News & CommentaryArchive
Feb 26, 2009
Mobile Cash Transfers Pose Threat to Banks
One of the major trends in the remittances market in 2008 was the rapid growth in mobile remittance services. Traditionally, the remittance transfer market has been dominated by funds transfer providers, such as Western Union or MoneyGram, or by informal mechanisms, such as hand-delivery. More mature remittance corridors, or those with established banking and funds transfer markets, such as US-Mexico or US-Philippines, tend to be dominated by the former; less mature markets with more limited banking markets, such as Pakistan-India and other “south-south” corridors, by the latter. But both methods are imperfect for the user: funds transfer services are expensive, while informal channels are both expensive and risky—anywhere between -10 and 40 percent of the total remittance can get eaten in the process, if it makes it there at all. Underground methods also lack a paper trail, which is a concern for governments trying to limit opportunities for money laundering.
It is therefore no surprise that in the markets where they are available mobile remittances have captured significant market share over a short period of time. Possibly the best known are the M-Pesa service offered by Safaricom (a Vodafone subsidiary) in Kenya for in-country transfers, and G-Cash offered by Globe Telecom in the Philippines, for both in-country and cross-border transactions. Most mobile remittance services work for the user in similar ways: the sender goes to an ‘agent’ of the telecommunications provider (usually independent shops that offer convenience items as well as providing services for the telecom, such as minutes sales) and registers himself and his receiver for the service. When the remitting customer wants to send money, the sender gives cash or a credit card to the agent. The money is credited to his account as value. He then ‘sends’ the money to his receiver’s phone. Once the receiver gets an SMS telling him he has money waiting for him, he goes to his local agent to cash in his remittance. The cost of an M-Pesa transaction is around $1, significantly less than what Kenyans pay to send money with the Postal Corporation, a popular sender of in-country remittances, and much less risky than handing an envelope of cash to a bus driver, a common alternative.
Literally millions of people have signed up for these services—Safaricom alone claims to have more than 5 million registered users for M-Pesa. If there was any doubt that there is pent up demand for financial services in the developing world, a crowd of 5 million remitters should resolve it. The response that banks in Kenya are having to the success of M-Pesa also suggests that Safaricom is most definitely on to something: In December of last year, a group of banks reportedly lobbied the Kenyan finance minister to audit M-Pesa, in an effort to have the service shut down. Bankers claim that their concern is primarily that Safaricom is providing a financial service without the regulatory infrastructure to support it, and that people might lose their money. But might the response primarily be driven by fear that another player has come in and captured a potentially lucrative customer base that banks have to date been unwilling or unable to serve?
As satisfying as it might be to dismiss banks as conservative dinosaurs, the banking community should not be entirely overlooked as providers of services to the poor. A favored position among development experts is that access to formal financial services improves individual and household well-being among the poor, by promoting savings and providing access to capital, among other things. Services like M-Pesa allow remitters to keep more of their cash and send it safely. Yet people could profit from other services as well. M-Pesa could conceivably be doctored into an ad hoc savings mechanism, where individuals “remit” funds, but the recipient (maybe a household member) does not pick them up for a period of time, but it is not likely to become much more than that. The poor need a range of financial services, not just remittances, a fact recognized last week by the UK’s Department for International Development (DFID—a co-sponsor, incidentally, of M-Pesa) announcement of an initiative aimed at developing mobile banking offerings in developing countries. First among the countries mentioned was Kenya, though it also included Pakistan, Nigeria, Ghana and others. Investment, plus a bit of competitive pressure from unexpected sources, may encourage banks to be more creative about how they develop offerings for under-served individuals.