Posted by: Caitlin | February 10, 2008

Mobile banking and the end of the cash era

The Consultative Group to Assist the Poor (CGAP) and DFID recently published an interesting study on the role of branchless banking in granting the poor access to financial services. Here is the report’s somewhat pedantic explanation of how branchless banking works:

“In the nonbank-based model, customers have no direct contractual relationship with a fully prudentially licensed and supervised financial institution. Instead, they exchange cash at a retail agent in return for an electronic record of value. This virtual account is stored on the server of a nonbank, such as a mobile network operator or an issuer of stored-value cards. Once customers have a relationship with the nonbank provider, they can order payment of funds to anyone else participating in the system and can receive payments from them. If the system relies on a POS network and plastic cards, customers must visit a participating retail agent every time they want to conduct a transaction. If the system is mobile phone based, customers need to visit a retail agent only to add value or to convert stored value back into cash.”

In Kenya, the M-Pesa system created by telecom giant Safaricom allows Kenyans to purchase items by accessing money through their mobile phone. Within ten months of its creation, over 1 million Kenyans have registered for M-Pesa, which also allows person-to-person transfers. Safaricom also provides the “sambaza” service, which allows users to transfer airtime between mobile phones (I learned this the hard way by lending my phone to a sly friend).

Paying by mobile phone is useful in a country where less than 19% of the adult population has a bank account, much less a credit card, but almost everyone has a mobile phone. This study predicts that as long as branchless banking is not too heavily regulated, the nonbank model will soon offer financial services other than payment, such as earning interest and granting loans. Mobile banking is effectively allowing developing countries to leapfrog and join the cashless transaction structure that is now the norm in many countries.


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