Mobile phones have emerged as a critical way to bring financial services to the globe’s legions of unbanked — a billion of whom carry cellphones. Ushering them into the ormal economy is a major initiative for various players—payments processors, financial firms and telecos—and though many issues must still be resolved, revenue is beginning to materialize. For the world’s financial institutions, this means a chance to do good while also doing good business.

A sound financial system accessible to as many citizens as possible is critical for a country’s economic growth and general well being. So the fact that billions of people have no access to financial services is not only a personal disadvantage, but it also inhibits socio-economic progress in developing countries. What many of them do have are cellphones. It’s estimated that one billion of the globe’s five billion cellphone owners are unbanked, and that makes mobile banking an effective way to bring more citizens into society’s fold, according to the International Finance Corp., the World Bank’s private-sector investment arm that is investing in a dozen mobile-banking operations in poor regions of Asia, Africa and Latin America.

“Embracing the financial services ecosystem gives poor people the ability to leverage their existing wealth, to plan for the future better, to save resources and to interact outside of their neighborhood,” says Andi Dervishi, who leads investments in alternative-payments systems for the IFC. Unlike the developed world, where mobile banking is an organized, heavily regulated affair, the turf in most developing nations is awkwardly shared by a jostling array of banks, cellphone companies, telecommunications operators and payments firms. That leaves an opportunity for financial-services firms to jump in to serve the unbanked and underbanked who show growing promise to move into the middle class. Mobile banking can now do it all: Send remittances 100 miles or 1,000 miles; pay salaries; reimburse suppliers; pay bills; and act like a debit card in buying groceries or clothes.

What it doesn’t do well—yet—in the developing world is allow people to save in interest-bearing accounts, buy insurance, obtain business or personal loans, use it as a credit card, or buy stocks and other investment products. But all those services will soon be routine, say analysts, and with them the kind of financial literacy that can raise people up from poverty. Indeed, GDP rises 0.5 percent for every 10 mobile phones per 100 people, according to a 2005 London Business School study, which concluded that cellphone access has a dramatic effect on earning potential.

But the belief that banks can do business while doing good seems lost on the majority of financial institutions, which remain the smallest participants in most mobile-banking operations in the developing world. “Banks remain conservative,” observes Dervishi. “They don’t see this as a big opportunity. They are taking a more defensive position, rather than offensive, and not really going after the customer. Their business model needs to be changed.” And if 86 percent of the globe’s population is expected to be living in emerging markets by 2050, as the World Resource Institute predicts, isn’t that exactly where banks ought to be?

The transformative power of mobile banking, however, isn’t lost on everyone. “India, China, Brazil and Russia all now have more cellphones than ATMs,” says Nick Holland, an analyst at Boston-based Aite Group. “Banks that miss out on this do so at their own peril. And they shouldn’t underestimate the technology savviness of this market. ‘Developing’ does not necessarily mean ‘technology illiterate.’ Adapted with smart cards, fingerprint scanners and photo-recognition software, cellphones are financial tools useful for even the illiterate among the planet’s four billion poor, many of whom still hoard their savings under their mattresses, borrow only from pricey black-market lenders and are at risk for theft after payday check cashing.

Nor does poor mean unprofitable. “There’s lots to win for banks and for the public good in mobile banking,” observes Janey Place, CEO of consultancy DigitalThinking and a former Mellon executive. “Economies become stronger when more people can participate. …Here’s where the do-good and profit motives overlap. Access to financial services is hugely empowering of the poor.”

Citi learned that lesson decades ago, having grabbed a foot-hold in mobile banking in various developing economies by partnering with a variety of players, from telecommunications providers to cellphone operators, and by being open to adopting a variety of phone standards. Among its most successful launches has been India, where it began experimenting in 2000 with one-directional messaging that drew 100,000 users its first year. Today, the operation boasts two million users, which deliver 12 million to 13 million alerts monthly, offers bank statements and provides options for credit cards and loans. The program has been so successful that Citi has activated it in 26 other countries.

The bank expects to roll out Mobile Money Ventures in Korea and China in the third quarter to allow stock trading. “The thinking has been to go beyond balances and payments to encompass a total [variety of] customer transactions,” explains Satish Menon, the Singapore-based executive of growth ventures and innovation who runs Citi’s Asian operations. “But we had to selectively choose those countries that were ready.” In fact, Menon says Citi has learned to be “technologically agnostic” in most countries, focusing instead on “whatever works for the customer.”

Next on the horizon for Citi? Near-field-communication technology, or NFC. “The mobile wallet is the future,” Menon says, noting that Citi’s openness to experimentation has been the key element that has kept it nimble. A pilot project begins in India later this year.

Another bank that claims early-mover advantage is Istanbul-based, $61 billion-asset GarantiBank, which has been marketing its Web-based cellphone-banking prowess through TV and billboard ads since the service was launched in February. In the first two months, Garanti’s Mobile Banking Portal signed up 50,000 customers who racked up more than one million page views and inquiries, more than 30,000 transactions and $24 million in transaction volume, according to evp Fuat Erbil. The bank had first launched short-message service, or SMS, banking in 2003. Today, the country claims 1.3 million mobile-banking customers; that’s not bad given Garanti was first to market in a country where 50 percent of 75 million people remain unbanked, Erbil says. “Even if we get only 10 million of that number, it would be a great success,” he says. “But you have to be patient. The customer’s resistance is not to the cost. The challenge is making them use it once, until they see how easy it is to use.”

