Why is half the world unbanked? The defining characteristic of the unbanked is less that they have a lower income level than the rest of us but the fact that, lacking stable or formal jobs, they tend to be paid with less predictable regularity and in cash. Whether they are farmers, day laborers, traders or micro-entrepreneurs, nobody is guaranteeing them where their next dollar will come from. And yet they are probably earning some money on a more frequent, perhaps daily, basis when they sell their wares or their labor for cash. Small wages paid with high frequency make for very small payments. Unstable income makes it hard for them to commit to time-based financial products. Banks’ offerings are indeed stacked against them.
Three representations of money
Let’s formalize the banking challenge. Making financial services relevant to poor people entails connecting three different clouds, as represented in Figure 1:
A physical cloud of hard cash (or, worse, specie currency,) which is the legacy payment system on which most poor people operate today to exchange and store value.
A digital cloud where money is just an accounting record. This constitutes an alternative payment system, and is where financial services ought to reside. Making money digital makes it easier to supervise the integrity of transactions and accounts, to create new financial products and to move money around as a mere debiting and crediting of accounts.
A neural cloud in people’s brain, through which people form their ideas and habits around money in the context of their circumstances, their needs and their aspirations. It is through this cloud –the mind— that people interpret the range of informal and formal financial services proposed to them.
The opportunity with mobile phones
Connecting these clouds is the job of financial institutions. Mobile phones’ digital communications capabilities, combined with their increasingly pervasive presence in people’s pockets, hold significant promise to connect these clouds in novel, cost-effective ways.
Mobile phones allow for a ubiquitous, low-cost deployment strategy. If transactions can be initiated remotely through a secure electronic channel (ensuring the proper authentication of transacting parties and integrity of the data transmitted) and authorized in real time (ensuring that all transactions are pre-funded,) then banking transactions can be safely taken outside of bank branches and into neighborhood stores (which act as cash in/out outlets) or right into customer hands (with mobile banking as a self-service channel.) This particularly helps with the exchange and transfer functions in Figure 1.
Beyond reducing costs, mobile phones also permit customers to interact more directly with their banks, checking balances and initiating transactions from wherever they are. Using mobile phones as the access device offers the customer a level of immediacy, convenience and control that no other channel can provide. The real power of mobile will come when it is seen not only as a mechanism for reducing access costs but also for building new types of banking experiences that begin to approximate how people think about their money – the plan function in Figure 1.
Local shops as bridges to cash
In the first instance, in order for poor people to opt to formal financial services, we need to dramatically increase the number of bridges between the cash and the electronic clouds.
The bridge at the top of Figure 2 is big and imposing: let’s call it a branch. But it´s way too costly to build in every village and neighborhood. It’s efficient to build in high-traffic locations, but smaller communities on the river will need to travel significant distances to access it. To service these smaller communities more effectively, what we need is a whole hierarchy of smaller bridges that are appropriate in different environments.
The bridge at the bottom is no less safe than the top one given the stream it is trying to cross; it is entirely appropriate given the risks involved. Just don’t build this type of bridge to cross the river at the top. The bridge analogy underscores the principle that improving the economics of serving poor people shouldn’t be done by relaxing safety standards; it should be done by deploying the appropriate infrastructure given the risks involved in each case.
Unlike the bridge at the top, the bottom one is cheap because building it requires materials and skills that are available locally. So we can now afford to build many more of them. How to build the small bridges to cash? Start by using the bricks and mortar of retail shops that exist in every village and neighborhood. They are more convenient, less crowded, and, chances are, more friendly to customers than the bank branches. But is it safe to deposit at these retail outlets? It can be, as long as these shops trade entirely with their own stock of both electronic money and cash, and transactions are properly authorized in real time.
