Studying the Past, Looking to the Future: Microfinance’s Bridge to the Digital Future
It's hard to believe in the age of mobile money that at one time a loan officer using a palm pilot was considered pretty high tech. Now that technology is all but obsolete (I have one if you want it!). Mobile money and cell phones won't have such a short lifespan. As we will hear next week and in the upcoming Speakers Corner, USAID and its partners have several mobile money initiatives. The first program I knew of was the Haiti Mobile Money Initiative funded by the Bill and Melinda Gates Foundation and supported by USAID/Haiti. Lawrence Yanovitch, who has been one of USAID's partners through the years, describes the exciting promise of microfinance paired with this technology.– Anicca Jansen
Microfinance’s Bridge to the Digital Future
Today, a Massai herdsman can use his mobile phone powered by solar energy to get a better price for his cattle. He can then take his savings and store them in “the cloud” via a mobile money account, accessible anywhere on the Kenyan plains through his phone. This leap into the digital future has been made possible through a progressive alignment between the Kenyan government, the mobile industry, banks, and microfinance institutions.
This alignment, however, is the exception rather than the norm. Despite having over 200 deployments in developing markets, mobile money has not reached scale in many countries, often because stakeholders have not aligned with each other and the regulatory environment is not conducive. It is time to change that. By tailoring services to the needs of those who live outside of modern infrastructure, microfinance institutions and mobile operators have succeeded, independently of each other, in reaching many of the two billion people who transact their daily lives in the equivalent of pennies. At the same time, many governments see the opportunity of digital financial inclusion, but are uncertain on how to bring it about.
I serve as president of the GSMA Foundation, which supports public-private partnerships between the mobile industry, governments, and civil society. Previously, I had a career in microfinance and philanthropy. Our work at the GSMA Foundation enables us to see how the parallel tracks of microfinance institutions and mobile operators are ready to converge. Both industries can learn more about the other and partner more effectively with governments. Regulatory reform is critical to accelerating digital financial inclusion.
Twenty years ago when I opened my first village bank in Senegal, in my excitement, I overlooked an important fact: transporting US$5,000 of cash from Dakar to make US$50 loans to 100 women was dangerous. We had little choice—the nearest bank branch was hours away. As I travelled by bus with the avuncular village sheikh who bundled the cash in a sack, I asked if he shared my concern. He gently smiled and showed me his concealed pistol. Many front-line microfinance workers experience these dangers, and yet these risks are common for the two billion people who have no secure way to store their money or transport cash.
In the 1990s, the microfinance industry knew that technologies could be a game changer, but we didn’t know how to access the digital future. Our problems included not just security, but the paper-intensive administration of working with tens of millions of low-income customers.
In 2006, I joined the Bill and Melinda Gates Foundation. We started thinking about 21st century solutions for banking the world’s underserved. Several things popped. Most important was the realization that the central problem that left half the world’s population unbanked was the cost of cash—the fact that transacting in cash, whether for making or collecting payments, sending money across a distance, or disbursing a microloan, is disproportionately expensive for small sums of money.
Around that time, Safaricom, the largest mobile operator in Kenya, launched M-Pesa, a mobile money service that was originated to help a microfinance institution improve efficiencies. Subsequently, Safaricom found that its customers simply required a service that allowed them to easily send money to each other and streamlined the service into a domestic remittance offering. This innovation sparked a near-ubiquitous mobile payment service in Kenya. M-Pesa then partnered with financial institutions to offer digital efficiencies in microfinance loans, savings, and insurance. Today, the GSMA Foundation supports innovations to scale mobile money services throughout the developing world.
At the GSMA Foundation, we believe that once low-income customers have access to mobile money services, a range of additional financial products become affordable. In the future, we see many opportunities for the integration of microfinance and mobile money services. Microfinance institutions have a rich history serving poor communities and understanding their wants and needs, whereas the mobile industry has built a commercially sustainable communications, information, and transaction network that reaches into these communities. Together, the two industries can put the world’s two billion unbanked on a pathway to meaningful financial inclusion.
This brings me to the opportunities to bring together the mobile industry, governments, and microfinance. According to GSMA’s Mobile Money for the Unbanked 2013, State of the Industry report, there are 13 mobile money services each with more than one million active customers, and the sector is growing in all regions of the developing world. Previously, there were but a few countries with this kind of mobile money penetration. We think that the timing is right for microfinance institutions to begin to partner with mobile operators to deliver a full range of financial products on a digital backbone to increase customer security and convenience.
Microfinance professionals have served low-income customers for decades. This gives them insight into how to tailor digital products for the financial lives of the poor and design consumer protection standards. The “high touch” customer interface of microfinance front-line workers who provide a range of financial products complement the lower touch requirements of operator agents who concentrate on airtime sales and mobile money services. For their part, mobile network operators offer authentication by linking a password to the SIM card inside the phone, customer usage data, and vast retail distribution networks. If these two forces come together, governments should prepare to support a wave of innovations in digital financial inclusion.
A few years ago, I had an “ah-hah” moment sparked by a conversation with Jack Weatherford, author of The History of Money. As he accounts, in ancient Lydia, King Cronus sponsored technology to break large gold coins accessible to the rich into small denominations for common merchants, accelerating trade and making the kingdom wildly prosperous.
The parallel is apt. In the 21st century, mobile money operators have tapped into Cronus’ insight, providing access to underserved customers by giving them the ability to transact in amounts that they can afford. And, here I would suggest, is microfinance’s bridge to the digital future.
Resources to Explore:
Success stories from Haiti Mobile Money Initiative (HIFIVE)
- Bringing a Technological Revolution to Haiti
- Haiti Mobile Money Initiative reaches the five million transaction milestone
- Haiti Tech Sector develops solutions for mobile money
Success stories from the Malawi Mobile Money Accelerator Program
- Bringing Competitors Together for Financial Inclusion
- Creating Awareness and Demand for Mobile Money
Resources from Mobile Solutions Technical Assistance and Research (mSTAR)
- Quarterly Report
- Resources detail mobile financial services in Bangladesh and progress made in the cash-to-mobile transition
- Digital Finance for Development Handbook