Financial Inclusion: Mobile Banking

Naveen Garg

Introduction
The world has been in the grips of a financial crisis for past five years, history’s worst after the great depression of 1930s. At the center of this crisis are capital markets, governments, corporations, and investors. Continuing sluggish demand is one of major concerns for the policy makers and a much debated way to improve the demand has been increasing money supply so that people can spend more. In the discussion of financial crisis and slow growth, there is very little consideration given to those hundreds of millions of people who are not even part of the mainstream economy but can be a great source of demand. Discussion of financial inclusion thus becomes even more relevant in the context of this new economic reality.

Among many problems faced by the poor is very limited access to even the most basic financial services, including savings deposit accounts and the ability to make payments easily and efficiently. Access to affordable financial services is linked to overcoming poverty, reducing income disparities, and increasing economic growth. Worldwide, approximately 2.5 billion people do not have a formal account at a financial institution  (Demirguc-Kunt and Klapper 2012). This problem is even more critical among the poor, as adults are more than twice as likely to have bank accounts if they reside in a high-income country or are amongst the wealthiest people in the developing world. The underlying reason of this situation is not just poverty: cost, distance, and paper work are also considered as influencing factors  (Demirguc-Kunt and Klapper 2012).

The ability to make payments may seem to be a trivial aspect of financial system but has fundamental implications for financial development and inclusion  (Klein and Mayer 2011). A large portion of the population in the developing world still does not have access to any organized and mainstream system of making payments and thus relies solely on inefficient cash-based methods. Fortunately, with the rapid growth in wireless communication, there is now a tool available to begin to solve this problem and increase financial inclusion. Over 4 billion people living in the developing countries have access to a mobile phone (Information and Communications for Development 2012). In many developing countries mobile based banking and payments systems are already a huge success. In sub-Saharan Africa mobile banking has expanded to 16% of the market where traditional banking is not effective due to lack of transportation and infrastructure  (Demirguc-Kunt and Klapper 2012). Society for Worldwide Interbanks Financial Telecommunication, SWIFT, predicts that there will be 900 million users and USD 1 trillion in transaction value through mobile payments by 2015 (SWIFT 2012).

Like any other new development, these systems have their own challenges, related to technology, business viability, and regulation. With a broader representation of countries from the developed and developing world, the G20 summits can be pinpointed as an excellent platform to stimulate the discussion from a regulatory perspective and increase the support for mobile banking initiatives across the world.

 

The G20 Perspective

The G20 is an international forum with varied objectives, including policy coordination between its members to achieve global economic stability, sustainable growth, and the creation of a new international financial architecture. This international forum not only promotes cooperation between governments and policymakers but also tries to engage civil society and non-governmental organizations in a broader discussion  (Culpeper 2012).

The issue of financial inclusion is central to the agenda and mandate of the G20. Roy Culpeper (2012) discusses the evolution of financial inclusion in the G20’s agenda and various initiatives undertaken by the organization. Financial inclusion was put on the G20 agenda in November 2008 and was formally launched in September 2009 at the Pittsburgh meeting. As part of Financial Inclusion Initiative (2008-2010), Financial Inclusion Experts Group (FIEG) was setup to provide recommendations on expanding access to finance for households and small & medium scale enterprises (SMEs). Two sub-groups were formed: SME Finance and Access through Innovation http://www.boell.org/downloads/Culpeper_G20_Financial_Inclusion.pdf (Culpeper 2012).

The focus of the latter group was to improve access to financial services through innovative methods such as mobile communication. This group was supported by Consultative Group to Assist Poor (CGAP), an independent entity with membership comprising 16 donor countries, 11 multilateral development organizations and 5 private foundations. In the Toronto G20 Summit Leaders’ Declaration (2010) nine “G20 Principles for Innovative Financial Inclusion” were endorsed. Later, at the Seoul G20 Summit (2010) an action plan was developed with some key items as follows:

  • Encouraging financial inclusion and coordinated information sharing;
  • Promoting Public-Private partnership to increase access to financial services;
  • Improving the quality of data to measure financial inclusion; and
  • Improving national, regional and international coordination.
  • In coordination with the Alliance for Financial Inclusion, CGAP and International Finance Corporation, G20 launched a Global Partnership for Financial Inclusion (GPFI). The purpose of this initiative was to provide a systematic coordination and implementation structure for the Financial Inclusion Action Plan. The GPFI encourages the development of tools and diagnostics for financial inclusion.

