It’s a busy day for bankers in a bazaar in Abuja, one of the four cities of Nigeria. But this isn’t western-style branch banking. Indeed there’s not a branch in sight.
Instead customers are lining up at news-stands, corner-shops and kiosks to be helped by a new kind of banker: local businesspeople known as agents who have been trained in the use of mobile phones. Most of the customers have come into the city for the day from outlying districts, and are being given advice on how to transfer money, send remittances back home, deposit cash and cheques, and pay bills – among other normal banking activities. And they’re doing it without even opening an account.
Welcome to the new frontier of M-banking – the provision of financial services by mobile phone – that is transforming the lives of not only Nigerians but much of the world’s population. Some 500 years after Italian merchants opened the first banks – the bancos that did business in the street in much the same way as agents are doing in Abuja today – most people still haven’t got a bank account. In the industry’s jargon, they are ‘unbanked;’ and as a result, sidelined from the broad economy.
But they do have mobile phones. There are 5.3 billion people on the planet with mobile phones, and less than half of them have a bank account. And until M-banking began to gather momentum in the last few years, they had little chance of ever becoming ‘banked’ because of the prohibitive cost of opening branches, especially in remote communities.
In parts of sub-Saharan Africa, for example, the percentage of the unbanked population varies between the merely high and the absolutely catastrophic. In Tanzania, Uganda and Zambia, for example, at least two-thirds of the population have no access whatsoever to western-style banking services, relying instead on informal arrangements or, most commonly, keeping cash in the house or on their person. Physical transfers of money are usually done through the services of a friend travelling on a bus with a pocketful of cash. Even in Kenya, a leader in mobile banking, 38 percent of people don’t have an account; while about half of all South Africans, most affluent of the region’s nations, remain unbanked.
According to some studies, only one percent of the sub-Saharan population as a whole is banked. Swedish academics Dr Lennart Bangens and Bjorn Soderberg point out: “A substantial part of the rest lives in a cash-based, subsistence, barter-trade economic environment.”
High costs for branch banking
But now there’s hope. M-banking is not only spreading into sub-Saharan Africa and beyond, it’s making rapid inroads into many poorer Asian countries – such as the Philippines, Bangladesh and remote Nepal – as well as into Latin America, where it’s revolutionising banking in a way that some authorities, and certainly the conventional, branch-based industry, find disconcerting.
“Mobile banking services are the new animals on the financial services savannah, and policy-makers and central banks are still figuring out what the risks and benefits are,” observe the Swedish researchers.
Asian nations have proved some of the most enthusiastic adopters of M-banking. In the Philippines, for example, an astonishing 95 percent of the population have access to mobile banking in the broadest sense, according to a 2011 report by Asia Development Bank. As well as the usual financial services, Filipinos use their phones to buy a wide range of goods, including hamburgers.
Nigeria provides a particularly compelling example of the transformational effect of banking by telephone. Of the 90 million adults in the oil-rich country, only 20 million have any access at all to financial services. As Prateek Shrivastava, managing director in Africa for Monitise, the UK-based company that is running the M-banking services in Abuja, points out, it costs about $300,000 to open a bank branch and about $500,000 a year to staff and run it. That’s prohibitively expensive for Nigeria’s domestic financial services industry, which much prefers to focus on high-return, oil-based accounts – even though some have fallen foul of the authorities (a number of Nigerian bankers have been jailed on corruption charges).
Here mobile technology has come to the rescue. “There are more than 100 million mobile phone subscribers in Nigeria,” explains Shrivastava. “This is why the mobile is such a vitally important channel to reach a large population with trusted and secure bank-grade financial services.”
Monitise’s M-banking project has taken off. Launched as a pilot project in late 2010 in four cities – the capital Lagos, Port Harcourt, Ibadan and Abuja – under a provisional licence from the central bank, it had signed up 6,700 people by July of this year. Take-up was so promising that in August the central bank gave the green light for a full-scale roll-out of a mobile banking platform that will be shared among domestic and international banks.
Cross-selling opportunity
The implications for sub-Saharan Africa and other regions are seen as far wider than just banking, although it’s certainly good for the latter. Latin Americans, for example, typically start by using mobile banking for basic services such as remittances, and then progress to buying insurance, pensions and loans.
But the broader economic benefits alone are significant and probably transformational. Mobile banking helps grow the economy by oiling the engine of commerce as more agents, merchants and customers are drawn into the network. It boosts tax income, makes the economy more transparent, and serves as a catalyst for employment – Nigeria’s pilot programme alone created 170 jobs.
Then there’s the social payback. According to Shrivastava, “bringing people into the banking system through mobile financial services can make a huge difference to both individuals and families’ lives.”
M-banking, sometimes known as transformational banking, has a short history. First pioneered about 12 years ago by telecommunications companies, it’s generally now practised in a partnership either by telcos working with established banks or, as with Monitise and other mobile payments companies, with a wide range of card companies, domestic and international retail banks, or by new entrants to the market who have spotted its vast potential.
