Isobel Coleman

Democracy in Development

Coleman maps the intersections between political reform, economic growth, and U.S. policy in the developing world.

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The Slow Shift from Cash Economies to Mobile Banking

by Isobel Coleman
July 31, 2012

A man leaves an M-Pesa booth after a transaction in Nairobi, Kenya on May 12, 2009 (Noor Khamis/Courtesy Reuters). A man leaves an M-Pesa booth after a transaction in Nairobi, Kenya on May 12, 2009 (Noor Khamis/Courtesy Reuters).

As I have written previously on the blog, mobile banking has the potential to make daily life for the world’s poorest not only more convenient, but also more financially secure. In fact, given the significant drawbacks of cash economies, mobile banking is now recognized as an effective antipoverty tool. After all, when someone stores her money in her home or on her person instead of in a formal bank account, she runs the risk that robbery or disaster will wipe out her assets. Studies show that when people save informally, they stand to lose between 15 percent and 25 percent of their savings each year—a huge loss for anyone but especially for those living on the edge.

Mobile technology has begun to increase poor people’s access to savings accounts, and growing numbers of people are using mobile payment systems. But there is still a long way to go: according to the Gates Foundation, of the approximately 2.5 billion people who live on less than $2 a day, only about 10 percent have a bank account.

If mobile banking is to meet its potential for the world’s poor, it must supplant the cash economies that still constrain too many livelihoods. Recently, I had the opportunity to speak with Priya Jaisinghani, head of USAID’s Mobile Solutions team. As I noted a few weeks ago, USAID has entered into a partnership with Citi in an effort to extend banking to more of the world’s unbanked population. In our conversation, Jaisinghani underscored how, despite the proliferation of mobile banking platforms across the developing world, people are resorting to mobile payments at lower rates than one might expect. She said that even in Kenya, where nearly 90 percent of Kenyan adults have used the mobile payment system M-Pesa, about 98 percent of all transactions are still in cash.

USAID’s goal is to speed the transition away from cash toward mobile money as an anti-poverty measure. But this requires solving what Jaisinghani characterizes as a chicken-and-egg problem: people will only use mobile money if it is accepted widely, but vendors will only accept mobile money if more people are using it. USAID’s partnership with Citi is part of an effort to chip away at this problem. Citi will use its brand and global reach to encourage its corporate and institutional clients around the world to support mobile money, perhaps by using it to pay their employees, or to settle wholesale transactions.

In Afghanistan, where USAID has facilitated the payment of civil servants’ salaries through mobile money—to great anti-corruption effect; some employees thought they had received a 30 percent raise—USAID is now enabling people to pay utility bills through mobile money. Jaisinghani notes that this program will not only allow Afghans to avoid countless unproductive hours of waiting in line to pay bills in person, but also provides a reason for people to keep their mobile money in the system instead of fully cashing out when they are paid via M-Paisa, Afghanistan’s mobile money system.

To become a true replacement for cash, mobile money must also overcome a number of specific problems, including what mobile money expert Ignacio Mas describes as the “last yard problem,” or the “width of the counter between buyer and seller at the duka, the sari sari store, or the bodega.” For small, ordinary expenditures like buying a soda or some food, it is hard to replace cash with mobile money as cash is perfectly suited to such a transaction. Also, as Priya Jaisighani notes, making a payment by mobile money typically involves a transaction fee on the user end. Consequently, when it comes to small purchases, people have little incentive to use mobile money.

Other systemic and legal issues prevent mobile money from living up to its potential. In India, the regulatory constraints have so far prevented mobile money platforms from enjoying the same kind of success they have in other places, like Kenya. Even in Kenya, businesses remain reluctant to make full use of mobile money: according to Ignacio Mas and a co-author, businesses are wary of fraud and of the mobile money platforms’ incompatibility with other business technology, among other concerns.

These kinds of obstacles will inevitably slow the transition away from a cash economy, but they are not insurmountable. Indeed, they are similar to the problems developed economies faced in their own transitions from cash to credit cards. In February, Vodacom in Tanzania reduced M-Pesa transaction fees by 75 percent and in March, Safaricom in Kenya made similarly pro-customer adjustments to M-Pesa fees—perhaps a sign of things to come.

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