    As discussed above, there is a definite appreciation for financial inclusion in the G20 and associated bodies. Mobile communication based solutions are increasingly considered as tools to improve financial inclusion, especially in the developing countries. Some countries have already made noticeable progress in innovative ways to push financial inclusion further. This issue is as much international and multilateral as it is local to these countries. The G20 with its wider scope and broader representation can be an effective platform to resolve some of the issues faced by mobile banking and payment systems.

     

    Mobile Banking and Payments

    Technology is an integral part of the financial systems in both developed and developing worlds. Unfortunately, in the developing world the benefits of financial technology have largely been limited to the urban or semi-urban population with access to ATMs or internet. People in the rural areas still use the conventional banking or are unbanked. However, in the last decade this proposition has significantly changed in many developing countries with a rapid growth of mobile banking and payment systems. According to SWIFT, there were more than 130 mobile payment deployments in the world as of early 2012 and 100 more were in planning phase. According to the Groupe Speciale Mobile Association (GSMA), the number of mobile money deployments increased by about 38% in 2012 (GSMA 2013). In sub-Saharan Africa 37% of their mobile network operators have already launched mobile money and 34 out of 47 countries in the region have now implemented mobile money services (GSMA 2013). There are other such examples in countries like India and Philippines as well.

    The potential of mobile banking has also attracted large and diverse corporations such as Vodafone, Google, Carrefour, PayPal and credit card companies like MasterCard and Visa to invest in this field. Many new technology start-ups across the world are also driving innovation to enhance mobile payment technology further. Recently Monitise, a mobile banking services company, announced that it will shortly be launching a BlackBerry Messenger based person-to-person money transfer service with a bank in Indonesia. Others are working with near field communication (NFC), a technology that allows devices to establish radio communication with each other when brought in close proximity, and voice recognition technologies to develop newer mobile banking services. According to SWIFT, mobile banking and payments projects are now a top investment priority for many large banks in the developed as well (SWIFT 2012).

    As the concept of mobile based banking and payment systems is still evolving, many terms such as mobile banking, mobile payments and mobile money etc. are used interchangeably. Based on the specific requirements and regulations of a country or a region the implementation and design of these systems can also vary significantly. As such there is no universal definition of these systems; however, Di Castri (2013) highlights that there are some common elements among mobile payment systems. In his opinion mobile money defined as monetary value that is:

  • “Available to a user to conduct transactions through a mobile device;
  • Accepted as a means of payment by parties other than the issuer;
  • Issued on receipt of funds in an amount equal to the available monetary value;
  • Electronically recorded;
  • Mirrored by the value stored in an account(s) usually open in one (or more) bank(s); and
  • Redeemable for cash” (Di Castri 2013).
  • These systems are instantaneous and typically bypass the traditional bank clearing systems. Convenience, security and efficiency are the key elements of these payment systems. Apart from just being a new hi-tech way of performing financial transactions, mobile banking has far reaching benefits to society. It brings basic financial services to millions of people who are not included in the traditional financial system due to constraints such as distance from bank, lack of money, and high cost of services. Mobile banking services reach to the remote areas where bank branches are not present, allowing the people in these areas to perform transactions without having to travel long distances or waste time in queues. Savings in terms of time and effort result in better productivity.

    There are numerous real life scenarios where these payment systems clearly differentiate themselves. For instance, many people need to remit money to their families. In the absence of a formal banking system in the remote areas, people have to depend on informal channels. This is inefficient and highly risky. Using mobile banking, people can instantaneously send money to their families in a secure way. Another simple yet powerful application is that people transact with small shop owners using mobile money. The shop owner has to secure less cash and can also deal with its suppliers more efficiently. Figure 2 shows the significant underutilization of conventional bank accounts for the two most common channels of receiving money. A lack of technology and difficulty in accessing formal accounts can be a reason for this. Using mobile based payments, people can receive money electronically and can have access to it on the go.

    Mobile banking also enables the use of book-entry money instead of cash. As book-entry money is in electronic form, tracing and recording transactions becomes much easier. Additionally, by bringing these unbanked people into the mainstream financial system, mobile banking and payments systems can work as a catalyst to providing other important financial services like insurance, lending, and savings.

     

    Challenges and possible areas of collaboration

    The technology and business case for mobile banking is proven and it is growing fast. However, there are multiple challenges which need to be addressed to sustain this growth and to maintain the integrity of these systems. Even though mobile banking and payments have a great potential from developmental point of view, the mobile industry has found it challenging to launch and scale services for the unbanked due to policy and regulatory hurdles (Di Castri 2013). To ensure the success of this new model of financial services in multiple countries and contexts, it is important that the learning from success of others is emphasized. Demirguc-Kunt and Klapper (2012) report that 20% of the people who don’t have an account with a traditional financial institution consider distance as the main hindrance in accessing financial services; 13% cite lack of trust while 25% consider cost an influencing factor. A focus on coordinating efforts to address these issues can generate significant results.

