Primer on Mobile Banking

The Philippines is called the “texting capitol of the world.”  Everyone has a phone, mostly because they are a) inexpensive (starting at $20 USD), b) offer flexible plans (everything is prepaid), and c) texting makes life easier.  SMS messaging is the predominant mode of communication not only here, but in other parts of Southeast Asia.  Even business inquiries and scheduling a meeting might be done via text.   The mobile infrastructure of the Philippines is far more robust and pervasive than landlines or Internet.  In the context of development, the mobile landscape offers great opportunities.  Like anything, it is better to improve and leverage the existing system than to try to create a new one altogether.  The question becomes, how do you harness this existing infrastructure to improve delivery of microfinance services?  The answer is mobile banking.

In the rural communities where microfinance institutions and other smaller banks operate, the population density is very low.  Negros, in particular, is a farming province – the soil is volcanic and rich with nutrients, and 80% of arable land is cultivated.  People work these farms, and communities spring up to serve the workers.  I can attest to just how difficult it can be to reach some of the more remote communities deep in the rice and sugar cane fields.  Of course, there are no bank branches here.  The nearest ATM might be 50 kilometers away.  Just getting to a bank might take half a day of traveling (resulting in reduced income) and unnecessary transportation fees.  In addition, carrying large amounts of cash around, as anyone who has been mugged before (knock on wood) knows, is not ideal.  Mobile banking offers an ingenious solution to these problem by removing the dependence on traditional bank branches altogether.  That means no travel, limited cash on hand, and a more appealing and convenient banking system that will actually attract the unbanked.  Here is how it works:

You are a woman that lives in a barangay 20 kilometers from the nearest town center.  You own a sari sari store and make 1,000 pesos (~$20) per week.  Depositing money in the bank means closing the store and making the trip to the branch, meaning a high-yield savings at Bank of the Philippine Islands is out of the question.  Instead you enroll in an organization with a mobile banking program.  You can now go to any retailer – a grocery store, Internet cafe, etc. –  that is a partner of the organization and give them the 1,005 pesos (small transactional fee).  They will then credit your mobile account with 1,000 pesos via text message.  That message is relayed through a participating telecom provider.  Both of the major telecoms in the Philippines – SMART and Globe – each participate in mobile banking programs.  That text message is then relayed to a participating bank, which manages the “float,” or the difference between deposits and withdrawals.   The bank pays out the 1,000 pesos to the participating retailer, which includes a small processing fee paid by you.  When you want to withdraw that money, you can go through the same process.  It is essentially electronic money, which can be distributed via SMS.

This is a very high-level description of mobile banking.  CGAP has a nice overview of the four major types of mobile banking, if you are interested in learning more.  Mobile banking has far-reaching benefits.  For one thing, it is ideal for transmitting remittances.  In the Philippines, remittances – or money sent home by workers overseas – accounts for ~10% of GDP, on average.  The traditional way of sending that money is through an organization like Western Union, which has high processing fees.  Using mobile banking, however, the fees are much lower, meaning more money gets in the hands of the intended recipient.  Another benefit is that it can be used as a savings account.  In times of emergency, it is nice to have a bit of money saved up.  Now, all you need is a cell phone.  Lastly, mobile banking has particular benefits for microfinance institutions, which rely on a system of weekly cash payments at center meetings.  What if all you needed at a center meeting was your cell phone?

In an interview, the head of Globe’s m-commerce subsidiary, G-exchange, describes the benefits:

In the Philippines, the greater portion of the population lives at or below poverty line.  In spite of this, there are over 60 million mobile phone subscribers and around 98% are on prepaid services.  GCASH benefits the lower income segments because it reduces the transaction fees and costs to send and receive money.   GCASH requires only a mobile phone and a one-time SMS-based registration, with a minimal charge of U$0.02 (P1.00) per transaction.  Subscribers can do their transactions at home instead of traveling several kilometers to rural banks to pay or do their banking transactions….GCASH is all about convenience and lower transaction costs.  For partner establishments, GCASH has the potential of reducing costs and promoting efficiency.  Since transactions are electronic, their processing capabilities are automated thereby reducing manual handling and potential reducing back office costs.  The reduction of operating cost could translate to increased margins, better value passed on to our partners’ customers, or both.   Utilizing GCASH to help in our partners’ automation and increased access to more customers requires almost zero capital expenditure on their part.

The Philippines is a hotbed of innovation in the mobile banking sphere, mainly because that critical infrastructure is already in place.  When I go out to the field to visit borrowers, everyone has a cell phone.  Right now mobile banking is still in its nascent stages here (<5 years), but it has the potential to completely revolutionize the banking system in the developing world.  I am excited to watch it rolled out up close among the various MFIs and rural banks in the Philippines.

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