying at a shop by sending a text message from your phone. Or sending money to your child at university in another city with an SMS. Or getting a small loan via your phone.
This futuristic vision of mobile money has been promised ever since mobile phones took off in the 1990s. In most of the developed world, mobile banking means using a phone to do the same kinds of transactions—checking a balance, transferring funds—one would do on a desktop computer. Mobile money hasn’t found footing.
In Kenya and some other developing countries, however, mobile money is widely accepted. The World Bank estimates 2.5 billion people in the world are “unbanked”—without access to formal bank accounts. Mobile money programs offer a bridge toward financial inclusion, not just in developing countries but also for unbanked people such as the poor or immigrants in the West.
In Africa, where people were trying to transfer money from urban to rural areas or across borders, they had to rely on really insecure methods like giving the money to a bus driver to deliver,” says Janine Aron, economics professor at the University of Oxford in the U.K. and author of “‘Leapfrogging’: A Survey of the Nature and Implications of Mobile Money.” “In the West we have secure methods like credit cards, payment cards. People are suspicious of the security of mobile methods.” But in Africa, the mobile methods are more secure than the alternatives.
In Kenya, the biggest mobile phone operator, Safaricom, offers a service called M-Pesa—pesa is Swahili for money. Since its launch in March 2007, M-Pesa has reached 18 million active users among Kenya’s 43 million population.
In poor countries that rely heavily on cash, these services are likely to take off,” Dr. Aron says. Vodafone, which developed M-Pesa with Safaricom, took the mobile money program in March to Romania, after launching it in India last year.
In 2001, there was only one mobile money service for the unbanked, she says. By 2007, there were 11, including M-Pesa. Last year, there were 219, with the biggest growth in Africa.
M-Pesa takes advantage of Safaricom’s dense network of 45,000 agents who sell mobile phone airtime. People go into the Safaricom kiosk to top off their SIM cards. “My SIM card becomes my bank,” explains Sunil Gupta, business professor at Harvard University in Cambridge, Massachusetts. The Safaricom agents thus act as bank tellers handling cash, taking deposits and paying out withdrawals. The kiosks are open early and close late for maximum convenience.
Kenya has two commercial bank branches and about four automated teller machines per 1,000 square kilometers; high-income countries have an average of 28 branches and nearly 75 ATMs per 1,000 square kilometers, according to the World Bank.
The whole service has really helped compensate for the lack of infrastructure,” says David Albertazzi, senior analyst at Aite Group, a market research consultancy in Boston, Massachusetts. “The lack of infrastructure let mobile devices become that infrastructure.”
In addition, Kenyans mostly are using older models of mobile phones. That made the M-Pesa approach different from the fancy user interfaces and responsive Web design that vendors in high-income countries are developing for smart phones and tablets. “In the rest of the world, I don’t care how it looks—I just want to conduct transactions and I want it to be ubiquitous,” Mr. Albertazzi says.
The system continues to evolve. In December 2012, Safaricom partnered with Commercial Bank of Africa to launch M-Shwari, a service with a savings account that bears interest—important in a country with inflation topping 6%—and 30-day loans that can be applied for via SMS. The program is open to M-Pesa users who have had an account for at least six months. Algorithms analyze the customer’s transactions on M-Pesa to substitute for what in the U.S. would be a credit score. M-Shwari already has 2.4 million active users and has collected the equivalent of $21 million.
“It’s tremendously enabling,” Dr. Aron says. “It has reduced transaction costs and reduced risk.”
In the absence of credit information about people who don’t have bank accounts, banks have been reluctant to give loans. The lack of access to credit is a key culprit in Africa’s economic stagnancy—people can’t start small businesses because they don’t have enough savings (in cash) upfront; small businesses can’t get loans to expand. M-Shwari begins to address that situation by making small loans accessible—not only in terms of openness to a population who previously couldn’t get loans through a bank but also in terms of ease of use—a simple SMS.
However, only Kenya, Tanzania, Ghana and the Philippines have mobile financial services adoption rates above 10%, according to the World Economic Forum. Adoption of mobile financial services remains under 1% in some very populous countries, including India, Pakistan, Nigeria and Brazil.
The world’s poor have long been ignored, not just by banks but also by companies and governments, because the cost of reaching them was so huge, Dr. Gupta says, “That’s the next battle to win, for banks and the rest of the private sector.”
*For more from Catherine, contributors from the Economist Intelligence Unit along with industry experts, join The Future Realities discussion.