No Bank Nearby? No Problem. Cell-Phone Banking Booms In Developing World
From the Philippines to Mexico, things like extreme poverty, topography and security problems often make traditional banking a serious challenge. Global cell phone penetration, however, has opened up a new option: mobile banking.
MEXICO CITY – In the Philippines, a trip to the bank can sometimes take two days – and might require a boat to get there. Such is life in a country that's made up of some 7,000 islands, not all of which have their own bank branches.
Those who are not willing or able to take an overnight ferry just to pay a telephone or electricity bill can turn instead to a "collector," someone who makes it his business to go from island to island collecting bills and the money to pay them – all for a commission, of course.
In recent years, however, a third option has emerged: mobile banking. Since 2006, the dominant mobile phone company in the country have been converting cell phones into payment platforms, for the cost of a text message and without the necessity of opening a bank account. It could mean an end to "collectors."
Filipinos make some 150 million mobile phone banking transactions annually, including money transfers, service payments and subsidy payments. There's huge room for growth as well – particularly in rural areas. About 40% of the country's municipalities are without a bank. But almost all Filipinos have a cell phone.
"Electronic money is an opportunity to include a large percentage of the population in a cost-effective way," says Nestor Espenilla, deputy director of the Filipino Central Bank.
Safe, cheap and easy
Across the Pacific, Mexico is now thinking about doing something similar. Mexico doesn't have the same geographical challenges that make banking so difficult in the Philippines. But its citizens do have to deal with serious security problems, particularly assaults by gang members.
Proponents of the technology insist that mobile banking is neither complicated nor risky. Putting money in the account is as easy as putting money on a pre-paid cell phone: the transfers are made by text message and don't require a bank account. The deposits are made to a specific telephone number, which reduces chances of account mix-ups. All of this is possible because modern cell-phone chips are identical to the chips used in credit cards.
"Each user has an account with the mobile phone operator, but all of the money is deposited in a bank account," explains the Spanish consultant Ignacio Mas, one of the promoters of worldwide mobile banking.
"The bank issues one account, and the mobile phone operator divides that account into 15 million accounts. In the end, you have the same protections as if you had a bank account, because investment is done with all of the same regulations as a regular bank account," he says.
Mobile banking, sometimes called SMS banking or M-banking, is also gaining ground in Africa. In Kenya, for example, annual GDP per capita is barely $1,600. Two thirds of the territory is arid, unemployment is around 40%, and half of the population lives below the poverty line. Traditional banking is out of the question. But mobile banking can and does work there, since about half of Kenya's population has a mobile phone. This past August, in fact, 16 million cell phones were used to pay for public services, representing about $1.2 billion, according to Kenya's Central Bank director, Njuguna Ndung'u.
"Mobile banking allows us to save about $3 per operation, and if we take into account that we have millions of operations every month, the savings are impressive," says Stephen Mwaura, the director of the National Payments System at the Kenyan Central Bank. "It's not only saving money, but also time and quality of life," he adds.
Like in the Philippines, Kenyans no longer have to travel long distances to take care of financial transactions. "The advantage with electronic money is that it costs the same to transfer one dollar as one thousand," says Ignacio Mas.
The retail distribution model
The Achilles heel of mobile banking continues to be cell phone connection and compatibility problems. With that in mind, many Latin American countries have adopted public policies with two goals: to regulate the industry and make sure it is cost effective; and to make sure that banks, and not just mobile phone companies, are involved in the effort.
"In Guatemala, the banks and the telephone companies have not wanted to launch any new products until there was clear regulation," says Ricardo Estrada, a regulation specialist in Guatemala's banking regulatory agency. Estrada's efforts for clear regulation were supported by a network of policymakers called the Alliance for Financial Inclusion (AFI).
In Mexico, the process began with the creation of banking partnerships, which allow individuals to do basic banking in any store, not just a bank. "The mobile phones aren't really the most important part. It's the ability to forge relationships with stores. If I don't have any way to convert cash into electronic money, then the system doesn't help me at all," says Mas.
According to the Spanish expert, one of the reasons that the mobile phone companies have progressed more than banks themselves is that they understand the retail distribution model better. "You have to have establishments with a large cash flow where people feel welcomed, and that is not always the case with banks," he says.
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