Mobile Banking for the Poor

At a press conference this morning in Mumbai, mobile-banking company Obopay announced an alliance with Grameen Solutions -- an alliance with an extraordinarily ambitious goal. In ten years' time, the companies said, they would like to see 1 billion of the world's poor -- people living on less than $2 a day -- receiving banking services via their mobile phones. It probably won't happen, but it would be amazing if it did.

Mobile banking is not new, of course, although it is still young. What sets this particular initiative apart are three things: its global ambition, its emphasis on the poor, and the central role of microfinance institutions (MFIs).

Mobile banking is of course banking, and banking is regulated nationally, not globally. As a result, it's hard to scale mobile banking across borders -- but that's precisely what Obopay and Grameen are trying to do. They're starting in India and Bangladesh, with a small core team of engineers looking carefully at what works and what doesn't in the real world. They will then offer that expertise to anybody in the world who wants it, and plan to entrench themselves as a "center of excellence". If MFIs in Congo or Nicaragua want to team up formally with Grameen and Obopay, that's fine; if they just want to talk to them to get advice on how to proceed on their own, that's fine too.

In any event, the system being set up by Grameen and Obopay is designed from the beginning to be able to handle payments and remittances not only nationally but also internationally. The problem of domestic remittances is often overlooked: large cities like Dhaka are home to millions of migrants who would love to send money back to their families elsewhere in the country but who are unbanked and have no real means of doing so. The ability to remit money domestically with little more than a text message could be revolutionary.

Then, of course, there's international remittances -- which already account for an enormous part of the annual capital inflows into many countries around the world, especially in Central America. Compared to Western Union or banks, the ability to send money directly from mobile phone to mobile phone is orders of magnitude easier and cheaper.

Then there's the emphasis on the poor. Although the poor are more likely to be unbanked and therefore in need of mobile banking services, they haven't been directly targeted by many of the first wave of mobile banking providers. As Gautam Ivatury and Ignacio Mas write in their excellent overview of the situation as it stands today,

Providers experimenting with a new technology or business model typically seek to reduce risk by focusing on known markets (avoiding the "double gamble" of new business model and new customer segments), and within those on likely "early adopter" subsegments (i.e., those more naturally predisposed to try the new offering).

The poor, of course, are both a new customer segment and generally the very last adopters of any new technology. It's hard to sell banking services to someone who neither knows nor understands what a bank is.

So that's where MFIs come in: they can play a crucial role in reaching out to, and educating, potential customers among the world's poorest people.

Grameen Solutions' CEO, Kazi Islam, told me that I shouldn't try to extrapolate forwards from where mobile banking stands today, but rather work backwards from the needs and capabilities of the world's poor. MFIs have been reasonably good at extending credit to such people, but they've found it much harder to offer savings accounts, since banking licenses are hard to come by.

Other financial services, like microinsurance -- especially crop insurance for people working small plots of land -- have barely gotten started: insurance "doesn't make sense if it costs 20 rupees to collect 25 rupees," said Islam at the press conference. "It's all about reach, and cost and operational reasons make it difficult to reach these people."

With mobile banking, reach is effortlessly expanded, piggybacking on the massive investments made by mobile-phone companies. Meanwhile, costs are tiny: in the US, Obopay's money-transfer fee is a flat 25 cents for any amount up to $1,000.

All the same, the goal advanced at the press conference this morning is so ambitious that I give it only a small chance of success. One big reason is China: without access to China's rural poor it's going to be almost impossible to reach the 1 billion goal. And while China's rural poor are getting cellphones at an astonishing pace, the chances that they'll be able to plug them in to a global -- or even national -- payments system still seem remote. On the other hand, no one imagined ten years ago the progress that China has made to date; if you extrapolate that rate of change, anything is possible.

Another risk is that the goal will be reached but in name only: people might have mobile-banking accounts, and might even automatically get such an account when they get their phone. But the accounts might not be used, and insofar as they are used, they might be used only for payments and not for real banking services. It's relatively easy to see a world where mobile phones are used as mobile wallets, containing roughly as much money as one might have in a real-world wallet. It's harder to see a world where mobile phones are used as mobile bank accounts, home to individuals' life savings.

There's also the effect which mobile banking might have on repayment rates at MFIs: experience in Kenya suggests that letting people make their loan payments via mobile phone rather than in person at a group meeting results in higher delinquency rates.

And insofar as mobile banking does take off, it will inevitably and necessarily do so primarily via the mobile phone providers themselves. Depositing money into one's mobile bank account must never be harder than buying extra airtime for one's phone; ultimately there's no reason why airtime charges can't come straight out of the bank account, combining the two accounts into one. What's more, mobile operators already have a network of agents licensed to accept cash on their behalf; it seems silly to try to build a parallel bank-agent network from scratch.

It's a great idea for banks and MFIs and mobile phone companies all to pull together in the same direction, resulting in a global open system which benefits from massive network effects. But with a couple of big exceptions like Grameen, and possibly not even there, the MFIs will always be dwarfed in size, reach, and importance by the mobile-phone operators. The MFIs risk being marginalized, to the point at which the poor get forgotten in the drive towards broader mobile-banking adoption. And without MFIs to help guide the way, the chances are that the poor won't embrace mobile banking of their own accord.

Obopay CEO Carol Realini understands this. "The carriers could be the MFIs, but you don't want to take away from the MFIs," she told me. "They serve the customers, and they're part of the last mile to the customer. They offer services beyond transactions. They're underwriting loans and coaching customers. Having the MFI play an active role with the poorest people is great, because they're not comfortable with credit and savings. The MFIs make the approach to the poorest people that much better, and it helps them understand how to use this powerful new tool."

The promise of mobile banking for the poor is that mobile phone providers have managed to get a degree of penetration among the world's poor that MFIs can only dream of. But that's also the peril. The mobile phone providers are likely to continue in the direction they're headed in at the moment: staying away from banking regulation, confining themselves largely to payments rather than fully-fledged banking, and targeting their entire customer base without any particular emphasis on the bottom of the pyramid. The MFIs, by contrast, are going to want something which is both narrower and more ambitious. Will the mobile phone companies sign on, even if they see lots of regulatory headaches and very few profits by doing so? The answer to that question could be the answer also to whether Obopay and Grameen Services will come close to achieving their 10-year goal.