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Mobile phones can bring banking within everyone's reach

For millions – perhaps billions – of lower-income people around the world, a mobile phone represents more than just a tool for communication. It can also become a means of extending financial services to people without bank accounts, setting off a “virtuous circle” of benefits to individuals, families, communities and nations. Only active collaboration between financial and
telecom regulators, financial institutions, mobile operators and handset manufacturers will make this possible.

Lack of access to banking services is currently forcing many people in emerging markets to rely on an often insecure cash-based economy. Bringing inclusive financial services to the unbanked – people without bank accounts – is a key element in improving living conditions and critical for overall economic development.

Many emerging market governments are seeking to increase access to financial services. As access to mobile phones is very widespread and still growing, it is natural to consider their ability to become a tool for enabling much-needed banking services.

Recent mobile banking (m-banking) programs in Africa and Asia have highlighted the potential for mobile phones to deliver these services. M-banking has been shown to reduce risk and bring convenience in financial transactions,and make it easier and cheaper to extend financial services to lower-income people without a bank account.

M-banking brings clear benefits to the unbanked, allowing them to save, borrow and remit safely, easily and cost-efficiently. All of this boosts their sense of security and ability to improve their living conditions.

Banks, in turn, are realizing that they can create viable business out of offering services to the lower income groups. Through m-banking, they can cut transaction costs and greatly expand consumers’ access to financial services.

Ubiquitous and low-cost

M-banking is still in its formative stages in emerging economies. A number of projects are currently under way in the Philippines, South Africa and elsewhere. Instead of using a physical bank, industry players are using technology to create size and bring down cost.

“The need for mobile banking actually came from microfinance,” says Ms. Lalita Gupte, chairperson of the Board of Directors of ICICI Venture Funds Management Co. Ltd., a private equity company that is a subsidiary of ICICI Bank, India’s second-largest commercial bank, and member of Nokia’s Board of Directors. Until late 2006, she was the bank’s joint managing director and member of the board of ICICI Bank. She is also on the board of Swadhaar FinAcess, a nonprofit company that has recently started providing microloans to the urban poor in Mumbai.

Microloans make up one aspect of microfinance. Few of those who take out microloans have ever had contact with formalized banking, particularly in rural India, but more and more are taking their first steps via a mobile phone. In the process, m-banking and microfinance are feeding each other and the scope of each is increasing.

“We need a model to facilitate commerce in a way that can create volume and bring down the cost of transactions.We need to make it ubiquitous and low-cost. The obvious answer is mobile banking. It will be necessary to cooperate and benefit from others’ distribution systems, whether it is created by non-governmental organizations, microfinance institutions, banks or the telecom industry. A secure, cardless alternative is needed, based on something consumers are already using, something that is always with them.”

Mobile banking has a lot of potential to bring cost efficiency to the provision of cash-in and cash-out services in rural areas. Whereas credit cards require expansion of infrastructure such as automated teller machines (ATMs), mobile phones make every user a potential cash-in and cash-out agent. They just need to exchange cash in return for a mobile money transaction. This removes the need for local ATMs or even retail banking outlets in rural areas, given that a certain amount of cash will flow around the local area anyway.

“In India alone, there are 600 to 700 million people in rural areas who must have access to finance using technology,not just physical bank branches. The need for this is so great for the poorest of the poor. All the players must work together, and this is happening. The mobile phone is such a powerful tool,using technology that is continuously evolving,” Ms. Gupte states.

Confidence in people

One important m-banking service is peer-to-peer transfer of funds, for example remitting money to family members rather than physically carrying cash. Then there are customer-to-merchant and customer–to–point-of-sale transactions, payment of utility bills and purchase of transport tickets. Other than the physical exchange of cash, all these banking services can be provided through mobile phones in a cost-efficient manner.

