Mobile Banking

We predict in a recent paper that people in developing markets are more likely to use mobile phones to undertake financial transactions than people in developed markets.  More than half of the more than three billion mobile users live in developing countries and many of them are among those with limited access to formal financial services. People in developing countries have fewer options (if any) for transferring money and accessing banking services, as there is less formal banking infrastructure (fewer branches, ATMs generally co-located to relieve branches rather than stand-alone, low internet penetration). So a branchless banking channel using mobile phones could be far preferable to poor people than the available options: travel to and queuing at distant branches, and savings in cash or physical assets.

So what is the “it” in mobile banking?  The mobile phone itself has unique features that make it a close substitute to other banking channels but unlike those channels it is everywhere. Phones on the most common standard in the world have both a highly secure “smart card” (the SIM) and a “card reader” in one device. And all phones have “native” technologies (SMS and USSD) that can be used to create banking interactions. To be sure, mobile phones are likely to always be limited in functionality than a PC that is online or a specialized point-of-sale (POS) device, but because of inherent functionalities and its ubiquity, the phone is seen by providers as a possible lower-cost alternative to banking via internet or ATM or point-of-sale. Early results from CGAP’s experiments with providers show that using branches could cost 30 times more to set-up than using third-party agents equipped with point-of-sale. Replace the point-of-sale device with a cell phone and you have further cut cost in half.

As we explain in a forthcoming paper, the use of cell phones, however, does not mean the end of cash, at least not yet. Over time electronic money could replace cash with mobile phones as more commonly accepted payment devices like cards or internet terminals. But for now, a mobile banking platform needs to be supported by a cash conversion platform – whether bank branches, ATM terminals or banking agents. In fact, in our review of the early experience of branchless banking, we find that financial services providers view substantial retail presence as a key competitive strategy.

Mobile operators have a leg-up here as they maintain some of largest retail distribution networks to support their prepaid card sales.  It is not surprising that mobile operators have had more success than banks and in a number of countries use mobile phone for mobile remittance and bill payment services. Their large distribution networks, control over key security elements in the phone, let alone the wireless connectivity they provide, put them in an advantageous position when it comes to mobile banking. Operators are also some of the most well known brands in their country and are already serving the mass market. In fact, because of these advantages and favorable regulation, none of the early mobile banking projects were led by banks. SMART in the Philippines and MTN in South Africa created mobile payment services where customer accounts are maintained by banks.  

Despite a few exceptions, the road to mobile banking nirvana for banks has not been easy. For banks to take advantage of mobile banking, they need to be growth-oriented and have to understand what mobile operators bring to the table. In a forthcoming paper, we show that banks that are aiming to grow rapidly and increase their reach to large numbers of mass market customers have the most to gain from strategic alliances with mobile operators.  These growth oriented banks could be start-ups, recently transformed microfinance providers, foreign banks, and others in position to gain market share relatively soon in developing countries.