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Banking
regulators still don’t get it: The best candidate for
making access to finance truly universal in a developing
country is the mobile phone.
A report
last month by the Washington-based Consultative Group to
Assist the Poor (CGAP) shows that in several nations of
Asia, Africa and Latin
America, more people have mobile phones than bank
accounts. The notable exceptions are China and India,
though even they won’t buck the trend for very long.
“Rapidly
growing mobile penetration in both countries means that
it is probably only a matter of time before they fit the
pattern,” the CGAP study noted.
India
offers a good example of what’s possible.
There
are now about 260 million wireless-phone subscribers in
the country, more than in the
United States.
Given the rate at which new users are being added, most
Indian households will, in the next decade, have at
least one mobile phone.
By
contrast, the spread of banking services is rather
limited. According to a survey of 100,000 households by
Invest India Market Solutions, only two out of three
shopkeepers and half of self-employed farmers have bank
accounts.
To
attempt to reach bottom-of-the-pyramid customers by
building new branches will be prohibitively expensive.
Seeking to recoup those large fixed costs from farmers
whose average annual income is 60,000 rupees ($1,400) is
a non-starter of an idea because it will make banking
services unaffordable.
It’s the
same story throughout the developing world.
Mobile
banking
Pakistan’s Tameer Microfinance Bank estimates the cost
of setting up a branch in a shantytown of Karachi at
about $42,000; add operating expenses—$28,000 a
month—and it becomes clear why so few of the poor people
use a bank.
That’s
where wireless technology comes in handy.
A
typical banking transaction automated via mobile phones
costs 50 US cents to a bank in the
Philippines;
routing the same through a branch would be five times as
expensive.
Globe
Telecom Inc., the second-biggest Philippine phone
company, has 1.3 million customers for G-Cash, its
mobile-payment and remittance service.
Globally, mobile phones will handle $587 billion in
financial services by 2011, UK consulting firm Juniper
Research Ltd. says.
In many
developing countries, mobile-phone companies are miles
ahead of banks in using technology to cut the cost of
processing a transaction. In India, for instance, phone
companies have a 100-fold cost advantage.
Money
laundering
Text
messages in most countries are now inexpensive enough
for regulators to favor their use in promoting basic
banking services such as transfer of funds from one
account to another. A survey last year showed that
Chinese consumers are likely to switch lenders to gain
free mobile-banking services.
Yet,
regulators insist that those offering such services
follow the same “know-your-client,” or KYC, norms as
mainstream financial institutions.
Telecommunications companies conduct their own checks
before they take on new subscribers, yet, their due
diligence isn’t always acceptable to the banking
regulator whose concern is to prevent money laundering
and the financing of terrorists.
Strict
KYC norms present a big hurdle: The very people who have
most to gain from mobile banking are excluded because
they don’t have identity cards, proof of address and
other credentials.
One way
to deal with this problem would be to allow “KYC-lite’’
that restricts the amounts per transaction to minimize
risks while ensuring that the poor aren’t left out.
The
other regulatory concerns are provision of liquidity and
containment of fraud.
The
future
If a
mobile-banking customer who wants to withdraw money
visits an agent of the telecommunications company for
that purpose, and the latter happens to be temporarily
out of cash, does that shatter the consumer’s confidence
in the solvency of the country’s banking system?
CGAP
researchers say the evidence from Kenya is that
customers “seem to appreciate there’s no guarantee of
cash availability.” Even so, providing adequate
liquidity in this alternate-banking channel is something
that weighs on the regulators’ minds when designing
policies.
Market
participants are getting impatient.
“Mobile
banking is the future,” Vikram Akula, chief executive of
SKS Microfinance Pvt., recently told Wharton School of
Business’s online journal. “The problem is the
regulatory environment. The central bank in India hasn’t
understood mobile banking and its full potential, and,
therefore, the regulations get prohibitive for us to do
this.”
Flexible
regulation
With 2
million borrowers, SKS is India’s biggest provider of
small loans. It aims to quadruple customers in two years
to become the world’s largest microlending business.
If
mobile-banking regulations ease, “then clearly this is
the investment that we’d make,” Akula said.
For now,
banks in
India
are taking the lead in offering mobile banking to their
existing customers as a value-added product. ICICI Bank
Ltd., the country’s second-biggest lender, started its
iMobile service in January.
Real
breakthroughs in financial inclusion may only occur when
telecommunications companies lead the effort. Their
incentives and skills may be more aligned with handling
large numbers of small transactions than a traditional
bank’s.
To
encourage innovation, the focus of regulation has to be
on ensuring that the banking service runs smoothly
regardless of who is providing it. That’s something else
regulators don’t get. |