Kenya’s hugely popular M-Pesa, which is backed by phone company Safaricom, is an exception in not having a banking partner – to the annoyance of the traditional banking community. That’s because M-Pesa doesn’t have a banking licence; arguing that as it’s only a remittance service, it doesn’t need one. Kenya’s banking regulator happens to agree but the issue, one of those growing-pain problems identified by the Swedish researchers, remains unresolved.
By contrast South Africa’s runaway success, Mzansi, serves as a platform for the branch banking industry in a country with low internet penetration but high cell-phone ownership (about five million South Africans out of a population of 49 million have internet access, compared with about 35 million mobile phone users).
Mzansi allows mobile-operated accounts to be opened at several retail banks, as well as the Post Office. For most of its partner banks, Mzansi serves as a low or no-profit service that may turn in time into valued accounts. Meanwhile, the value for the phone companies is that it helps keep customers loyal. Once they’ve signed up through a particular company, they tend to stay with it.
A question of trust
M-banking’s rapid adoption in some regions often reflects the population’s general dislike and even distrust of retail banks. In some Latin American countries, the opening of an account is a bureaucratic and time-consuming process. Also, it’s by no means uncommon for people to have no personal identification, a problem M-banking has been able to circumvent by accepting letters of confirmation from village mayors or chiefs.
But probably the main reason why many Latin Americans distrust banks is historical. Most Spanish-speaking countries have experienced long periods of political instability, even turmoil. In some, banks were nationalised or collapsed: a disaster for ordinary citizens, because much of Latin America doesn’t have deposit insurance. As a result, countries such as Paraguay, Venezuela and Peru became largely cash-based societies, especially in rural areas.
For these reasons, many Hispanics and Latinos emigrating to America were for years more likely to trust their money to retail chains such as Wal-Mart, Home Depot and 7-Eleven. After all, there was no possibility they would be nationalised.
Although M-banking has also invaded the US, many of these emigrants still prefer to send remittances back home through these non-traditional channels; as well as more accustomed ones such as Western Union and MoneyGram. And it’s big business – last year remittances by Hispanics and Latinos hit about $100bn.
The next generation of Latin American bank customers are likely to be more tech-savvy, however. Earlier this year Telefonica and MasterCard launched a mobile banking service in 12 Latin American countries under the Spanish phone company’s Movistar brand. A vast project, it aims to make the partners’ portfolio of financial services available to no fewer than 87 million current and potential Movistar customers, probably through so-called mobile wallets or pre-paid accounts.
According to Mastercard, the project will “achieve financial inclusion for the underserved” in the region. It’s also a potentially lucrative business that has passed the traditional industry by. In Latin America alone, the value of mobile transactions is forecast to reach $63bn by 2014.
The project can also legitimately be seen as an assault on the distrustful cash-based economy that has kept many communities impoverished. As Joaquin Mata, Telefonica’s global head of financial service, says: “This initiative arms us with the right artillery to strengthen our war on cash.”
Embracing the unbanked
The enthusiasm for M-banking in Paraguay, one of the poorest countries in the region, shows what it can do. Many rural areas have no access to formal financial services, and yet Paraguay leads the entire region in M-banking take-up. It’s the only Latin American country which has two live mobile-money platforms – Tigo and Personal – and both have posted almost overnight success. According to the central bank, of a total population of six million, about 60,000 Paraguayans already use mobile money services on a regular basis, and the number is increasing.
Market-leader Tigo started it all off as recently as 2008 with Tigo Cash, a multi-functional e-wallet designed mainly for retail payments. The company followed up in 2010 with a mobile money services facility under the brand name Giros Tigo, focused on remittances. It’s an over-the-counter model, as in Abuja, whereby the sender finds an agent to despatch e-money to the recipient. The latter receives a text message advising that the money is available, and then goes to another agent to cash the remittance out using a secure PIN.
Some countries are doing better than others in embracing the unbanked. In Nepal, where the notoriously corrupt and illiquid financial sector (several banks got the thumbs-down in the latest IMF stress tests) has proved largely uninterested in marginal customers, they have just received a belated boost by the central bank. This time though it’s not an M-banking initiative.
The central bank will make it easier for so-called Class C and D institutions – essentially, finance firms – to open branches in 30 districts “with low financial access;” while, unusually, commercial banks will be forced to open two branches outside lucrative Kathmandu, one of which must be in a rural area. The government will also support the spread of the microfinance institutions that have proved so important in impoverished Bangladeshi communities.
Indeed Bangladesh underlines the long-term value that the financial industry can gain by embracing the unbanked. Having missed out on the demand for microfinance there, retail banks have belatedly discovered that today’s low-value customer may be tomorrow’s high-return one. The industry has been caught on the hop by the rapidly growing affluence of Bangladeshis and clamour for all kinds of loans for mortgages, automobiles and marriages. According to research by Standard Chartered Bank, demand for consumer services is 10 times higher than supply. Growth in retail banking has grown by double digits for the last five years.
At present, red tape limits the number of branches that foreign banks can open outside Bangladesh’s main cities, and the expense of opening and running branches in rural areas inhibit the development of nationwide networks. But some retail banks are taking a more conventional route to the unbanked by opening automatic cash machines in rural areas.
But many observers think that, as in other countries, M-banking will turn out to be the better approach in the long run.
