Big Calling: How mobile banking is eradicating poverty in emerging economies.

from Banking Wire

This explores the new concept thatMuhammad Ynuns has for giving cell phones to the poor. - Kale

by Karen Krebsbach,

Cellphone banking is emerging as an important link that could bring the most basic financial services to the globes billions of unbanked cellphone users. Bringing the unbanked into the formal economy is a key initiative of various playerspayments processors, financial-services firms, telecommunications firmsbut it, like the developing countries most affected, is a work in progress.

The obligation for financial institutions is to serve as the foundation on which such socio-economic progress can rest.

In battling poverty in the developing world with affordable financial services, there is nothing quite as democratizing as the ubiquitous cellphone. Few proponents of economic growth would quibble with the belief that banking integral to the foundation that society is built on, but a full one billion of the globes five billion cellphone owners have no access to financial services. That makes mobile banking the perfect way to bring the unbanked and underbanked into societys fold, according to the International Finance Corp., the World Banks private-sector investment arm that is investing in a dozen mobile-banking operations in poor regions of Asia, Africa and Latin America.

Embracing the financial services ecosystem gives poor people the ability to leverage their existing wealth, to plan for the future better, to save resources and to interact outside of their neighborhood, says Andi Dervishi, who leads investments in alternative-payments systems for the IFC. Unlike the developed world, where mobile banking is an organized, heavily regulated affair, the turf in most developing nations is awkwardly shared by a jostling array of banks, cellphone companies, telecommunications operators and payments firms. That leaves a yawning opportunity for financial-services firms to jump in to serve the unbanked and underbanked who show growing promise to move into the middle class. Mobile banking can now do it all: Send remittances 100 miles or 1,000 miles; pay salaries; reimburse suppliers; pay bills; and act like a debit card in buying groceries or clothes. What it doesnt do wellyetin the developing world is allow people to save in interest-bearing accounts, buy insurance, obtain business or personal loans, use it as a credit card, or buy stocks and other investment products. But all those services will soon be routine, say analysts, and with them, the kind of indelible lessons in financial literacy that raise people up from poverty. Indeed, GDP rises 0.5 percent for every 10 mobile phones per 100 people, according to a 2005 London Business School study, which concluded that cellphone access has a dramatic effect on earning potential.

But the belief that banks can do business while doing good seems lost on most financial institutions, which remain the smallest participants in most mobile-banking operations in the developing world. Banks remain conservative, observes Dervishi. They dont see this as a big opportunity. They are taking a more defensive position, rather than offensive, and not really going after the customer. Their business model needs to be changed. And if 86 percent of the globes population is expected to be living in emerging markets by 2050, as the World Resource Institute predicts, isnt that exactly where banks ought to be?

The transformative power of mobile banking, however, isnt lost on everyone. India, China, Brazil and Russia all now have more cellphones than ATMs, says Nick Holland, an analyst at Boston-based Aite Group. Banks that miss out on this do so at their own peril. And they shouldnt underestimate the technology savviness of this market. Developing does not necessarily mean technology illiterate. Adapted with smart cards, fingerprint scanners and photo-recognition software, cellphones are financial tools useful for even the illiterate among the planets four billion poor, many of whom still hoard their savings under their mattresses, borrow only from pricey black-market lenders and remain security risks for theft after payday check cashing.

Nor does poor mean unprofitable. Plenty of banks are making money doing mobile banking in the developing world, though the journey is not without pitfalls and roadblocks, experts say. Theres lots to win for banks and for the public good in mobile banking, observes Janey Place, CEO of consultant DigitalThinking and a former Wells Fargo executive. Economies become stronger when more people can participate... Heres where the do-good and profit motives overlap. Access to financial services is hugely empowering of the poor.

Citi learned that lesson decades ago, having grabbed a foothold in mobile banking in various developing economies by partnering with a variety of players, from telecommunications providers to cellphone operators, and by being open to adopting a variety of phone standards. Among its most successful launches has been India, where it began experimenting in 2000 with one-directional messaging that drew 100,000 users its first year. Today, the operation boasts two million users, which deliver 12 million to 13 million alerts monthly, offers banks statements and provides options for credit cards and loans. The program has been so successful that Citi has activated it in 26 other countries.

The bank expects to roll out Mobile Money Ventures, will allow stock trading, in Korea and China in the third quarter. The thinking has been to go beyond balances and payments to encompass a total [variety of] customer transactions, explains Satish Menon, the Singapore-based executive of growth ventures and innovation who runs Citis Asian operations. But we had to selectively choose those countries that were ready. In fact, Menon says Citi has learned to be technologically agnostic in most countries, focusing instead on whatever works for the customer.

