Last moth we published the First Part of our article “Credit Industry Ripe for Disruption: AI and Big Data (Pt. 1)”, this week we come with the Second Part, enjoy!
A Fintech model of microfinance: Mobile Banking
Among the social FinTech possibilities, mobile banking has proved to be very successful in areas such as Sub-Saharan Africa. One of the factors that favors financial exclusion is the absence of branch banks in specific areas. Mobile banking can provide people with branchless banking, allowing the population to make cash transactions without actually going to a physical branch bank. Mobile savings can be seen as the application of technology to microfinance where lending is the final goal of the process.
Mobile banking is especially interesting and convenient for both the population of underdeveloped countries and banks. Mobile phones are a very inexpensive technology, and so more affordable in areas where establishing a branch bank would not be profitable. In addition to that, mobile phones have a continuous connection to the network and secure user identification, so transactions could be made almost anytime anywhere.
Mobile savings can be classified in two groups: “basic mobile savings” and “bank-integrated mobile services”. The former refers to the storing of electronic money, which could only reach the second level of financial inclusion, while the latter also includes interest and other financial instruments, and could also reach the third level of financial inclusion, such as loans and borrowing.
Drivers of the Success of Mobile Banking in Africa
Mobile phones have been one of the biggest innovations of the century, and the adoption of this technology had been one of the fastest in history. While in many African countries water or food are almost luxury services, the percentage of adults owning a cell phone is near to that of the US.
This expansion in the number of mobile phones led to banks recognizing the potential of reaching millions of prospective customers, especially the rural population, who account for more than 60% of Africa’s total population and have no access to banking services. The lack of bank branches is a clear catalyst for mobile banking, while in the developed world, where financial institutions are physically present everywhere, mobile phones are not being used as intensively as in Africa for financial purposes.
Illustration 6: Comparison of mobile banking services between Africa and developed countries
In the last decade some really successful stories have pioneered the pathway for mobile banking for the financial excluded, M-Pesa in Kenya being probably the best known of all. M-Pesa was launched in 2007 by Safaricom (the African subsidiary of Vodafone). It was intended to be a financial service targeting the unbanked population. M stands for mobile, and Pesa stands for money in Swahili.
The service was an e-wallet connected to the user’s mobile account that could be accessed through the SIM card. Initially, only peer to peer transfers were possible, but the evolution and success of M-Pesa also included peer to business and international transfers. M-Pesa does not require immediate payments or withdrawals because e-money can be accumulated over time, so it also works as a savings instrument. A text message (SMS) is issued to the customer’s phone after each transaction. This instant recording protect the users and allows them to keep a record of payments. Additionally, the accounts are supported with a 24/7 service provided by Safaricom and the Vodafone Group.
The initial business plan did not anticipate the incredible success of the venture. In the first month alone, more than 20,000 customers signed up for the service, it is now used by 1.7 million people and recent estimates suggest that around 25% of the country’s gross national product flows through the system. One of the factors in the scheme’s success was that a bank account was not a prerequisite for registering; one simply had to be a Safaricom customer and to own a national ID card.
Mobile Money for the Unbanked is an organization set up by the GSM Association3 that specializes in monitoring and advising about mobile banking and its impact on financial exclusion. It estimates that around 80 services similar to M-Pesa are now in operation around the world.
If financial exclusion has been identified as one of the factors underlying extreme poverty, it is important to ensure that people are able to access the financial system in order to fight chronic poverty. The fast implementation of technologies in underdeveloped countries makes mobile banking, among other Social Fin Tech solutions, a relevant tool to boost financial inclusion, bringing financial solutions for those who are excluded and could hardly access it any other way.
“Financial inclusion helps lift people out of poverty and can help speed economic development. It can draw more women into the mainstream of economic activity, harnessing their contributions to society” Sri Mulyani Indrawati, Indonesian Minister of Finance and former COO of World Bank.
1 According to the G20, 2.5 billion adults are excluded from the formal financial system.
2 It doesn´t include those “voluntarily excluded”, meaning people who have access to banks but do not wish to use their services.
3 Representing mobile phone operators, regulators and others
Ana Patricia Moreno es graduada en Ingeniería de Telecomunicaciones por la Universidad Politécnica de Madrid y Máster en Ingeniería de Telecomunicaciones y MBA por la Universidad Pontificia de Comillas. Desde enero de 2017 trabaja como Iberia Trade Analyst en Procter and Gambl. Durante este periodo cursó un módulo de Data Science en el MIOTI (Madrid Institute Internet of Things). Colabora con distintas ONGs, entre ellas la Fundación Pablo Horstmann con la que viajó a África en 2016.
Rocío Sáenz-Diez es profesora desde 2003 del departamento de Gestión Financiera en la Universidad Pontificia Comillas de Madrid, donde se licenció en Derecho y ADE (especialidad E-3). Trabajó unos años como profesional en el sector financiero, tanto en Londres (Corporate Finance Merrill Lynch) como en Madrid (Equity Research UBS). Posteriormente se incorporó a la universidad defendiendo la tesis doctoral en 2004.