    Multilateral forums like the G20 can play a critical role by providing a platform for cooperation, knowledge sharing, and discussion of regulations which can help in addressing issues specific to mobile banking and payments. Like traditional financial services, an adequate level of regulation is required to ensure consumers are protected. As regulations for mobile banking are still evolving, there are many questions to be addressed:

  • To what extent are conventional risk management rules applicable to these new systems?
  • Will the existing Basel rules capture the risk profile of these newer systems?
  • Should mobile banking be regulated by a telecom or banking body?
  • How will the intricacies of national and international governance manage this new area of regulation?
  • With so much uncertainty, is it possible to achieve a homogenous or interoperable implementation of mobile banking platform across the world? Following are some key areas where assistance in terms of policy and regulations can be provided through coordinated efforts.

     

    Allowing non-traditional financial services provides to access the market

    The financial services industry has traditionally been highly regulated by both central banks and governments. In many countries, only conventional banks were allowed to take deposits and perform money transfer activities. The advent of mobile based payment systems challenged this arrangement and faced a lot of resistance in doing so. Initially many central banks did not allow mobile network operators (MNOs) to offer money transfer services, citing risks related to security and the integrity of financial systems. Over time the success of some mobile based systems placated these concerns and regulators have become more willing to provide support to non-bank financial services providers, particularly MNOs.

    In many countries, mobile banking services offered by both banks and MNOs have been vastly successful. This shows that the two channels can co-exist in the market. Di Castri (2013) discusses how countries like Kenya, Tanzania, Madagascar and Uganda now have a higher number of mobile money accounts than they do traditional bank accounts. This indicates that MNOs offer a compelling product to their customers, including their ability to extend financial inclusion. Allowing MNOs to operate in financial services space is all about enabling a competitive market place in which innovation is rewarded and providing basic financial services to millions of unbanked people efficiently and conveniently is the central agenda. Recognizing this, a number of developing countries have taken definitive steps to allow MNOs to offer mobile banking services. These countries include Bolivia, Burundi, Democratic Republic of Congo, Fiji, Kenya, Madagascar, Malawi, Malaysia, Morocco, Namibia, Paraguay, Peru, the Philippines, Rwanda, Somaliland, Sri Lanka, Tanzania, Tonga, Uganda, Zambia, and Zimbabwe, the eight countries of the West African Economic and Monetary Union (WAEMU), and others. Brazil and El Salvador are also working on such regulations (Di Castri 2013).

    In spite of this wide spread movement towards embracing mobile based payment systems, there are still some countries in which regulators have restricted non-bank entities from offering such services or have prohibited mobile payments altogether. Additionally, forcing a bank-powered business model in which an MNO has to engage with or report to a bank might not generate the intended results. Banks could see these services as a lesser priority or competing with their existing services. Additionally, banks will have a different approach to risk management, since the risk profile of a mobile banking business is drastically different. A bank’s approach to handling this risk might have a detrimental effect on the growth of the business. Forums like G20 can be a useful platform to facilitate discussions and provide guidance to the countries that still have apprehension for mobile banking services.

     

    Interoperability and Standardization

    Developing payment systems is a complex process and requires large capital investment. The success of these payment systems is highly dependent on whether the organizations that innovate and invest their money can generate a financial return. This is where the concept of mobile banking and payments becomes a little tricky from the financial inclusion perspective. The company that develops the system and takes the early mover risk wants to ensure that subscribers pay for these services and the late entrants into the industry don’t free ride. One way to ensure this is to have a proprietary technology. The downside of having a proprietary system is that it stifles the competition and interoperability.

    To resolve interoperability issues regulators and policy makers have an important role to play. Regulators can either set the standards or mandate them. Setting standards has its own perils as the technology is fast changing, so the standards set by the regulators might quickly become obsolete, making standard setting a continuing task. The process of mandating interoperability based on cost and cross access charges requires tedious multilateral agreements and managerial discretion. Klein and Mayer (2011)argue that the policymakers and regulators have to find a balance between imposing rules in order to promote interoperability among account providers and not interfering with incentives for the service providers to innovate.

    Interoperability in mobile banking and payments is growing, for example Western Union links to M-PESA in Kenya and India’s Interbank Mobile Payment Service (IMPS) is multi-bank by design. Increasingly, mobile operators are teaming with the banks to provide such services. Examples include Equity Bank with M-PESA, State Bank of India with Airtel, Banamex with América Móvil, Alfa-Bank with VimpelCom, Garanti Bank with Turkcell and Avea. These services are often run on a domestic basis, but service providers are now interconnecting to capture the higher margin international person-to-person remittances. Not one single bank or mobile network operator can provide services across the world, so there is a definite need for cooperation, partnerships, and a common set of rules.