Next on the horizon for Citi? Near-field-communication technology, or NFC, that works by embedded contactless chip in the cellphone. The chip allows owners to purchase items with a simple tap of the phone, and effortlessly send remittances. The mobile wallet is the future, Menon says, noting that Citis openness to experimentation has been the key element that has kept it nimble. A pilot project begins in India later this year.

Another bank that claims early-mover advantage is Istanbul-based $61 billion-asset GarantiBank, which has been marketing its Web-based cellphone-banking prowess through TV and billboard ads since the service was launched in February. In the first two months, Garantis Mobile Banking Portal signed up 50,000 customers who racked up more than one million page views and inquiries, more than 30,000 transactions and $24 million in transaction volume, according to evp Fuat Erbil. The bank had first launched the short-message service, or SMS, banking in 2003. Today, the country claims 1.3 million mobile-banking customers; thats not bad, given Garanti was first to market in a country where 50 percent of 75 million people remain unbanked, Erbil says. Even if we get only 10 million of that number, it would be a great success, he says. But you have to be patient. The customers resistance is not to the cost. The challenge is making them use it once, until they see how easy it is to use.

Since only 26 percent of Turkeys population has computer Internet access, beefing up the banks Web-based banking made little sense, says Erbil. But Web-based cellphone banking did, since 76 percent of the population own cellphones. Finding a protean technology in Volantis and Hewlett Packard, GarantiBank and the pair built a platform that works on more than 5,100 cellphone models, offering a wide variety of transactions from remittances to paybill services to foreign-exchange buys and stock purchasing. For these tens of millions, their mobile phone is the only point of access, he says, noting that Turkeys second-largest bank hopes to move into mobile banking in Russia and Romania in 2009.

It is the poorest reaches of the globe where the deepest resistance among banksand, therein, the greatest opportunity for deep, lasting alleviation of poverty to providing mobile banking lies. Most of the developing world uses the global system for mobile communications standard, or GSM; it now covers about 82 percent of the mobile market and is used by about three million people, according to the GSMA, a trade group for the mobile-communications industry. GSM makes it easy to switch to SMS text messaging, which is supported by more than 799 mobile operators in 218 countries. But just because financial-services firms have been slow to jump into the mobile-banking fray in the developing world, it doesnt mean other providers have been so timid. A smattering of initiatives, not all of which involve banks, include:

* In Latin America, Spanish telecommunications giant Telefonica is partnering with the Inter-American Development Bank on a mobile banking initiative launching this month and targeting 175 million unbanked across the 13 nations in South America. The Spanish telecommunications giant says about 65 percent of the population has no access to banking services, although mobile-phone penetration is about 70 percent of those unbanked, compared to only 45 percent in 2006. Officials of Telefonica Europe, which is spearheading the offering, say the provider already offers mobile communications to 86 percent of the regions population. This makes the next jumpmobile bankinga no-brainer.

* In Kenya, M-Pesa by Vodafone has been making waves with a mobile-banking initiative launched in February 2007 that is bypassing banks altogether. In its first month, it added 200,000 new customers, and today boasts 1.6 million subscribers. Since the formal banking sector reaches just 19 percent of Kenyas 36 million residents, locals have long been searching for a trustworthy financial-services option. This one, SMS messaging, seems to have struck a chord with its sheer simplicity, says Aites Holland. Whats interesting in Kenya is theres no bank involved at all yet, he says. But they are ignoring the sheer numbers of the unbanked. Theres a huge scale of opportunity. M-Pesa, which stands for mobile money in the local vernacular, lets customers add credit to their account at some 1,500 shops and kiosks, where customers can also pick up sent cash. Customers can send credit to other mobile phones via a code-bearing text message. By comparison, Kenya has about 580 bank branches, according to the countrys central bank. Vodafone, like other service providers, makes money by charging fees on transactions. Customers pay about 45 cents to transfer money to another registered M-Pesa customer. Transfers to people who havent registered with the M-Pesa service cost between $1 and $6 per transaction, depending on sum. Signing up and money depositing are free, as is transferring airtime credits from one M-Pesa customer to another.

* In the Philippines, GCash uses cellphones to store cash credits transferred from other phones or purchased at a post office, kiosk operator or the office of a licensed operator. With their phones, customers make purchases and payments or withdraw cash as needed.

* In Nigeria, MoneyBoxAfrica, an initiative promoted by Nigerias Integrated Capital Service, is partnering with German vendor Paybox to roll out a mobile banking and payments system this summer. Some 80 percent of the nations population is unbanked. The partners hope the offering will expand across the continent to create the first truly pan-African mobile banking and payments system in 2009. The Mobiliser platform allows customers to remotely save money in accounts, add funds to their phones like a debit card, pay utility bills and tithes, buy insurance, send remittances to friends and relatives, withdraw cash at agents locations or ATMs, and obtain access to credit and investments.

