The field day beckoning the money markets

Financial services are critical to economic growth and human development. Banking, savings, investment, insurance, debt and equity financing all help people to build assets, guard against uncertainty, generate income and create options for their futures. But the world’s poor — the four billion or so living at the so-called ‘base of the economic pyramid’ (BOP) — are today largely excluded from the market for formal financial services.

There are many interconnected reasons for this including informality, insufficient information, inadequate infrastructure, inappropriate regulation, and cultural bias among financial services firms and the poor themselves.

As a result, workers in Nairobi must take time off work to bring money back home to the Kenyan countryside, enduring the physical risk of carrying cash. Owners of family-run stores in the Philippines must pay for inventory deliveries in cash, putting themselves and delivery drivers at risk.

It takes Bangladeshis three or four hours to travel and queue at designated banks to pay their gas bills. Employers in South Africa often direct-deposit their employees’ paychecks into bank accounts, forcing those among them with lower incomes to queue at the ATM on payday because ‘bank money’ is not accepted at the places they do business.

Fewer than one billion out of 6.5 billion people worldwide have bank accounts at all. In contrast, nearly four billion have mobile phones. The ubiquity and convenience of the mobile phone has given the mobile channel great potential to open up the market for formal financial services of all kinds — from simple payments to insurance, savings and credit — to poor people who are currently excluded.

In Kenya, M-PESA offers migrant workers the ability to send money home via their mobile phones. The service gained 2.37 million subscribers in little over a year. In the Philippines, Smart Communications enables small shop owners to pay for deliveries with mobile money, allowing them to reduce risk, aggregate orders and receive discounts for buying in bulk with the equivalent of cash.

In Bangladesh, GrameenPhone’s gas bill payment pilot has proven a resounding success, even though customers must still travel and queue at the banks to pay their electricity bills.

In South Africa, Wizzit enables employers to deposit employees’ paychecks directly into their mobile money accounts, which they can use to purchase airtime and other goods and services.

Today’s examples do not yet add up to financial sector inclusion but they point to what is possible. It is not too early to start thinking longer-term about laying the foundations for growth on a global scale.

I recently had the opportunity to interview 15 CEOs and other leaders in the mobile money sector in connection with the inaugural Mobile Money Summit in Cairo, co-hosted by the GSM Association, International Finance Corporation, Consultative Group to Assist the Poor, and the UK Department for International Development. They identified three keys necessary for global growth: utility, capacity and an enabling environment.

Utility

Mobile money cannot enable financial sector inclusion without much greater integration into customers’ economic lives. Remittances and remote payments are the current ‘killer apps’, but they must catalyse an order of magnitude increase in the number of ways and places it is possible to use mobile money. A greater diversity of applications must be developed, including savings, credit, and insurance. Mobile money must eventually be accepted wherever money is accepted.

Capacity

The end goal of ubiquity requires a whole ecosystem of players to become involved, developing mobile money applications, accepting mobile money, and using mobile money, from the biggest, slowest-moving banks down to the smallest, grassroots kiosk owners and individual consumers. They will all require capacity-building. Big developing country banks might need to increase their cultural openness to serving the poor. Microfinance institutions might need to improve their tech-readiness. Small businesses and individual consumers might need to build financial literacy and basic business skills.

Enabling Environment

Mobile money is real money. It is the responsibility of the regulator to protect consumers and ensure financial sector stability. At the same time, to achieve financial sector inclusion, regulators must permit innovation — indeed, they must encourage and facilitate it. The right regulatory approach will be proportional, weighing the potential gain against the potential damage. It will also be incremental, allowing the channel to emerge and adding regulation as risks manifest thus enabling mobile money to blossom in ways that might not be predictable.

Cross-sector partnership and public policy dialogue will be critical to building all three foundations. Mobile network operators and technology providers must collaborate to ensure that services move toward interoperability. While mobile network operators have been the primary drivers so far, now banks, microfinance institutions, insurers and many others must take some initiative in developing new applications and services.

To meet the capacity-building challenge, international financial institutions, development donors, government agencies, NGOs and corporate CSR departments can contribute resources and expertise, particularly with regard to small businesses and BOP consumers. And business and government must engage in ongoing, open dialogue to achieve the delicate balance that regulating this emerging channel requires.

As UNDP reminds us, human development is about expanding people’s opportunities to live the kinds of lives they have reason to value. Financial sector inclusion is a necessary step. Using the power of business and technology, mobile money promises to accelerate our progress in this critical direction.