    According to SWIFT, at the international level there is very limited progress from the interoperability perspective. A proactive approach towards setting regulations and policies enabling cross-border mobile transactions will allow providers of these services to grow their services faster and reach to a broader audience. In the international context, currency conversion, anti-money laundering and controls on capital flow can become debatable topics. As a result, internationally coordinated efforts are critical to resolve these issues.

     

    Data Access and Use

    Designing, funding and implementing developmental plans is a complex process and requires data and tools to measure the effects. Unfortunately the quality and quantity of data available to understand the financial inclusion has been inadequate. This problem is much more acute in the less developed countries that do not have resources to implement any comprehensive plans to improve data collection quality. With a large part of the economy relying on cash transactions, it becomes even more difficult in these economies to collect any meaningful transaction data.

    As discussed earlier, improving data quality to assess financial inclusion is one of the focus areas that G20 has also identified. Reliable data and common indicators are considered as enabling factors to measure the progress and impact of the financial inclusion activities. At the multilateral organization level there have been some initiatives to improve this situation. One such initiative is The Global Findex database which provides indicators for measuring how people in 148 economies save, borrow, make payments, and manage risk. These indicators are created through survey data from interviews with more than 150,000 nationally representative and randomly selected adults age 15 and above (Demirguc-Kunt and Klapper 2012). Through Global Partnership for Financial Inclusion (GPFI), efforts are also being made to improve the quality and quantity of data needed to effectively design national policies and targets and monitor progress (Financial Inclusion Experts Group n.d.). Though these are some steps in the right direction, there is still a lot to be achieved.

    Mobile banking can be an important tool in this regard by helping in collection of data in electronic form for millions of transactions. With interoperable national and international networks, this data can be gathered in a homogenous way which can then be leveraged for various analytical and developmental purposes. International multilateral bodies can play an important role in facilitating efforts to develop protocols and frameworks which are implemented by mobile banking service providers across jurisdictions.

     

    Conclusion

    Access to basic financial services and payment systems for people in remote areas of developing economies has been identified as a catalyst for improving financial inclusion. Once the ‘unbanked’ people become part of the formal financial system, opportunities for providing other financial products such as savings, lending and insurance open up. Across the world, numerous mobile operators, banks and other technology companies are successfully implementing these products and pushing the innovation further.

    Even with having significant potential and promise, mobile banking and payment systems face challenges from regulatory and interoperability perspectives. Initially these new financial systems faced resistance from regulators and governments with regards to security and integrity of financial framework. In the recent years governments and regulators have become increasingly supportive; however, still there is a significant ground to cover. A more open and competitive market with interoperable technology will ensure that the incentive for innovation are properly aligned to the market and social needs.

    Multilateral organizations like the G20 have a significant role to play in this regard by providing a platform for collaboration to governments, regulators, industry (technology, mobile and banks etc.), and NGOs. In particular, the G20 has adopted financial inclusion in its agenda and has also identified mobile banking as an effective tool. Various initiatives undertaken by G20 so far also highlight the importance of access to the market for non-bank mobile banking services providers, interoperability and data access. Addressing these issues will help in achieving deeper penetration and success of mobile based banking and payment systems.

     

    References

    Culpeper, Roy. The Role of the G20 in Enhancing Financial Inclusion. February 2012.http://www.boell.org/downloads/Culpeper_G20_Financial_Inclusion.pdf.

    Demirguc-Kunt, Asli, and Leora Klapper. Measuring Financial Inclusion: The Global Findex Database. April 2012. http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-6025.

    Di Castri, Simone. Mobile Money: Enabling Regulatory Solutions. February 28, 2013.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2302726.

    Financial Inclusion Experts Group. G20 Financial Inclusion Action Plan.http://www.gpfi.org/sites/default/files/documents/G20%20Financial%20Incl….

    GSMA. GSMA Global Mobile Money Adoption Survey Identifies 30 Million Active Mobile Money Customers Globally in 2012. February 27, 2013. http://www.gsma.com/newsroom/gsma-global-mobile-money-adoption-survey-id….

    Information and Communications for Development. Maximizing Mobile. 2012.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECH….

    Klein, Michael, and Colin Mayer. Mobile Banking and Financial Inclusion: The Regulatory Lessons. May 2011. http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-5664.

    SWIFT. Mobile Payments – White paper. 2012.http://www.swift.com/resources/documents/SWIFT_white_paper_Mobile_Paymen….

     
     

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