* In Latin America and the Caribbean, remittance giant Western Union Corp. of Englewood, CO, is rolling out a cellphone service this quarter to enable workers in the U.S. to send money to relatives in Latin America. Fort Worth-based RadioShack Corp. and Dallas-based Affinity Mobile are part of the deal, which will allow customers to buy a prepaid Affinity mobile phone at any of RadioShacks 4,300 stores in the U.S., at a cost ranging from $19.99 to $79.99 each; the phone includes a stored-value card, which can be loaded with up to $2,500 and function as a debit card. The network in the U.S. includes RadioShack, 47,000 Western Union outlets and 65,000 convenience stores and pharmacies. Sending money is done through a cellphone transaction for a set fee, currently $9.99 to send up to $1,000, though officials say growing competition in the remittance field will force that fee to drop. Cash pickup is done at any Western Union office in Latin America or the Caribbean. This is a major, high-margin business: In 2004, workers in the U.S. sent a whopping $34 million to Latin America and the Caribbean, according to the Pew Hispanic Center. Some 43 percent of those Latino workers in the U.S. lack a bank account, the Pew Center says.

Strife-torn South Africa is becoming the petri dish of mobile-banking experimentation, with the three largest banks competing for 47 million South Africans, 25 million of whom are poor and live in rural areas with no bank branches. Though the nation boasts only 13 million bank accounts, with an estimated 48 percent of adults unbankedan astounding 30 million residents own cellphones. It is a strange case of a previously white-dominated society...that now has to embrace 25 million poor people who have been outside of financial services forever, explains the IFCs Dervishi. But the banks were pressured to do something and they realized it was something they should have been doing all along. So that initial resistance has disappeared. One bank has partnered with a mobile operator; another has teamed up with a telecommunications firm. First National Bank is joining forces with Clickatell to expand its Contact SMS alert services.

But the most innovative experiment, say observers, is Wizzit, an upstart launched in 2004 by South African banking consultant Brian Richardson that is rapidly gaining market share; Wizzit is a unit of South African Bank of Athens Ltd. and has attracted a 10 percent stake from IFC. Though only 200,000 South Africans have signed up for the service, Richardson is confident he will make a dent among the 48 percent of the adults who remain unbanked. The model allows customers to pay bills, store cash like a debit card, transfer funds and send remittances, although loan applications and payments are not yet an option.

Accounts can be opened in 30 seconds via a call center, and sold via Wizzkids, part-time workers who are spreading though the countryside like a swarm of locusts. Opening an account costs $5.50; buying groceries costs 25 cents; withdrawing cash at another banks ATM costs up to $2, depending upon the bank. Richardson expects the service to be profitable by the end of 2009, but that hasnt stopped it from expanding into Zambia and Eastern Europe.

The services uses a technology called unstructured supplementary-services data, or USSD, which acts much like SMS with a fundamental difference: Its an interactive technology that offers a constant link between user and network, so users can be confident a transaction has occurred in real time. Although the Wizzit markets itself as a true virtual bank with no branches of its own, it has a partnership with Absa Bank and Postbank for depositing cash and checks. Wizzit claims to be 30 percent cheaper or $2.80 lessthan an account at any of the four major brick-and-mortar South African banks; that tiny sum makes a difference when the average Wizzit user earns the equivalent of $257 a month. South Africa is a good laboratory for a bank to say, Im going to go after this and not just leave it up to the other players, says consultant Place.

Its an irony that undeveloped markets have leapfrogged past the technologies of mature markets, reversing the traditional flow of technology innovation. Until recently, developing world consumers tolerated third-rate technology and their role as the dumping ground for antiquated products and hand-me-down services.

But cellphone capitalism is changing all that. Encouraging economic growth through mobile commerce, a term in the development world that is known as inclusive capitalism, appears much more effective in poor nations than pumping in international aid money. In fact, several sources mention the success of Bangladeshi Nobel Peace Prize winner Muhammad Yunus, founder of Grameen Bank, whose microfinance movement has provided tiny loans to more than 90 million business people in the developing world, helping them dig themselves out of poverty.

Others point out that the potential to do the same is much greater with mobile banking, which is expected to add one billion more customers by 2013. That vision was not lost on Iqbal Quadir, a Bangladeshi expatriate now living in the U.S. who helped found in 1996 Grameen Phone Ltd., which has since started the careers of more than 250,000 phone ladies in Bangladesh, one of the planets poorest countries. Women use microcredit to buy $150 cellphone kits, each equipped with a long-lasting battery. The women become their villages phone operator, charging small commissions for villagers to make and receive calls. Soon, the entrepreneurs are expected to add cellphone bankingparticularly remittance servicesto their repertoire. Grammen Phone, which has morphed into Bangladeshs largest telecom provider, claims annual revenues of about $1 billion. The idea is being duplicated in Rwanda, Uganda, Cameroon and Indonesia.