Banking regulators still don’t get it: The best candidate for making access to finance truly universal in a developing country is the mobile phone.
A report last month by Washington-based Consultative Group to Assist the Poor (CGAP) shows that in several nations of Asia, Africa and Latin America, more people have mobile phones than bank accounts. The notable exceptions are China and India, though even they won’t buck the trend for very long. “Rapidly growing mobile penetration in both countries means that it is probably only a matter of time before they fit the pattern,” the study noted.
India offers a good example of what’s possible. There are about 260 million wireless phone subscribers in the country, more than in the US. Given the rate at which new users are being added, most Indian households will, in the next decade, have at least one mobile phone.
According to a survey of 100,000 households by Invest India Market Solutions, only two out of three shopkeepers and half of self-employed farmers have bank accounts. To attempt to reach bottom-of-the-pyramid customers with new branches will be prohibitively expensive. Seeking to recoup those large fixed costs from farmers, whose average annual income is Rs60,000, is a non-starter of an idea because it will make banking services unaffordable. It’s the same story throughout the developing world.
Pakistan’s Tameer Microfinance Bank estimates the cost of setting up a branch in a shantytown of Karachi at about $42,000 (almost Rs18 lakh); add operating expenses— $28,000 a month—and it becomes clear why so few of the poor use a bank. That’s where wireless technology comes in handy.
A typical banking transaction automated via mobile phones costs half a dollar to a bank in the Philippines; routing the same through a branch would be five times as expensive. Globe Telecom Inc., the second biggest Philippine phone company, has 1.3 million customers for G-Cash, its mobile-payment and remittance service.
Globally, mobile phones will handle $587 billion in financial services by 2011, UK consulting firm Juniper Research Ltd says. In many developing countries, mobile phone companies are miles ahead of banks in using technology to cut the cost of processing a transaction. In India, for instance, phone companies have a 100-fold cost advantage.
Text messages in most countries are now inexpensive enough for regulators to favour their use in promoting basic banking services such as transfer of funds from one account to another. A survey last year showed that Chinese consumers are likely to switch lenders to gain free mobile banking services. Yet, regulators insist that those offering such services follow the same “know-your-client” (KYC) norms as mainstream financial institutions. Telecom firms conduct their own checks before they take on new subscribers, yet their due diligence isn’t always acceptable to the banking regulator, whose concern is to prevent money laundering and the financing of terrorists.
Strict KYC norms present a big hurdle: The very people who have most to gain from mobile banking are excluded because they don’t have identity cards, proof of address, etc. One way to deal with this problem would be to allow “KYC-lite” that restricts the amounts per transaction to minimize risks while ensuring that the poor aren’t left out.
If a mobile banking customer, who wants to withdraw money, visits an agent of the telecom company for that purpose and the latter happens to be temporarily out of cash, does that shatter the consumer’s confidence in the solvency of the country’s banking system?
CGAP researchers say the evidence from Kenya is that customers “seem to appreciate there’s no guarantee of cash availability”. Even so, providing liquidity is something that weighs on the regulators’ minds when designing policies.
Market participants are getting impatient.
“Mobile banking is the future,” Vikram Akula, chief executive of SKS Microfinance Pvt. Ltd, recently told Wharton School of Business’ online journal. “The problem is the regulatory environment. The central bank in India hasn’t understood mobile banking and its full potential and, therefore, the regulations get prohibitive for us to do this.”
With two million borrowers, SKS is India’s biggest provider of small loans. It aims to quadruple customers in two years to become the world’s largest micro-lending business.
If mobile banking regulations ease, “then clearly this is the investment that we’d make”, Akula said.
For now, banks in India are taking the lead in offering mobile banking to their existing customers as a value-added product. ICICI Bank Ltd, the country’s second biggest lender, started its iMobile service in January.
Real breakthroughs in financial inclusion may only occur when telecom companies lead the effort. Their incentives and skills may be more aligned with handling large numbers of small transactions than a traditional bank’s. To encourage innovation, the focus of regulation has to be on ensuring that the banking service runs smoothly regardless of who is providing it. That’s something else regulators don’t get. BLOOMBERG
Respond to this column at firstname.lastname@example.org