Published on All About Finance

Low Cost Banking: How Retail Stores and Mobile Phones Can Transform Access to Finance

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More than 3 billion people in the world today don’t have access to savings accounts. Many of these 3 billion fall below the less-than-$2-per-day benchmark of the world’s poorest people. Why are banks not doing a better job to help them manage their financial lives?

The problem is largely one of cost. Providing financial services to the poor is prohibitively expensive for banks. Each time a client stands in front a of a teller’s window it costs most banks from $1 to $3. If poor clients make transactions of $1 or $2, or even less, banks won’t be able to support the costs.

It’s also too costly for the poor. Most poor people, especially those in rural areas, live far away from bank branches. Let me give one example of a woman in Kenya. The nearest branch may be 10 kilometers away, but it takes her almost an hour to get there by foot and bus because she doesn’t have her own wheels. With waiting times at the branch, that’s a round-trip of two hours – a quarter or so of her working day gone.  While the bus fare is only 50 cents, that’s maybe one fifth of what she makes on an average day. So each banking transaction costs her the equivalent of almost half a day’s wages.

What we need is a much lower cost form of banking that meets the needs of the poor:

  1. Convenience, being able to transact near where they live and work;
  2. Trust, putting their money with organizations that seem to care for them and who they feel are going to be there for them when they need them the most; and,
  3. Affordability, being able to transact in small amounts at reasonable cost.

So what can we do about it? The key is to take banking outside of banking halls. Banks need to use stores that already exist in every village and in every neighborhood to offer banking services. Depositing and withdrawing money from your account should be just another product that your local store offers, along with toothpaste and mobile prepaid cards.

We can use technology to ensure that banks and their customers can interact remotely in a completely trustworthy way through local retail outlets. Customers can be issued bank cards with appropriate security features, and the local store can be equipped with a point-of-sale device controlled by and connected to the bank via a telecoms network. If a customer wishes to make a deposit at a store, he swipes his card, the bank checks the balance on the store’s bank account, and if there are sufficient funds the bank will automatically transfer the equivalent amount from the store’s bank account to the customer’s bank account. The store keeps the cash in compensation for the amount taken out of its bank account. All this can happen in real time, in which case there is no credit risk at all: the transaction is done and settled by the time the customer walks out of the door.

This vision of banking beyond bank branches is now happening. Brazil has seen 50,000 such retail “bank correspondents” (stores offering deposit and withdrawal services on behalf of banks) open up, most in the last five years, with the result that all municipalities are now covered by the formal banking system. Such models also exist in the Philippines, South Africa, Peru and Colombia, and are being piloted across many countries in Africa.

We’ve taken the brick-and-mortar cost out by using stores that already exist. We’ve done away with bank tellers that represent a fixed cost, and instead we are now paying local retailers a small commission for each transaction they undertake. But it’s still expensive to deploy the technology platform to ensure every step is secure. We can do better.

Why give each customer a card, when they already have one sitting in their pocket – inside their mobile phone? And why deploy dedicated point-of-sale terminals in stores when they already have an entirely functionally equivalent device – again, their mobile phone? This is how a mobile-to-mobile transaction would work. Say I want to do a deposit at a shop set up as a business correspondent. I grab my phone, and through an easy-to-use menu I enter three critical pieces of data: the phone number of the person I want to send money to, the amount I want to send, and my PIN. This is sent securely over the mobile network to my bank, which checks that I have a sufficient balance. If so, our respective account balances are adjusted immediately, and the bank sends two messages confirming the transaction: one to me (“your account has been debited”) and one to the recipient of my money (“your account has been credited”). The transaction is completed, phone-to-phone.

There are an estimated 1 billion people in developing countries who have a mobile phone but not a bank account. In Africa 50% of the population has cell phones, more than double the number of people who have access to bank accounts. With that alone we can go a long ways to cracking the problem of getting bank accounts to the poor.

Imagine if this system could be used by banks as a “front end” to enable people to send money to the bank of their choice, right from their neighborhood store. The incremental cost per customer and per store is reduced to a bare minimum. Now, having millions of $1 transactions begins to be profitable.

Financial institutions can draw inspiration from what the telecoms industry has achieved in the last fifteen years. With their low-cost prepaid platforms, cellphone operators have found a way to tap into their customers’ pockets in amounts as low as 20 US cents. And they are selling them through the mass market, reaching stores in every neighborhood and practically every village. The biggest bank in Panama has 65 branches in which you can make a deposit, whereas you can buy mobile prepaid cards—in effect, a deposit—at any of 12,000 retail outlets. Any banker should be gob-smacked by the distribution networks that mobile operators have built.

This is happening as I speak in Kenya, where the M-PESA mobile money service is a true African success story. Launched just over three years ago, it is now used by 10 million people, which corresponds to almost 60% of Safaricom’s customer base or 45% of the adult population. They can cash in and cash out at any of some 18,000 retail outlets associated with M-PESA – 20 times the number of bank branches in the country. The system is used primarily to make remote person-to-person payments, and now handles more transactions in Kenya than Western Union does in the entire world. In value terms, the equivalent of USD 320 million is transferred monthly, which is equal to roughly 10% of Kenyan gross domestic product. And customers love it.  98% declare themselves to be happy, and 84% say that losing M-PESA would have a large negative effect on them. My colleague Dan Radcliffe and I have documented this intriguing case in the World Bank’s series on Yes Africa Can: Success Stories from a Dynamic Continent.

This inspires us to believe that new banking systems are possible that work for the poor and yet are commercially sustainable. Using new technologies, alternative distribution channels, and new partnerships, everyone can have access to basic financial services.

(Editor's Note: Interested readers can also view a TED Talk by Ignacio Mas on this topic.)


Ignacio Mas

Consultant on Mobile Money

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