Soon the rural populations of Latin America and the Caribbean (LAC) will have access to microloans, savings and insurance against the unexpected …… and all through their mobile phones. This is indicated by trends in microfinance institutions (MFIs), increasingly advanced mobile payment systems and the emergence of open source programs that serve as a bridge between the two.
This post will briefly explain how MFIs and mobile payments work, how open source software can facilitate financial inclusion and what challenges face this process.
Introduction
According to The World Bank, only 35% of the LAC population has access to financial services. It’s a situation that reduces their options for payments, savings and credit and limits their financial channels to the less efficient and more expensive.
Access to savings, credit, insurance and other financial services are necessary to improve your position and overcome unforeseen financial emergencies (medical expenses, education fees, occasional unemployment …). Moreover, proper financial planning enables families and entrepreneurs to increase the chances of growing their businesses, reduce the volatility of income (i.e. consumption smoothing), amass savings and property and, ultimately, improve their ability to respond to economic shocks.
Recent studies show that banked individuals and families are economically better off than those who lack access to formal financial services. To the extent that income and savings grow, banked individuals are less vulnerable to financial crises and can go from simple everyday survival to medium and long term planning.
These circumstances are especially important in rural areas, underdeveloped urban zones and, generally speaking, in those places dominated by the informal sector, which may only be accessible by cell phones.
MFIs
Micro-credit and -finance came to rise in the 1970s, when social entrepreneurs began to provide microloans and other financial services to poor microentrepreneurs who had no access to formal finances due to a lack of collateral.
Some poor countries of LAC were pioneers in the development of microfinance. This has never stopped developing and has reached such an extent that the 2009 Global Microscope study, prepared by the prestigious financial publication The Economist, listed Peru, Bolivia, Ecuador and Colombia (in that order) in the top ten countries worldwide with the better business environment for microfinance.
Most MFIs started as non-governmental non-profit organizations (NGOs), rural banks or other financial cooperatives, or national development banks. Over time, many of the MFIs became for-profit institutions, as this is a requirement for licensing and offering savings services. The for-profit MFIs can be grouped into non-bank financial institutions, commercial banks specialized in microfinance or finance departments of a bank that offers various types of services.
Mobile Payment
Mobile payment is a system that allows users to deposit money into a mobile wallet and distribute it via text messages (SMS). Mobile payments are faster and cheaper than sending money through banks, post offices or intercity bus drivers. By using this type of payment, rural people can forgo traveling to a bank or post office to access transferred money and, consequently, can devote their time to more productive activities.
Mobile payments are also a means through which to introduce financially disempowered communities to formal financial services.
The pioneers of mobile payments, like microfinance, were entrepreneurs in poor countries who realized that they could make money by selling services to the base of the economic pyramid (BOP). There are two reasons for this: the sheer size of this market and the high rate of mobile phone penetration among its population.
Safaricom M-PESA (Kenya), SMART Money (Philippines), Globe G-Cash (Philippines) were among the pioneers. SMART Money & G-Cash alone bring roughly 275 million dollars per month to The Philippines! To learn more about how the typical mobile payment system works, see the information on Cash Splash (Sierra Leone), Obopay (India) and Paypal (USA).
How open source software facilitates financial inclusion
Consider the following example: A farmer needs money to rent a stall in the marketplace to sell his produce. Currently he has few options to get it. Most likely, he will have to go to the nearest MFI and apply for a micro-credit loan (with interest rates that can reach 28% annually, according to the Consultative Group to Assist the Poor). He needs to travel long distances to the MFI to pay weekly loan payments.
With a mobile payment system, the farmer in our example should be able to avoid the opportunity costs of both time (transit time) and money (transport cost) by accessing credit via his mobile phone. Theoretically, such a transaction should be simple.
In practice, however, MFIs have difficulty offering such services, even in the countries of Africa and Asia that have mobile payment channels. And why? MFIs lack a software that seamlessly integrates mobile payments with their management information system.
The development of free and open source software with the ability to process payments would help solve the problem above. This software would provide a bridge between mobile payment systems and MFIs, enabling MFIs to use mobile payments to distributed mass payments, automatically generate client credit histories and maintain robust auditing trails.
Challenges
Frontlinesms:Credit is an initiative that aims to bring formal financial services to rural and disconnected populations via simple text message (SMS). By merging free and open source software like Frontlinesms, which turns a computer into a mass-SMS communication hub, with the ability to process prominent mobile payment systems and integrate with common microfinance management systems, FrontlineSMS:Credit will facilitate financial inclusion in LAC.
The task that FrontlineSMS:Credit faces is not easy. On one side are the regulatory environments that enable mobile phone use as a tool for financial inclusion. While some countries are well advanced in the field, specifically Peru and Mexico (see América Latina en contexto: el entorno para los servicios financieros móviles), governments in LAC are still far away from creating enabling environments.
On the other hand is the development of mobile payment systems in the region. Fortunately, several systems have already emerged: Tigo Cash in Paraguay, Pago Móvil in Perú, Nipper in México and Oi Paggo in Brazil are a few.
And do not forget also the distribution networks, interoperability of mobile payment systems, marketing, security of transactions, customer trust, the accessibility of mobile phone platforms, transparency, etc..
FrontlineSMS: Credit has been working since October to produce a range of open source tools to expand the functionality of mobile payments. One of its modules will be ready for field testing and free download by the Spring, whether in Africa or Asia, where as we saw, mobile payment systems are well developed. In LAC we have it in early 2011, or earlier if circumstances permit.
The short history of development is fraught with false promises and failed benchmarks, says Ben Lyon, Executive Director of FrontlineSMS: Credit, and neither mobile payments nor microfinance should be exalted as the next ‘silver bullet.’ Nevertheless, the rapid emergence of mobile payment systems across the developing world presents a tremendous and exciting opportunity for billions of people… we must seize this opportunity!
[Read this post in Spanish at Jorge's blog]
This post was contributed by Jorge L. Alonso G., Central & South America Regional Coordinator for FrontlineSMS:Credit.
To contact Jorge, email
jorge@credit.frontlinesms.com.
____________________
Sources Consulted:
1. Fundación para el Desarrollo de las Microfinanzas, Andares
2. MicroRate: The Rating Agency for Microfinance
3. Telefonía Móvil y Acceso a Servicios Financieros en América Latina y Caribe
There is a massive change underway in the mobile media market as it becomes unshackled from the operators’ portals that have dominated it for a decade, all without having made any significant inroads into the content use of mobile users. The new capped data packages, fuelled by further competition, will see a total revamp of the mobile media market. It will no longer be based on portals but on direct services by content and services providers via open source phones and mobile-friendly Internet-based services. The next step is the continued emergence of m-commerce and in particular m-payment services.
Let’s hope this idea will bring better future for millions of people all over the world in rural areas.