John Hoffmire: How could mobile financial services help people in poverty?
According to the Bill & Melinda Gates Foundation, three out of four adults in the developing world don't have access to banks or any other financial institutions. Moreover, only 10 percent of the 2.5 billion people who earn less than $2 a day have a bank account. What these figures tell us is that for the most part, the transfer mechanism attached to the economic life of most low-income people is based on and limited to the traditional use of cash and barter.
Why would it be important for low-income people to access financial services? Again, an interesting answer comes from the Bill & Melinda Gates Foundation, which takes the perspective that having the right resources and tools at critical moments can make the difference between getting out of poverty when the opportunity arises, or going deeper into debt when disaster or misfortune strike.
In the face of an emergency, people may require a quick loan to pay for an expensive medicine. Without any financial services, the money might only be available through loan sharks, who tend to be very expensive. Often these lenders make available money at rates of over 200 percent interest per year, some much higher.
The problem is, how can financial services be made available to more people in need? A possible answer may lie in that, as of 2014, there are more mobile devices than people on this planet. This amounts to 7.2 billion mobile telephony gadgets, according to The Independent. The connection is clear. If we find a way to link financial services to cellphones, then financial services could reach a huge part of the world’s population.
Actually, this idea has already been in place for a while. There are now 255 mobile money services operating in 89 countries (reaching up to 61 percent of the world’s population) providing about 300 million mobile money accounts. Specifically, people use mobiles to pay taxes, transfer money, request a loan, receive money from a social program, receive their salaries and take care of many other financial needs.
This strategy has been so successful that operators are now moving to mobile insurance and savings. Furthermore, the fact that many of the mobiles are not smartphones means, surprisingly to many, that old-fashioned phone users are not restricted from accessing mobile financial services, since many financial platforms are optimized for non-smartphones.
Given the importance of mobile financial services for low-income people in the U.S., the Consumer Financial Protection Bureau published a report that documents many of the most important issues to low-income people. One of the highlights is the following: in the U.S., 44 percent of unbanked individuals have smartphones that enable them to make faster payments when depositing checks remotely by using the phone's camera.
In addition, this report states that financial services need to be paired with in-person assistance that is oriented toward teaching financial literacy. This is because customers who are less well-informed are more apt to be taken advantage of. Furthermore, with financial literacy, they are more likely to acquire financial service products that better fit their needs.
Finally, it is worth noting, mobile financial services are not going, by themselves, to end poverty. Nevertheless, these services will help people have better prospects. There is no silver bullet to eliminate poverty. What we need is for a lot of people to receive small but specific solutions to specific problems. Little by little, poverty will influence fewer people as technology, education and better jobs paying living wages will make the difference.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Alejandro Mercado Mendoza, Hoffmire’s colleague at Progress Through Business, did the research for this article.
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