Jake Kendall and Rodger Voorhies of the Bill and Melinda Gates Foundation published an article on micro-finance, enabled by cell phones, in Foreign Affairs magazine, the bi-monthly journal of the Council on Foreign Relations and one of the preeminent platforms for rolling out new areas of geo-political thought.
Offsetting the large number of people who manage the arduous climb out of poverty is an almost equal number who lose their grip and plunge back down due to health problems, crop failures, livestock deaths and even wedding expenses.
Image credit: http://www.elenanicolae.com/what-motivates-people/
Kendall and Voorhies argue that lack of access to financial services one part of the problem, in that these unfortunates have no buffer against crippling setbacks.
These buffers are familiar to most Americans, indeed many have had to fall back on them during the long decline in our own economy: personal savings, insurance, credit and cash transfers from family and friends.
In underdeveloped countries, the poor do not have access to even the most basic banking services. Globally, they report, 77% of the poor do not have a savings account and in Sub-Saharan Africa, the number is 85%. Fewer still have access to formal credit or insurance products.
Kendall and Voorhies say that it is not that the poor do not save, it is more that they have no mechanism to help them to do so. Because they are not profitable customers, banks and other financial service providers do not try to reach them.
They maintain that this problem is a “breadth versus depth” issue. The huge number of poor, yet eager customers represents an enormous profit base in total, but one that is costly to serve.
Think of how many pennies are dropped on the ground across the United States in a year…if one were to collect them all, one would be quite wealthy, yet the effort to collect those pennies makes it impossible.
Enter the cell phone
Coupling financial services with almost ubiquitous cell phone access may prove to be the solution to the problem that Kendall and Voorhies write about. Mobile access is available to 90% of the world’s poor. In developing countries, according to the World Bank, there are 89 cell phones for every 100 people.
Mobile finance offers three advantages not available to traditional finance:
- Digital transactions are essentially free, matching the cost of providing financial services to meet the low, “micro- profit” potential of serving these customers.
- Mobile transactions generate large amounts of data, which banks and other providers can use to better hone their products, reach new insights and continue to drive the cost of providing services to the poor, and reap legitimate profits doing it. This data can also be used to generate substitutes for credit scores, something not readily available in underdeveloped areas.
- Mobile devices link banks to customers in real time, allowing customers to sign up for accounts, on their own, as they need them. This also allows the bank to promote new services, widely, or to selected customers, in a seemingly “personal” manner.
One such service, M-PESA, was originally designed to facilitate microfinance loan repayments by cell-phone. M-Pesa has become wildly successful: 62% of adults in Kenya have an account. The system allows an account holder to deposit cash at M-PESA kiosks and see the balance immediately credited on their phone. They can later withdraw the cash at any other M-PESA kiosk, or use the phone to transfer it to another account holder, for example to pay bills or send money to relatives. Similar efforts have been launched with great success in other countries: 47% of adults in Tanzania and 26% in Uganda have mobile banking accounts.
In November 2012, a joint venture between the Commercial Bank of Africa and telecommunications company Safaricom (who originally launched M_PESA) rolled out a service called M-Shwari, which allows M-Pesa account holders to open interest bearing savings accounts and apply for short-term loans. The demand for the product was overwhelming and by eliminating the time to sign up or apply in person, M-Shwari added almost one million new accounts in its first three months.
Visit the M-Shwari website: http://www.safaricom.co.ke/M-Shwari/
The crux of Kendall and Voorhies’ article is that access to financial resources helps a poor family capture an opportunity to lever themselves out of poverty and provides a buffer against an others=wise debilitating financial shock. Mobile phone-based financial products allow banks and other providers to serve this huge market, incentivized by profits that were previously outweighed by the costs.