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The roughly 2.5 billion people in the world who live on less than USD 2 a day are not destined to remain in a state of chronic poverty. Every few years, somewhere between ten and 30 percent of the world’s poorest households manage to escape poverty, typically by finding steady employment or living through entrepreneurial activities such as growing a business or improving agricultural harvests. During that same period, however, roughly an equal number of households slip below the poverty line due to a number of factors.
It is a simple conventional wisdom that in many such situations, the most important buffers against crippling setbacks are financial tools such as personal savings, insurance, credit, or cash transfers from family and friends. Yet these are rarely available because most of the world’s poor lack access to even the most basic banking services. Globally, 77 percent of them do not have a savings account. In sub-Saharan Africa, the figure is 85 percent.
An even greater number of poor people lack access to formal credit or insurance products. The main problem is not that the poor have nothing to save or they are not profitable customers, so banks and other service providers do not try to reach them. As a result, poor people usually struggle to stitch together a patchwork of informal, often precarious arrangements to manage their financial lives.
Over the last few decades, microcredit programs through which lenders have granted millions of small loans to poor people, have worked to address the problem. Institutions such as the Grameen Bank, which won the Nobel Peace Prize in 2006, have demonstrated impressive results with new financial arrangements, such as group loans that require weekly payments. According to the World Bank, today, the microfinance industry provides loans to roughly 200 million borrowers which is an impressive number to be sure, but only enough to make a dent in the over two billion people who lack access to formal financial services.
Despite its success, the microfinance industry has faced major hurdles. Due to the high overhead costs of administering so many small loans, the interest rates and fees associated with microcredit can be steep, often reaching 100 percent annually. Moreover, a number of rigorous field studies have shown that even when lending programs successfully reach borrowers, there is only a limited increase in entrepreneurial activity and no measurable decrease in poverty rates. For years, the development community has promoted a narrative that borrowing and entrepreneurship have lifted large numbers of people out of poverty. But that narrative has not held up.
Two trends, however, indicate great promise for the next generation of financial-inclusion efforts. First, mobile technology has found its way to the developing world and spread at an astonishing pace. According to the World Bank, mobile signals now cover some 90 percent of the world’s poor, and there are, on average, more than 89 mobile phone accounts for every 100 people living in a developing country. That presents an extraordinary opportunity. Mobile-based financial tools have the potential to dramatically lower the cost of delivering banking services to the poor.
Second, economists and other researchers have in recent years generated a much richer fact base from rigorous studies to inform future product offerings. Early on, both sides of the debate over the true value of microcredit programs for the poor relied mostly on anecdotal observations and gut instincts. But now, there are hundreds of studies to draw from. The flexible, low-cost models made possible by mobile technology and the evidence base to guide their design have thus created a major opportunity to deliver real value to the poor.
According to recent studies, mobile finance offers at least three major advantages over traditional financial models. First, digital transactions are essentially free. In-person services and cash transactions account for the majority of routine banking expenses. But mobile-finance clients keep their money in digital form, and so they can send and receive money often, even with distant counterparties, without creating significant transaction costs for their banks or mobile service providers.
Second, mobile communications generate copious amounts of data, which banks and other providers can use to develop more profitable services and even to substitute for traditional credit scores which can be hard for those without formal records or financial histories to obtain. Third, mobile platforms link banks to clients in real time. This means that banks can instantly relay account information or send reminders and clients can sign up for services quickly on their own.
The potential, in other words, is enormous. The benefits of credit, savings, and insurance are clear, but for most poor households, the simple ability to transfer money can be equally important. For example, a recent Gallup poll conducted in 11 sub-Saharan African countries found that over 50 percent of adults surveyed had made at least one payment to someone far away within the preceding 30 days. Eighty-three percent of them had used cash. Whether they were paying utility bills or sending money to their families, most had sent the money with bus drivers, had asked friends to carry it, or had delivered the payments themselves. A recent study in Kenya found that access to a mobile-money product called M-Pesa, which allows clients to store money on their cell phones and send it at the touch of a button, increased the size and efficiency of the networks within which they moved money. That came in handy when poorer participants endured economic shocks spurred by unexpected events, such as a hospitalization or a house fire. Households with access to M-Pesa received more financial support from larger and more distant networks of friends and family. As a result, they were better able to survive hard times, maintaining their regular diets and keeping their children in school.
Mobile money is useful for more than just emergency transfers. Regular remittances from family members working in other parts of the country, for example, make up a large share of the incomes of many poor households. A Gallup study in South Asia recently found that 72 percent of remittance-receiving households indicated that the cash transfers were “very important” to their financial situations. Studies of small-business owners show that they make use of mobile payments to improve their efficiency and expand their customer bases.
These technologies could also transform the way people interact with large formal institutions, especially by improving people’s access to government services. Governments, meanwhile, stand to gain as much as consumers do. A McKinsey study in India found that the government could save USD22 billion each year from digitizing all of its payments. Another study, by the “Better Than Cash Alliance (BTCA), a nonprofit that helps countries adopt electronic payment systems, found that the Mexican government’s shift to digital payments which began in 1997 trimmed its spending on wages, pensions, and social welfare by 3.3 percent annually, or nearly USD1.3 billion.