BELCHERTOWN, Mass. — Everyone in the modern world is taught that saving money is a virtue. Maintaining a savings account promotes good personal financial management as well as a safety net for the future. This is also true for those in developing nations, as new studies show poor people benefit from having a savings account.
Poor people have money to save, the problem is that most cannot access basic banking services. In fact, 77 percent of them do not have a savings account. This is because there is little incentive for banks to invest in impoverished areas. This further inhibits the poor from investing their own money, making access to credit impossible or potentially causing them to save their money through insecure means. It also inhibits them from pulling themselves out of poverty or saving themselves from falling into poverty should a disaster occur.
What if there was a way to give people in developing countries the ability to save their money without physically having to go to a bank? In the past few years, newly developed technology is attempting to do just that, and it is all done by mobile phones. A new mobile financial services infrastructure is leading the way at giving the worlds poor access to modern banking.
The reason this technology is so viable is because of the already huge influx of mobile phones in developing countries. There are now “on average, more than 89 cell phone accounts for every 100 people living in a developing country.” This is incredible, as a key piece for this type of banking is already in place. There are still gaps, of course; many thousands of impoverished people still do not have phones. But the amount that do is hopeful, and have definitely helped the mobile banking idea get started. If proven to be very successful, programs to expand mobile phone use can be adapted.
The idea is simple. People will transfer money via mobile phone text. This payment could come from an employer or a family member, even a hospital trying to give someone bus fair so that they can access important medical procedures. The money can be put in a savings account or the money can be exchanged for cash if the recipient goes to a local authorized agent. This agent can be anyone from the local grocer to an automated kiosk set up by the mobile banking company. Even if a customer does not have access to the kiosks, the ability for people to be able to save money is beneficial.
There are some good reasons as to why mobile banking will be helpful to those in developing countries. First, it is almost completely free. This means that people can avoid banking transaction costs, which can be expensive. Second, these mobile banking companies can collect data that can then be used to create credit scores for their customers, most of which have little to no ability of building up a credit score or accessing credit.
There is also the added security. In Sub-Saharan Africa, about 83 percent of the population transfers money using unsafe means. For example, giving cash to a bus driver or having to take the time to deliver it themselves. Transferring money via a mobile phone would stop the potential dangers and difficulties of delivering cash in person.
Giving people in developing countries the ability to save money is crucial. Their governments often lack safety net services, health care and other necessities that will keep them afloat should any financial disasters occur. If they had savings, they would be less likely to fall into poverty should some unforeseen life emergency happen. The mobile banking companies also give incentives to save. They send their customers reminders through text notifications about when they should save.
An example of this type of mobile banking at work is in Kenya. There, they have a mobile banking company called M-Pesa. About 62 percent of the adult population has an account through them, and there have been improvements with the transfer of money when households are struggling. Family members who live farther away can send money during times of financial hardship so people can continue “maintaining their regular diets and keeping their children in school.”
M-Pesa customers also have the ability to sign up for loans and interest accruing savings accounts on their phones. They have kiosks that can distribute actual cash, which have shown to increase the benefits for those who are near them. Of course giving access to the kiosks for those in extreme rural areas is difficult but easier than building entire banks. The cost is much lower as the kiosks are small and easy to maintain.
Beyond giving poor people the ability to successfully manage their own finances is the added advantage of direct aid. There are studies that show giving aid to poor people directly is highly effective. In areas where this is possible, instead of a nonprofit handing out food or clothes to locals, the locals themselves can go and buy whatever products they may need.
This is empowering and gives people a feeling of achievement to purchase things for themselves. This is important for the rest of the world as well to realize that, “poor people make good decisions, and they have resilience, and that we need to trust them and not blame them for being poor, but give them control over their own lives.” It is an easy process as well and even illiterate people can participate in mobile banking.
Mobile banking can eliminate the controversies surrounding government corruption and misallocation of aid funding. The money will go directly to the individual instead of being handled by a middle man who might otherwise mishandle the money.
Allowing people in developing nations to get cheap and easy access to modern banking will surely help them enter the modern economy. Problems with this new system have occurred, but the positive outcomes are too important to risk not working through them. Mobile banking companies are the next innovative idea in addressing global poverty. Since this is an emerging market, it will be interesting to see the continued studies and data relating to this exciting new anti-poverty tool.
Sources: Impatient Optimist, Foreign Affairs, Poverty Action, The Guardian, New York Times
Photo: Digital Trends