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Mobile Banks in the Developing World Prove Simpler is Better

Recent initiatives designed to make U.S. consumer financial products simpler and intelligible to customers, reminds me of a study we did on Mobile Banks in the developing world. Designed to work on the simplest mobile devices and originally targeting the unbanked, mobile banks evolved from simple services (transfer of mobile air time) to become widely used money-transfer and mobile payment systems. In the Philippines, over $100M flows through the GCASH system daily. GCASH and rival SmartMoney are accepted in establishments that take credit cards, giving the unbanked the ability to conduct cashless transactions, a benefit previously limited to credit card customers. In Kenya, the number of transactions that flow through M-PESA is comparable to the number of all ATM transactions in the country.

A key observation we gleaned when we studied Mobile Banks in the developing world is that the most successful services not only have easy-to-use products with low transaction fees, the terms and fees involved are spelled out clearly. The financial products they offer are by design easy for consumers to understand. A recent CGAP survey found that 1 in 6 mobile banking users in the Philippines previously had traditional bank accounts, and 7 in 10 viewed mobile banking services as easy to use.

Among other things, the proposed Consumer Financial Protection Agency will work to ensure “… consumers get information that is clear and concise, and to prevent the worst kinds of abuses.” It’s unfortunate that large financial services companies have to be strong-armed into simpler offerings, when there is a large market for such products. Fortunately smaller companies aren’t waiting for regulatory changes and are beginning to offer simpler products.

There’s more to the successful mobile banks than meets the eye, some of the large players have become world-class financial services providers. While it’s technically easy to roll out a rudimentary mobile payment system, the most successful mobile banks in the developing world use complex software systems that handle more (near) real-time transactions than traditional banking systems. Unecumbered by legacy software systems, business rules and practices, mobile banks are innovating at a much faster pace than traditional financial services companies. At the height of the banking crisis, Clayton Christensen offered the following advice to JP Morgan CEO Jamie Dimon: “Go to the developing world and buy a phone company!” Not surprisingly, traditional banks in the developing world are eagerly forging alliances with fast-growing mobile banks. GCASH has agreements with several Philippine banks allowing fund transfers (and other forms of inter-operability) between their customers.

Over the long-term, mobile banks have, in many countries, become the first step†† towards financial inclusion. Once unbanked consumers get comfortable using mobile banks, they become more likely to adopt other products such as micro-insurance and (micro) loans.

In a recent survey article, I discuss in detail the profound impact mobile banks have had in the developing world, as well as some of the main challenges they face. But let me highlight the following statistic from a recent CGAP survey of M-PESA users in Kenya: the income of rural recipients increased 30% since they started using M-PESA.

(†) Insiders like to distinguish between mobile banking (mobile phone access to existing bank customers) and mobile banks (financial institutions that arose with mobile phones).

(††) Moving into the realm of science-fiction, some technocrats in Japan recently “speculated” that mobile payment services could open the door towards eliminating cash altogether.

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  • http://aseidman.com ariel

    Good post. Here in the U.S. the challenge of mobile banking is lack of a common use case to ride on e.g. PayPal rode on eBay to create a very innovative new payment system. On the mobile banking side what is that scenario that will fuel the PayPal of mobile — not clear… just yet.

    The link to your survey article is broken.

    • http://radar.oreilly.com/ben/ Ben Lorica

      Hi Ariel,

      I checked the link to the survey article using two different browsers, it worked for me. Here is the link, I hope it works for you this time.

      Ben

  • Arun

    Hi Ben,

    I am from India and one statement in the report – ‘Among the most stringent are regulations
    in India that require mobile banking services have “end-to-end application level encryption”’, are not what they appear to be. In case you have used the draft guidelines then this is true. The final guidelines states – Where mPIN is used, end to end encryption of the mPIN is desirable, i.e mPIN shall
    not be in clear text anywhere in the network…therefore it is desirable and not mandatory. However, all the contenders in the Indian market are making sure that the PIN is encrypted while in transmission, processing and storage….and are avoiding channels which do not provide this security.

  • techmystic

    good article. definitely a growth area and with much potential for creative thinkers in app development. love the fact that rural people are making more money because of this technology.

    here is link to post by kenyan blogger about mobile banking.

    http://fortysouth.com/2009/02/17/gsma-and-gates-foundation-partner-to-expand-mobile-banking-in-developing-countries/

  • Danielle 

    But is it safe to avail mobile banking method for financial transactions? Although it has been made for easy customer transaction I have no much idea about using them.Your post shows that they are easy and good too. Nice post….

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    This is a great idea that needs to be expanded.