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The benefits of financial inclusion likely aren't lost on This Week in Fintech readers: Access to financial services drives higher savings, reduces food insecurity, fuels business growth, improves health outcomes, and dramatically boosts gender equality by allowing women to better participate in the economy. Mobile money has expanded financial access to over a billion people in the past decade by ditching physical bank branches to deliver solutions directly to users' phones:
Interestingly, many of the most successful digital banking programs in emerging markets weren't originally designed to offer banking. Rather, they launched as means for people to pay for specific services in cash. Their use cases then evolved as users tapped into their potential as safe, digital stores of funds.
In Kenya, where 96% of households have a mobile money account, digital payments originally got off the ground in the form of airtime credits. Airtime credits– phone minutes, data– can be bought from local shops and agents. They're also transferable, so people soon started depositing cash in airtime wallets and sending the credits to relatives, who could then resell them. Kenya now leads African countries in digital payment adoption, with Safaricom (Vodafone)'s M-Pesa serving as the country's largest mobile money service. A study found that over 6 years, M-Pesa "increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty," an effect that was even more pronounced for female-led households.
In the Philippines, GCash rolled out money transfers for a population that was 80% unbanked at the time of its launch in 2004. In the absence of a digital wallet or bank account, users could send each other money by taking cash to their local sari-sari store; recipients would in turn retrieve cash from a store near them. A few years later, GCash rolled out the ability for users to store their funds in digital GCash wallets. They then released an array of financial services branching from these accounts. Today, GCash is the leading mobile wallet in the Philippines– their model newly enabled millions to access financial services and overall, over 51% of the population now has an account with a financial institution or mobile money app.
The agent banking model
M-Pesa and GCash showed the world that mobile money can bring financial access to populations that traditional banking systems had previously failed to reach. Instead of transacting with customers only through physical bank branches, mobile money employs a near-ubiquitous network of merchants and individuals as agents. Agents provide liquidity to local communities and can verify users’ identities via SMS, mobile app, or QR code scan. They provides a far more convenient access point to financial services for individuals who don’t have the level of funds or proximity to a physical bank to justify a trip.
Evidence shows that simply owning a formal financial account drives people to save at higher rates and better withstand economic shocks– in Bangladesh, the World Bank finding that setting up bank accounts for garment workers increased participants’ likelihood to save by 25%. Digital deposits also open the door to a world of additional benefits by giving access to products like credit, insurance, remittances, and investments.
Globally, the rate of mobile phone ownership is now 91% and rising. It's an encouraging foundation for growing the 76% share of adults who have a formal financial account, which brings us to...
Digital identity verification
Mobile phone in-hand, anyone opening a financial account has to go through a KYC process to verify their identity. At this point new users will need to show a legally-recognized ID, but the World Bank's latest estimates show that 1 billion people do not have an official proof of identity, and another 3.4 billion people have some type of legally-recognized ID that can't be digitally verified.
Source: World Bank ID4D Global Dataset
Many countries are taking steps to standardize their identification systems, with digital verification playing a key role for populations like women and those living in rural areas– both of whom tend to face higher barriers in getting to a physical bank or mobile money agent to undergo KYC. The effect of digitizing ID systems on financial access is clear: When India launched its biometric digital ID system– Aadhaar– in 2010, only half the population had nationally-recognized identification and one-third of people owned a bank account. Within its first decade, Aadhar newly enabled 384 million people to open a bank account. A staggering 1.2 billion people– over 99% of India's population– is now enrolled in Aadhaar, and India's rate of financial account ownership has reached 80%.
Digital ID systems also give women more financial agency by elevating their position within the household. When Pakistan migrated federal income support payouts from analog ID verification to a biometric system, a study found that women were three times more likely to get the cash transfers on their family's behalf than have it collected by a male relative, which made these women 9% more likely to decide how this money was used.
The role of regulators
Governments play a critical role here. M-Pesa and GCash benefitted from getting permission to operate before legal frameworks for mobile money were established in their countries. Rather than stall their launches until regulation was created (the "Ex Ante" approach), the Kenyan and Filipino governments granted these platforms special licenses under a test framework that would be refined for the following generations of e-money products.
This level of friendliness isn't a given!
In the GSMA's latest analysis of 91 countries' regulatory frameworks, 81% of countries allowed non-banks to offer e-money services. Among these, regulatory attitudes towards mobile money vary widely: Governments set the KYC thresholds, capital requirements, and eligibility criteria for mobile money agents that ultimately determine e-money providers to operate. They can further these platforms' value proposition to users by setting reasonably high transaction limits, enabling cross-border payments, and letting platforms touch the interest on their managed deposits. Acknowledging the opportunity to further financial health, some governments will even encourage adoption by moving public cash disbursements to their populations' mobile wallets.
Where does mobile money go from here?
There is no universal playbook for countries to reach full financial access, but we know the building blocks that pave the way.
Before digital money platforms launch into new geographies, it's important that they consider the national government's attitude towards digital finance, the feasibility of digital KYC, and the population's ability to access financial services via mobile phone. From there, platform adoption is a matter of meeting users in the context of their everyday needs– phone airtime, money transfers, etc.– and building on this with services that drive meaningful value across other areas of their financial lives.
