Mobile Banking

The poor people’s lack of access to credit has been one of the major obstacles to the development of impoverished rural areas in developing nations. Although there have been establishments of subsidized government lending schemes and rural co-operatives, none such endeavors have been fruitful in overcoming the various problems that restrict their access to the formal financial sector, thus leaving this particular segment ‘un-banked’.

Increasing popularity of remittance services and emergence of various microfinance programs coupled with the proliferation of mobile services in developing countries seem to have created a unique potential to provide financial services to the ‘un-banked’ segment over the mobile network, and at the same time, streamline operations and reduce operational overheads.

Mobile Banking in Developing Countries – An Opportunity

Over the past few years, mobile and wireless market has been one of the fastest growing markets in the world, especially in Asian countries such as China, Indonesia, India, and Philippines where the mobile infrastructure is comparatively much better than the fixed-line infrastructure. Saturation of the mobile subscriber growth and commoditization of voice services has led Mobile Network Operators (MNOs) to consider alternative revenue diversification streams. Mobile commerce, which can be defined as "the delivery of trusted transaction services over mobile devices for the exchange of goods and services between consumers and merchants and financial institutions", has emerged as one of such options. The Asia Pacific region is expected to account for more than a third of the $80 billion revenues that the total global Mobile Commerce market is likely to bring in 2009.


Mobile banking or M-Banking, which is a type of financial services offered as a part of mobile commerce, will be a major driver for the adoption of wireless technology in rural areas in developing countries. The service refers to the provisioning and availability of banking and financial services through the mobile technology and the scope of offered services may include facilities to conduct bank and stock market transactions, as well as enabling users to access customized information. Mobile Remittances, Micro-finance and Micro-payments services are likely to fuel the growth of M-banking in the developing countries especially amongst the un-banked segment.

Opportunities

For Users – It facilitates and reduces the cost of remittances, and enables financial transactions without the costs and risks associated with the use of cash, including theft and cost of travel to pay-in-person
For Banks – Banks have extensive knowledge of financial models and a good reach worldwide. Mobile Commerce provides the banks with an opportunity to further enhance their customer reach by migrating customers upward in the use of banking services - move the "un-banked" community toward the "banked" status.
For Network Operators – MNOs have a unique advantageous position, as they are the first-point contact with the customers, to tap the growing subscriber base with new offerings providing consumers a strong value proposition. Thus, MNOs should be looking at M-banking as an important source of revenue. As the core competence of the MNOs lies in delivering mobility solutions to their customers, it is prudent for them to partner with a financial Institution in order to gain access to credit facilities, credit payment management and other financial services.

Micropayments

In the more affluent economies, a good infrastructure for a cashless environment is already prevalent and most people have bank accounts and access to both debit and credit facilities. On the contrary, in the developing economies, a very large population segment has to rely heavily on cash-based transactions for all their day-to-day expenses. Such need for cash requires adequate cash-handling facilities, which comes at a cost. Furthermore, the particular segment, being neglected by the banking sector, remains un-banked. These factors are incentives in the developing countries to move the population at large away from cash with introductions of low cost solutions such as micro-payments to further efficiency gains.

Recognizing the potential that M-banking holds in strengthening the socioeconomic position of those currently lacking access to banking, especially the rural poor, the two leading mobile operators in the Philippines (SMART and GLOBE) have both become facilitators of banking through the mobiles. Their respective services, SMART Money and GCash, enable users to send and receive money, pay bills and taxes, and purchase items in shops through simple SMS-based services.




SMART Money

The service was launched in December 2000 in co-operation with First E-Bank, which has since been acquired by Banco de Oro, and MasterCard, one of the world’s leading payment services providers. According to SMART, SMART Money was the world’s first re-loadable electronic cash wallet, linked together by their cellular network. Once cash has been transferred to the SMART Money account, it can be used in thousands of shops and restaurants. The cash value can also be used to load airtime, pay utility bills, or transfer money from one SMART Money card to another. Among the Filipino OFWs working overseas, over a million are using the service to transfer almost US$50 million per month into the Philippines economy1.

G-Cash

The service was launched in October 2004, with an initial set of three anchor services; international and domestic remittance, P2P (phone-to-phone or person-to-person) transfers and payments for retail purchases. With G-Cash, all of GLOBE’s subscribers are m-Commerce-enabled. As users do not need to have a card or bank account to be part of the service, G-Cash is able to provide M-Commerce capability to a previously underserved segment of the market, including those who currently do not do banking. Unlike SMART’s approach whereby it operates the service jointly with BDO, GLOBE on its own maintains records of all transactions and arranges settlement between the retailers and the G-Cash customers. G-Cash provides services through close to 4,900 retail outlets nationwide and more than 500 G-Cash partners.

Mobile Remittance

Migrant remittances, which are personal flows from migrants to their friends and families, have become a major source of external development finance, and in the process, play an effective role in reducing poverty. There has been a rising demand of providing such financial services over the mobile network. Capitalizing on the benefits of such a system, remittance services can become cheaper and more convenient, thus improving financial access of migrants, their beneficiaries and the financial intermediaries in the origin countries.

