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.