Editor’s note: As part of NextBillion Financial Innovation’s launch, we invited a number of leaders to contribute their views on where innovation is heading, and what obstacles remain. Today Lee Babcock, Managing Director of Mobile Strategy at ACDI/VOCA, describes how different stakeholders can help mobile money become the next innovation to transform finance at the BoP.
Microfinance was the last big financial innovation. Mobile money will be the next.
When Mohammad Yunus pioneered the Grameen Bank in 1976, nobody believed microfinance institutions (MFIs) could be commercially sustainable. But there was hope in the model’s ability to provide lending to the very poor, so donors helped start MFIs around the world.
The organization I work for, ACDI/VOCA, established a dozen MFIs, with USAID support, that have disbursed more than $1 billion in loans to microenterprises, smallholders and rural families. Once it was clear that MFIs were commercially sustainable, the private sector stepped in to expand financing. Donor-financed and now privately financed MFIs have served more than 154 million clients worldwide but fall far short of serving the 2.5 billion adults that are unbanked. This is because we can’t build a physical MFI or bank in every community that needs one.
Enter mobile money, which leverages an investment that an increasing number of poor people around the world have already made—a cell phone—to bring banking services, including savings, transfers, loan disbursements and repayments, directly into the home. It can extend financial inclusion even in the most remote areas. According to the International Telecommunications Union, the number of worldwide mobile subscriptions exceeds the global population. About 39 percent of those in the developing world have unique mobile subscriptions, a number that’s rapidly rising. Furthermore, these phones are commonly shared among the family.
MOBILE MONEY AND THE BASE OF THE PYRAMID
Mobile finance is simple, convenient, affordable – and disruptively innovative. In short, mobile finance has massive potential for the base of the pyramid.
And, as with microfinance, NGOs and donors will be pivotal to creating the foundation and pathways that will eventually bring private sector investment to mobile finance in rural areas.
THE RURAL PROBLEM
Mobile money started only a few years ago and has rapidly grown to more than 190 platforms worldwide. Only a few are profitable (one of which is the frequently cited Safaricom M-PESA), but many more are in the pipeline indicating the industry’s long-term commitment.
However, almost all of these platforms are confined to large urban areas. For the ecosystem of telecommunication companies, financial institutions, third parties and solution providers to prospectively receive an ROI, they need penetration into rural areas. Unfortunately, after a few highly visible failures, the mobile money industry has realized it lacks the capacity to deal with the three main barriers for mobile money in rural areas: illiteracy, financial illiteracy and lack of trust.
HOW NGOS AND DONORS CAN HELP
There’s a growing awareness that organizations like mine that understand rural economies and the needs of farmers can provide critical support to help mobile finance expand in rural areas. ACDI/VOCA has 50 years of experience in 146 countries dealing with illiteracy, financial illiteracy and lack of trust. We can conduct market research, educate customers and pilot scalable models.
Agriculture is the most important sector in rural areas. In sub-Saharan Africa agriculture employs 65 percent of Africa’s labor force and accounts for 32 percent of gross domestic product. As an agricultural development firm we’ve determined our two insertion points into the mobile finance ecosystem as informed by our current mobile finance work in Indonesia, Tanzania and Ghana:
1. On the demand side, we can leverage our status as trusted intermediaries in these communities by integrating awareness of, and education about, the features and benefits of mobile finance into our agricultural value chain work.
2. On the supply side we can help our telecommunication and financial institution partners identify, develop, train and finance the network of agents and merchants that are tightly aligned along our targeted value chains where our farmers and other stakeholders live and work.
COLLABORATION IN ACTION
For example in Ghana, Agribusiness Systems International (ASI), an affiliate of ACDI/VOCA, is using a Visa Innovation grant to extend mobile finance in the rice value chain. ASI created a strategic alliance with Tigo Cash, one of Ghana’s leading mobile network operators, and GADCO, a major rice producer and miller, and the farmers working with GADCO. In partnership, ASI, Tigo Cash, GADCO and smallholder rice farmers will roll out a mobile money platform allowing farmers to receive secure payments. The partnership will create demand among farmers for Tigo Cash wallets and promote the supply of agents among rice value chain stakeholders in the Volta Region of Ghana. Mobile money will reduce the risk of theft, connect farmers and other actors with financial services, ensure timely payments to farmers and promote farmer loyalty to GADCO.
There is similar potential for development organizations and agencies engaged in health, education and other initiatives.
PRIVATE SECTOR PROMISE AND POTENTIAL
Unlike in the early days of MFIs, the private sector has embraced the commercial potential of mobile finance. Telecommunication companies are already thinking about related value-added services, and we’ve seen recent joint ventures with microinsurance companies for health, life and agriculture coverage.
Multi-stakeholder alliances that include development implementers will be requisite for dealing with illiteracy, financial illiteracy and lack of trust—specific to mobile money. Beyond these three barriers, USAID recently determined that, for information and communications technology and mobile solutions overall, maximum mobile access can be pursued by promoting awareness, affordability, attainability and locally relevant content for the base of the pyramid.
We are in the early stages of the next great innovation in finance—mobile money.
In the coming years, I believe that mobile finance will do for the base of the pyramid what commercial banking did for the industrial revolution.