Think of how they might sell rice: they hold a stock of rice, and after a sale, they end up with a little less rice but more cash than before. They make a small margin in between. Making a deposit at the store would be the same thing, except that the commodity the shop stocks and exchanges for cash is electronic money sitting in its bank account. After the transaction, their bank account will have less value but they´ll have more cash in the till. The customer´s situation will be the mirror opposite. The store earns a small commission for the service and it will attract customers into the store.
Risk can be eliminated as long as electronic value can be transferred securely and in real time between the shop and the customer. We can ensure this with a traditional card and point-of-sale infrastructure, but even that is too expensive. Instead, we can use mobile phones which already exist in people´s pockets, as a virtual card and point-of-sale system.
Using stores and phones that already exist, we could increase the number of places where people can deposit and withdraw by 10 or 20 times, relative to the number of bank branches that exist today. Only then will banking begin to be convenient for the majority of people in developing countries.
Bringing personal back into banking
If you don’t have a stable, predictable source of income; if you are not literate or not comfortable with basic mathematics; if there are no computing devices available to you: how then do you budget? A time-tested way for people to budget and discipline themselves is by separating money into distinct categories and savings vehicles (represented in Figure 3, below.) You might have relatives who still do.
Whenever such people have some extra money, they are likely to set some aside for their children’s school fees, and that might be hidden under the mattress. They might also set some aside for the bicycle they want to buy to be able to get to town faster, and that money may fund the monthly contribution to the rotating savings club they run with their neighbors. They might also want to build a cushion to pay for any family medical emergencies, and that goes into keeping more chicken in the backyard.
This kind of separation of funds helps in two distinct ways. First, people are more easily reminded of how much money they have for each purpose.
They can easily check how much more they need for each savings objective. Second, all their savings is accounted for, in the sense that it has a defined purpose. Money under the mattress is not general liquidity, it is money ear-marked for their children’s education. This mental assignation of a purpose to each savings vehicle helps them avoid the temptation to use those funds for other less important purposes.
If this is how they manage their financial lives, it should be no surprise that they find bank accounts unhelpful, even if they are conveniently available. Expecting them to regroup all that value and dump it into a single account goes against the grain of the financial education they have received from their parents and grandparents. If banks want to capture people’s money, first they need to capture electronically how people think about their money. Cracking the savings problem requires incorporating into a formal banking service the kinds of tools and tricks that people use daily to plan their financial lives and build discipline, and that includes the explicit separation of money for different purposes.
In a recent paper, I have shown how this might be done easily by allowing people to send money to themselves at future dates. In many African countries, people are used to sending money to each other (across space) in real time using their mobile phones. If we expand this capability to allow them to transfer money to their future selves (over time,) they will then have a tool for managing not just today’s payments but tomorrow’s as well – a planning tool.
The key to linking the mental and digital representations of people’s money is therefore to put financial planning at the center of the provider-client relationship. This helps them understand how they can use new banking products to reinforce the financial mechanisms they have always used. In addition, clients’ financial educations will grow with usage, which in turn opens up new possibilities for client development.
This would require a fundamental shift in the nature of the conversation between banks and their clients. Now it’s fundamentally about the bank’s products: get this account, buy this product, get this loan. But imagine a bank that never uttered the words ‘savings’ or ‘loan,’ only ‘bicycles’ and ‘school fees’ and ‘retirement.’ The account would be pretty much the same for all –simplicity!—but each customer would experience it differently. Each customer would associate a different set of goals and dates with various pots of money, and the bank would have a different understanding of what they need and what their credit risk profile is.
The objective is to endow mobile financial services with as much richness of interpersonal interactions as possible. But it will certainly be impossible to electronically capture the subtlety of informal financial relationships. To bring effective financial services to millions more poor households, providers need to continue developing a high level of intimacy with their customers. Those relationships help providers learn from customers and permit them to propose the right thing at the right time. It might be hard to visualize such a service, but I am pretty certain it can’t be done without mobile phones.
Original -by Ignacio Mas -http://www.transactionworld.net/articles/2012/december/cover-story.html