To explore the demand of mobile remittance, let us at first take a look at how big the remittance market is. According to the World Bank, recorded remittances sent home by migrants from developing countries exceeded $200 billion in 2006, up from $193 billion in 2005 and more than double the amount in 2001. The true size of remittances, including unrecorded flows through formal and informal channels, may be even larger. As the chart below portrays, remittances was the second largest source of external finance for developing nations after foreign direct investment (FDI) and more than twice as large as official development assistance (ODA) received by developing countries. Considering that, on an average, banks impose around five percent remittance fee, the market is worth $10 billion, indeed a very lucrative one for mobile operators to tap.


The Philippines - A Case in Point

In 2005, the overseas Filipino workers (OFWs) spent $519 million (24,896 Pesos) as remittance fee. According to the Bangko Sentral ng Pilipinas (BSP), this is equal to almost five percent of the $10.7 billion-worth of remittances received by the Philippines the same year through bank channels.

For instance, there are currently close to 153,000 OFWs in Hong Kong, who make it the fifth biggest source of remittances for the Philippines, next to the United States, Saudi Arabia, Italy, and Japan. According to a study by the World Bank, the OFWs in Hong Kong remitted a total of $338.9 million in 2005, almost $65 million higher than $273.9 million remitted in 2004. Most of them remit at least once a month, sending home an average of $268 per transaction.

Recognizing the immense opportunity that remittance holds, Smart Communications, Inc (Smart), the Philippines' largest wireless service provider, has developed an m-commerce platform, the Smart Services Hub, to provide cash remittance and other financial services and products. Through this platform, migrant workers can send remittances to the Philippines at more affordable rates and, at the speed of a text message, any amount can be remitted from anywhere at any time.

According to the company, the service is part of the global money transfer program of the GSM Association - the program, supported by 19 of the world's leading operators, aims to create a money transfer solution that will take advantage of the pervasiveness of mobile phone networks worldwide in order to lower the cost of remittances.

Through the Smart Services Hub, mobile operators at the sending country are able to offer menu-based services that enable migrant subscribers to use their mobile phones to remit funds drawn from accounts in a partner bank in the sending country. After going though through authorization, clearance and settlement processes, the transaction is completed with the fund having being deposited in an account of the partner bank in the receiving country or in an electronic wallet linked to the recipient's mobile phone.

The Development Bank of the Philippines has also recently formed a strategic partnership with Smart to promote the use of m-commerce in delivering financial services to small and medium-scale enterprises, overseas workers and microfinance institutions.

Microfinance

In the recent past, microfinance programs have become one of the more promising ways to use scarce development funds to achieve the objectives of poverty alleviation.

Traditionally, banks and lending institutions would not lend money to low-income individuals due to various reasons, which include the lack of information about clients, the lack of acceptable collateral, and the high transaction cost of processing small loans. While countries such as the Philippines and Vietnam rely on a large microenterprise sector to fuel the economy, not many financial institutions, including rural banks, until recently, were enthusiastic and well equipped to service their needs. However, currently, the scenario is changing and there has been a growing market in east and south Asia for lending services provided by mostly non-governmental organizations. The rapid growth during the recent years coupled with government encouragement, is likely to create an enormous demand for such services in the near future.

Microfinance through Mobile Technology

Currently, a major constraint to microfinance is the high cost of operating in remote areas. Many institutions are now working toward low-cost delivery options such as Internet banking and cashless transactions to help the rural poor. In fact, it may not be the Internet, but the mobile devices that could be a more efficient tool for such transactions. For people in such rural areas, using computers is often a problem due to faulty Internet connections and frequent power failures. Hence, providing microcredits through a mobile platform (SMS-based) could be the best way to reach out to the poor.




In order to improve efficiency in the delivery of microfinance services, Kenya’s leading mobile operator, Safaricom Ltd, has collaborated with the Commercial Bank of Africa and a microfinance company, Faulu Uganda Limited, to design and test a micro-payment platform called M-PESA. In Kenya, where the banking system is not well developed, such a system will be able to utilize the existing large network of airtime dealers, shops, and kiosks, where cash can be collected and paid in. The micropayment platform, currently being tested, and the pilot study extended to 1,000 users, is likely to benefit both the customer and the service provider, for example, by reducing the time needed to make or process loan repayments.

Conclusion

While it can be argued that M-banking may not be the most necessary factor for an improved banking service in developing countries, it is, however, certain that traditional banking service alone may not result in any significant improvement in providing the un-banked community with access to the financial sector. The speed and efficiency with which money can be transferred and monitored, through such mobile platforms, is likely to be far greater and higher as compared to a cash-based system. Apart from extending customer reach, financial institutions will be able to reduce operational costs, which would have otherwise incurred on disbursement and loan collection. By leveraging operator's retail ecosystem comprising distributors, retailers, and street resellers, they will be able to streamline operations. The customers will also benefit by having better access to loans and lower borrowing costs.

Shaker Ibne Amin is a research analyst at Frost & Sullivan. He focuses on the mobile and wireless sector in Asia-Pacific, covering services, content and applications.

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(1 IFC Infodev Report, Micro-Payment Systems and their application to mobile networks, January 2006)