I tend toward curmudgeonry, as you might have noticed. And I don't spare new technologies of my skepticism even though I am a natural computer programmer. (Really, what was so bad about punch cards?) I don't have a smart phone, but am pleased with two features of my dumb phone: It can receive calls. And it can make them too.
And especially because of all the hype about high-tech microfinance, my attitude has been "show me." As I wrote in July,
So when I hear about how mobile phones and smart cards will revolutionize microfinance, I ask, What's the business case? How does it solve the business problems traditional microfinance solves?
Of course, I was also unimpressed the first time I heard about the web, blogs, and Twitter. But you can see I came around to those. In time I will probably do the same for high-tech microfinance---or have already, thanks to a post on saving through M-PESA on CGAP's technology blog.
Most success in high-tech banking for the masses has come in helping people transfer money. In Brazil, people use ATM-like machines at local shops to pay electric bills. In South Africa, the Philippines, and Kenya, people punch buttons on their phones to shift funds. The really extraordinary success, in fact, has been M-PESA in Kenya, which CGAP is all over. Barely two years old, M-PESA now serves something like a quarter (more?) of Kenyans. (Aid success alert: the U.K.'s aid agency sponsored the development of M-PESA.)
These are fantastic achievements. And with more than 4 billion people---more than half of all people---toting mobile phones, and with that number rising rapidly, the global potential for phone-based solutions is huge. But an important question stands, as far as I can tell: can high-tech supplant traditional microfinance methods in the domains of credit, savings, even insurance? For example, if village bank members could skip the weekly meetings and pay their loan installments by phone, that would save clients and microfinance institutions a lot of time and money. But if abandoning meetings dissolved the essential glue of social pressure ifor repayment, it might utterly fail.
That is the frame of mind I brought to Olga Morawczynski's September post on Why M-PESA should offer savings accounts. The post's implications blew my mind after they sank in. In a fine example of innovation from below, many customers have been using M-PESA as a savings account:
The fact that M-PESA is being used for savings illustrates the latent demand for appropriate savings products in Kenya. By appropriate, I mean accessible, affordable and safe. M-PESA scores very well on two of the three. In regards to accessibility, there are about 11 times more M-PESA agents than there are bank branches in Kenya. With no monthly or maintenance fees, and free deposits, M-PESA is much more affordable than most other savings services. However, it was not designed to be, nor is it regulated as, a savings mechanism. As a result, there are risks involved with this type of savings; liquidity being the most pertinent. If the network goes down, or the agent is out of float, customers cannot access their cash. [Emphasis in original.]
In other words, M-PESA is not quite ideal as a savings bank, but it is new, already pretty good, and one could imagine it being perfected. This is profound because it points a way to safe savings for billions of people.
I see a confluence of several big ideas here:
- However unintentionally, Safaricom, the mobile phone company, has broken the rule that only banks (and Stuart Rutherford) are supposed to take savings. There's a good reason for that rule: anyone entrusted with what bankers call "other people's money" should be carefully monitored and regulated. But within reason, and under the right rules, one can imagine trusting mobile phone companies with this responsibility. Safaricom is not a fly-by-night operation. In the end, mobile savings takers may have to comply with the same rules as banks, or become banks, or partner with them. But for now, a bending of the traditional rules has allowed an important innovation to sprout.
- The seed of the innovation is a simple idea: whenever you prepay, you are saving. That is how phone companies slipped into banking. When you buy airtime minutes, that is saving. When you use the minutes, that is withdrawing. When you give your minutes to a friend, that is a money transfer. When you give them to a border guard, that is a bribe. What makes phone companies special as takers of savings-like prepayment is that they are in the business of providing low-cost, user-controlled digital connectivity. You may save when you prepay the milkman, but it's not economical for him to go into banking by transferring credits among his customer's accounts.
- Another barrier to microsavings is that it tends to be a custom service, whereas credit can be more mechanical. You make the same loan payment each week, but you might want to save or withdraw from savings differently each week. In traditional microfinance, in which transactions are performed by human beings, collecting savings at weekly meetings tends to take more time than processing loans; and for microfinance institutions, time is money. Happily, computers like the ones in people's phones can easily manage the millions of minute transactions. That was not true when modern microfinance was invented.
- That said, technology does not eliminate the cost of transacting. A major challenge in high-tech microfinance is managing the interface between paper and electronic money. People need to be able to turn cash into electronic deposits and vice versa. This can be done with machines, such as ATMs, if the cost of the equipment is reasonable compared to the small amounts of money being moved. Or people can do it---usually not bank tellers, but agents, perhaps the same people who sell minutes via scratch card. Either way cash must be securely transported between banks and agents, and that costs too. Evidently M-PESA has found these costs manageable. Perhaps agents are cheaper because they integrate banking with their retailing business. They stay in one place and serve fewer customers while a microfinance employee specializes in banking and must spend a fair amount of time traveling from village to village to do enough volume each day.
- Savings, as we on this blog know, can substitute for credit more than is generally understood. And savings is superior to credit in the development as freedom perspective. It is much harder to get in trouble by saving than by borrowing.
- The prevalence of mobile phones is historically extraordinary, something even a curmudgeon like me must recognize as radical and disruptive. And it's a revolution in connectivity, which on principle seems like a good thing. Think about it: a majority of the people on the planet now carry a globally networked computer.
The natural dominance of the mobile phone business by large companies should make the regulatory challenges manageable.
Thus the mobile-ization of savings is the first high-tech package that I can imagine making traditional microcredit obsolete. I don't mean to imply that we should hasten that day for its own sake, nor that that obsolescence wold be complete, but only to convey the magnitude of this earthquake. And yes, mobile banking might not reach the poorest, those who can't afford phones, but neither does microcredit.
For all the justifiable hope for a high-tech microsavings revolution, Morawczynski ends cautiously:
Mobile operators are not launching savings products due to business model and regulatory constraints. Most will focus on developing their core mobile money services before supporting cross-domain business models with micro-deposit institutions including microfinance institutions and savings and credit cooperatives...
If this is the case, then it could be a while before we see the mobilization of savings via the mobile. This is unfortunate. There are currently billions of dollars stored under mattresses in the developing world. This means that the market for savings could be just as lucrative as the one for remittances. Perhaps the mobile money industry needs to shift its focus.
I'd go beyond "perhaps." This should be a call to action for the new year.