The recent ad spot for M-Kesho, the groundbreaking mobile phone-linked bank account launched earlier this year in Kenya, is endearingly playful. To gently teasing music, a man with a jar of coins digs a gigantic hole in an empty grass field. He sticks his jar deep in the mud, but finds that the hole he’s dug is now too deep to get out of. “There are easier ways to look after your money,” a voiceover tells us. No kidding.
In the fight against poverty, achieving global access to financial services holds enormous potential. Even the poorest need tools to help maintain their daily needs, prepare for sudden adverse events like illness, and build assets to pull themselves out of poverty. Saving is the best tool both to reduce the risk of destitution and to increase wealth. Yet more than 2.5 billion people today lack access to formal financial services, which could help them achieve these feats.
Not long ago, conventional wisdom held that the poor cannot and do not save. Now, the imperative of formal savings services for the bottom of the pyramid is finally getting its well-deserved spotlight. On November 12 at the G20, world leaders put financial inclusion among the nine core pillars of economic growth in their Action Plan for Development. Four days later, the Bill & Melinda Gates Foundation made a further $500 million commitment to financial inclusion, and in particular, access to savings accounts.
Cash is an obstacle
What stands in the way of global access to financial services? It may come as a surprise, but the single biggest obstacle is cash. In short, cash is expensive.
The poor tend to live in an entirely cash-based economy. But banks find it too costly to sustain branches in disadvantaged areas to collect the small amounts of hard cash that poor people can save. So poor customers have to travel miles just to make a deposit – wasting time and running up transport costs.
We can’t make cash go away. But we can make it easier to transform cash into electronic information, which is all a bank account is, really. Once money is “de-materialized,” it can be sent around electronically at very low cost. The fastest, most convenient way to achieve this transformation globally is to use the stores that exist in every neighborhood and every village as banking surrogates.
Fortunately, the spread of mobile phones across the developing world is already making this transition possible. In Africa alone, twice the number of people who have bank accounts have mobile phones. Banking transactions through mobile phones draw on an existing infrastructure, allowing “banking beyond branches” to occur safely for both financial service providers and their customers in rural areas.
By working together, financial institutions, telecom companies, and retail networks are working to vastly expand access to electronic and mobile-banking services, and even to switch to electronic delivery of social welfare transfers and other assistance. Kenya’s M-Pesa, the mobile money transfer service that began in 2007, is now used by more than half of the adult population. The secret: you can deposit and withdraw at any of 20,000 stores. That’s 20 times the number of Kenya’s bank branches.
A huge opportunity
Electronic banking platforms like mobile phones and point-of-sale devices that leverage mobile technology hold the promise of providing poor savers with the proximity and liquidity they need. But the opportunity is actually much larger.
Imagine if every person had access to a transactional account via an electronic network that was convenient, affordable, and trusted. Beyond access to a savings account, clients could also use such networks for remittances and other person-to-person transfers and payments. Vitally, the record of these payments could provide the basis of a financial history, in turn providing customers with access to credit products, and bolstering entrepreneurship.
Policymakers and regulators also have a lot to gain. The financial identities promulgated by massive financial access via electronic systems reduce the informal economy, making transactions more visible and traceable. At the same time, electronic platforms can improve the efficiency of social welfare and other government-to-person payments – which currently reach approximately 170 million low-income households worldwide by reducing the costs of delivering cash to poor beneficiaries.
As long as cash dominates the economic lives of the poor, and the systems that service them, massive access to financial services, including savings, will remain an elusive goal. It is time to get cash out of the way and put financial services in the palm of every hand, freeing up the poor’s time and resources to invest in their small businesses, health care, and education.
Jamie Zimmerman is director of the Global Assets Project at the New America Foundation. Ignacio Mas is deputy director of the Financial Services for the Poor team at the Bill & Melinda Gates Foundation.