What If? Mobile Financial Services and Freedom from Cash
Thursday, July 14, 2011 at 9:27AM
Ignacio Mas

Economic development is largely about connecting people to ideas and opportunities around them. We connect rural populations to markets by building roads. We connect people to new employment opportunities by building cities. We connect them to information sources such as radio, TV, mobile phones, the internet, and public libraries. And we connect them to clean water and energy by building pipes and electrical networks. These are all platforms which support people’s socioeconomic development. We need to apply the same platform logic to financial services.

We know that a loan or a savings account, even in isolation, confer sizable benefits on poor households by making it easier for them to self-finance business or farm investments, save-up for larger household expenditures (schooling, housing, wedding), and protect against unexpected shocks. The empirical evidence is still partial, but an increasing number of rigorous field experiments are showing that presenting savings opportunities at the right time (e.g. for farmers, at harvest time) and against a defined purpose (e.g. to buy fertilizer at planting time) are particularly impactful.

Imagine if the funds in these accounts could be transferred instantaneously to or from anyone else in the country. To be more specific: imagine that savings accounts were connected to a ubiquitous electronic payment platform that is accessible with the right keystrokes securely from anyone’s mobile phone. How much would this platform augment the already abundant benefits of a stand-alone account?

Now, when a child falls ill and must access treatment, her parents can receive funds immediately from a network of friends and family, allowing her to see a doctor on the first day of her illness. Now people can use their time more productively because they don’t need to spend hours lining up in front of banks and utility company offices to deposit funds or pay bills – they just move the money with the click of a button. Now, entrepreneurs can hatch a range of new businesses in which they no longer need to trust employees with cash – they make and receive all payments directly from their mobile phones. Now, farmers and vendors can sell their goods further afield and be paid up-front, without incurring credit risk. Now, businesses and households can minimize their cash balance and reduce risk of theft because they can move money around in electronic rather than physical form. And, because all transactions are recorded electronically, people now have a financial history which might help them access credit when they want to supplement their savings to undertake further investments.

Stand-alone savings accounts help households build fiscal buffers and fund investments, but connected savings help maximize the reach and innovative use of those funds. Consider in particular the boon that freedom from physical cash would be to entrepreneurship in developing countries: you are no longer constrained geographically by payments that must made or collected in person, you no longer have to trust your employees and associates with thick wads of cash, every payment anyone makes in your business leaves a record that you can track down.

Modern (“endogenous”) growth theories emphasize barriers to technology adoption as the reason for slow economic growth, and suggest that it is process technologies (new ways of doing things) rather than embodied inventions (new kinds of widgets) that are the key to the growth story. But these process technologies do not flow so easily across countries or within developing countries and are therefore a real roadblock for growth. E-payment platforms may turn out to be a fantastic “widget” type of invention that can unleash all sorts of business process innovation.

This vision of a payment utility reaching the bulk of the population is possible today with the spread of mobile phones. The mobile phone can act as a secure, low-cost device for client authentication, transaction data capture and instantaneous transaction authorization. The commercial success of the M-PESA mobile payment service in Kenya, which has penetrated into almost 70% of the adult population in just four years, has shown that there is pent-up demand for convenient electronic payments even among the poor. This is a technology that can spread, if only providers learn to market it appropriately based on local needs and invest the resources that are required to create the appropriate network effects.

Article originally appeared on Savings Revolution (http://savings-revolution.com/).
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