When a mobile can also mean a bank

As we strive to reach the Millennium Development Goals, our modest success in the ambitious aim of reducing global poverty has been overshadowed by an unsettling trend toward wider income inequality. Without a doubt an important factor in this trend is the increasing disparity in access to markets.

Why is access to markets important? In countries where the competitive provision of goods and services is weak, not only is their delivery unpredictable, expensive, and of lower quality, but opportunities for wealth creation through the provision of goods and services by individuals and businesses are limited as well.

Moreover, future innovation in products and services for a specific market is limited by access to technology and infrastructure. Over time people excluded from these markets are left further and further behind as innovations built on previous technologies pass them by. For example, the invention of the TV remote control becomes irrelevant to those without access to electricity, and online banking is of no use to someone without internet access.

One area where this is starkly apparent is in the market for financial services. Access to financial services gives people the ability to save for lean times, smooth consumption, provide better healthcare and education for their children, and allows entrepreneurs to start and grow new businesses.

Yet more than two billion people around the world are entirely without these services and lack even a basic savings account. Even more people are under-served and are faced with severely limited services that do not meet their needs.

In some areas this is due to a lack of infrastructure, but more often the meagre incomes and small transaction sizes of this population do not justify the high fixed setup costs involved in making financial services available through physical branches. Thus traditional banking results in prohibitively high costs for customers to set up and use a bank account.

For example, in Cameroon it takes an average of $700 to open a checking account and banks require applicants to provide at least four documents. Not surprisingly, only 20 per cent of households in sub-Saharan Africa have an account at a financial institution, and in some countries like Tanzania account ownership is as low as five per cent.

This pattern persists not only between countries but within them. Rural communities are especially prone to being excluded from financial services. In India, 60 per cent of the adult population has a bank account; however, in rural areas account ownership is less than 40 per cent.

The solution to this problem will not come from simply increasing the global footprint of mainstream banks whose structures are often ill-designed to serve the needs and cost-constraints of the poor. Instead the most exciting opportunities are coming from a combination of disruptive technologies and a deeper understanding of the needs of under-served customers. For example, several companies are deploying innovative applications that take advantage of the ubiquity of mobile phones to create more affordable, accessible and customer-centered financial services that leapfrog traditional offerings.

Companies like Globe Telecom and Smart Communications in the Philippines, WIZZIT in South Africa, and MTN, Celplay and Safaricom throughout Africa are providing users with the capability for SMS-based financial transactions that allow instant person-to-person money transfers, including receiving remittances from family members abroad with a simple text message from one phone to another.

Going a step further, a service from Rêv Worldwide and MPOWER Mobile provides not only an SMS-based mobile payments platform but also links directly to a user’s reloadable debit card, giving users the ability to buy and sell products and accept debit and credit card payments using their mobile phone. In Kenya, Safaricom’s M-PESA has attracted three million users since its inception a year ago, showing the latent demand for these payment services and the rapid adoption of the technology in developing countries.

Innovations like mobile banking will not only help the poor move away from cash transactions, but may open growth opportunities for small- and medium-sized companies. SMEs are an important engine of growth which is often anemic in developing countries: few SMEs exist, and even fewer actually grow to become large companies. By reducing the obstacles that stand in their way, innovations like mobile payments increase the ease of doing business with companies, and thereby increase companies’ chances at success.

For example, a Rêv Worldwide programme in partnership with a national paint store chain in Mexico will allow painters to expand their customer base, reduce the cost of doing business, and document their transaction history to improve their access to credit. Painters will be able to accept debit and credit card payments from their customers using their cell phones, expanding their customer base to those who prefer to use credit.

Once the painter receives his payments for the job, the money is loaded onto his prepaid debit card that he can use for both business and personal purchases. Now the painter can request a documented cash flow statement to be sent to a potential lender and demonstrate his creditworthiness. The painter now is not only in a better position to make more money but is also better able to leverage his income-stream to build wealth.

These innovations show a new and refreshing wave of entrepreneurs who are not only tapping into a latent demand profitably but tackling head on the self-reinforcing cycle of inequality. Governments and multilateral organisations have an important role to play in stimulating this type of private sector innovation.

Certainly governments play a crucial role in the prevention of money laundering and terrorist financing activities, all the while maintaining stability and averting financial crises. However, in doing so they often inadvertently hinder the expansion of financial services to the poor.

For example, transaction taxes can keep people from moving away from an informal and inefficient cash economy. One-size-fits-all ‘know your customer’ rules with antiquated identification requirements make it more difficult for virtual banking to develop. Unless countries start to examine how their existing policies hinder this type of entrepreneurship, they will lose out on an economic revolution.

Well-functioning markets are the fastest avenue for individual wealth creation and if this latent potential can be unlocked the Millennium Development Goals will be more easily and quickly achieved.