Ms. Gupte has strong confidence in the ability of those at the base of the economic pyramid to see the advantages of m-banking systems and adopt them, regardless of people’s level of education. “They may not be able to read or write well, but they understand numbers,” she says. She cites the runaway success of microfinancing as evidence of unbanked people’s readiness to embrace new practices. “They need to learn new skill sets, how to save, how to understand finances and become entrepreneurs. And they need microinsurance microinsurance to protect their incomegenerating assets. Once these things are explained, they want to be part of this ecosystem,” concludes Ms. Gupte. Thereare challenges, but ways have to be found to overcome them.

Importance of enabling Environment

Mobile banking usually involves several players, typically a telecom operator and a bank. They operate within an ecosystem regulated by national banking authorities. So far the central banks of India and the Philippines have been most active in mobile banking. The latter is one of the few countries to draw up a national microfinance strategy and m-banking forms an important cornerstone in this.

The Philippine Central Bank is one of the best examples of financial regulators focusing on m-banking regulations. It has managed to create a proper enabling environment that encourages flexibility and innovation while ensuring that policy and regulations provide security and risk management and protect against money laundering.

Two Philippine operators have successfully launched m-banking solutions. Globe Telecom and Smart give subscribers the option of transferring cash or paying for goods and services via their mobile phones, using SMS text messages. The m-banking field is just taking off in many markets. Regulators and policy-makers need to create sufficient openness and certainty in legal and regulatory frameworks to enable the m-banking ecosystem to develop.

Technology ready and able

Basically all the functions needed for a full-fledged m-banking solution are possible with even the low-end mobile phones. The key for handset manufacturers such as Nokia is the user experience, making it easy to use and creating trust in banking services. Nokia can enable handsets to let the financial institutions connect to their customers with a very human technology, and the customers can stay in touch with their funds any time and anywhere.

The technology enablers available in most low-end handsets are SMS, typically used with SIM ATK (application toolkit), USSD (unstructured supplementary service data) and voice calls with DTMF (dual-tone multifrequency interaction). SMS with SIM ATK is the most common solution for secure transferring of data. It works in rural areas with no data coverage, with all subscriptions, even prepaid ones, and with most handsets. Data coverage is not required. SMS-based services are affordable, and the consumer knows the cost of using the solution. All this, combined with the possibility to use the most low-end handsets, forms a cost-effective option for lower-income consumers.

SIM ATK–based solutions require active cooperation between operators and financial institutions. This has yet to happen on a bigger scale, although MTN Banking in South Africa, for example, has been pioneering it. The m-banking solutions that have been rolled out around the world are quite fragmented. Standardization would be needed to avoid further fragmentation as m-banking proceeds to grow.

Concerning security

Another prime area of importance is security. Since the birth of the GSM technology, security has been a key part of the rationale behind the standards. Hence SIM ATK includes an encryption mechanism, and in many countries the air interface is encrypted as well. More advanced solutions building on WAP, for instance, can also be set up to enable a more secure end-to-end environment.

“Data has to be secure, but at the same time quick. You need fool proof ‘know your customer’ (KYC) systemswith an easy-to-use interface,” says Ms.Gupte. The m-banking ecosystem must be able to conform to KYC and AML (antimoney laundering) regulations. This means being able to authenticate the person doing the transaction, authorize and execute transactions securely in a trustworthy manner and then provide the information to initiating and terminating parties upon completion of the transaction. Whatever the technological means – SMS, WAP, GPRS or 3G-based browser – operators play a big role in enabling these services. Operators gather information about subscribers that can be used for KYC. Operators also offer the over-the-air services for verification of customers and execution of transactions. While the operator service with the handset is the facilitator, it is the bank that allows unbanked individuals to become banked customers. While the quick spread of mobile communications does not necessarily guarantee a similar pace for the growth of m-banking, the potential has been shown to exist.Worldwide m-banking norms have yet to be set. If the regulatory environment is an enabling one, innovative business models and cooperation among industry players will be able to flourish, to the benefit of lower-income consumers.

All stand to gain

Given the benefits to be had from mbanking, the outlook seems positive for further development. Working together, the key stakeholders (telecom regulators, operators, financial regulators and institutions and mobile handset manufacturers) can help make m-banking a reality. Across the board, consumers, civil society and the private and public sectors all stand to gain.