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March 2014

Policies to foster mobile banking development

Eva M. Gutiérrez's picture

Mobile banking (m-banking) — the use of mobile phones to conduct financial and banking transactions — represents a key area of financial innovation in recent times. Mobile banking allows banks’ customers convenient access to a variety of banking functions, and increases efficiency.  Customers can access funds in their bank accounts at all times through mobile phones, and transaction costs are driven down. Even when individuals have access to bank accounts with low fees, m-banking can reduce the opportunity cost of financial transactions.

Mobile banking has also been identified as a potentially significant contributor to financial inclusion by the G-20. While half the adults worldwide do not have access to formal bank accounts, it is estimated that more than 2 billion of those unbanked already own a mobile phone. Unbanked individuals cite difficulties in obtaining a bank account such as living too far away from branches, not possessing necessary documents, or high banking costs.  All such barriers to finance can in theory be overcome through a pivot in business model that is supportive of m-banking.

M-banking has flourished both in developed and developing countries in various forms in response to structural characteristics. The model of providing financial services through a mobile phone linked to a bank account is referred to in the literature as the additive model. The use of m-banking in developed economies often follows the additive model. This contrasts with the practice of using m-banking to target the unbanked - the transformative model. Under this model, non-banks issue electronic currency to offer costumers payment services and value storage services.

Do firms in developing countries grow as they age?

Asli Demirgüç-Kunt's picture

The answer is yes, but not as fast.  In the U.S. for example, we know that new businesses start small, and if they survive, grow fast as they age. An average 40 year old US plant employs over seven times as many workers as the typical plant five years or younger. In a new paper, my co-authors Meghana Ayyagari, Vojislav Maksimovic and I focus on developing countries and look at what happens to firms in the formal sector as they age. We focus on formal firms because informal firms look very different from formal firms in terms of size, productivity and education level of managers and there is little evidence that growth occurs by informal firms eventually becoming large formal establishments. We see that there the average 40 year old plant employs almost five times as many workers as the average plant that is five years or younger.