Since only 26 percent of Turkey’s population has computer Internet access, beefing up the bank’s Web-based banking made little sense, says Erbil. But Web-based cellphone banking did, since 76 percent of the population owns cellphones. Finding a protean technology from Volantis and Hewlett Packard, GarantiBank and the pair built a platform that works on more than 5,100 cellphone models, offering a wide variety of transactions from remittances to billpay services to foreign-exchange buys and stock purchasing. “For these tens of millions, their mobile phone is the only point of access,” he says.

It is the poorest reaches of the globe where the deepest resistance among banks—and, therein, the greatest opportunity for deep, lasting alleviation of poverty—to providing mobile banking lies. Most of the developing world uses the global system for mobile communications standard, or GSM; it now covers about 82 percent of the mobile market and is used by about three million people, according to the GSMA, a trade group for the mobile-communications industry. GSM makes it easy to switch to SMS text messaging, which is supported by more than 800 mobile operators in 218 countries.

But just because financial-services firms have been slow to jump into the mobile-banking fray in the developing world, it doesn’t mean other providers have been so timid. South Africa is becoming a Petri dish for mobile-banking experimentation, with the three largest banks competing for 47 million South Africans, 25 million of whom are poor and live in rural areas with no bank branches. Though the nation boasts only 13 million bank accounts, with an estimated 48 percent of adults unbanked—an astounding 30 million residents own cellphones.

“It is a strange case of a previously white-dominated society...that now has to embrace 25 million poor people who have been outside of financial services forever,” explains the IFC’s Dervishi. “But the banks were pressured to do something and they realized it was something they should have been doing all along. So that initial resistance has disappeared.” One bank has partnered with a mobile operator; another has teamed up with a telecommunications firm. First National Bank is joining forces with Clickatell to expand its Contact SMS alert services.

But the most innovative experiment, say observers, is Wizzit, an upstart launched in 2004 by South African banking consultant Brian Richardson that is rapidly gaining market share; Wizzit is a unit of South African Bank of Athens Ltd. and has attracted a 10 percent stake from IFC. Some 200,000 South Africans have signed up for the service that allows customers to pay bills, store cash like a debit card, transfer funds and send remittances; loan applications and payments are not yet an option.

Accounts can be opened in 30 seconds via a call center, and sold via Wizzkids, part-time workers who are spreading though the countryside. Opening an account costs $5.50; buying groceries costs 25 cents; withdrawing cash at another bank’s ATM costs up to $2, depending upon the bank. Richardson expects the service to be profitable by the end of 2009, but that hasn’t stopped it from expanding into Zambia and Eastern Europe.

The service uses a technology called unstructured supplementary-services data, or USSD, which acts much like SMS with a fundamental difference: It’s an interactive technology that offers a constant link between user and network, so users can be confident a transaction has occurred in real time. Although the Wizzit markets itself as a true virtual bank with no branches of its own, it has a partnership with Absa Bank and Postbank for depositing cash and checks. Wizzit claims to be 30 percent cheaper—or $2.80 less—than an account at a traditional bank, a tiny sum that makes a difference when the average customer’s monthly salary is $257. “South Africa is a good laboratory for a bank to say, ‘I’m going to go after this and not just leave it up to the other players,’” says consultant Place.

It’s an irony that undeveloped markets have leapfrogged past the technologies of mature markets, reversing the traditional flow of technology innovation. Until recently, developing world consumers tolerated third-rate technology and their role as the dumping ground for antiquated products and hand-me-down services.

But cellphone capitalism is changing all that. Encouraging economic growth through mobile commerce is a kind of “inclusive capitalism” that appears much more effective in poor nations than pumping in international aid money. That was not lost on Iqbal Quadir, a Bangladeshi expatriate now living in the U.S. who in 1996 helped found Grameen Phone Ltd., which has since started the careers of more than 250,000 “phone ladies” in Bangladesh, one of the planet’s poorest countries. Women use microcredit to buy $150 cellphone kits, each equipped with a long-lasting battery. The women become their village’s phone operator, charging small commissions for villagers to make and receive calls.

Soon, the entrepreneurs are expected to add cellphone banking—particularly remittance services—to their repertoire. Grameen Phone, which has morphed into Bangladesh’s largest telecom provider, claims annual revenues of about $1 billion. The idea is being duplicated in Rwanda, Uganda, Cameroon and Indonesia.

The big question, however, is whether banks become part of the solution or sit out the revolution altogether. “Banks need to rethink their competitive advantage in this area,” says the IFC’s Dervishi. “But it’s going to be worth it.” But the next five years will be critical ones, as players in developing nations entrench themselves in their chosen niches. “Each country is unique,” says Holland. “It’s hard to apply the one-size-fits-all approach. But if banks don’t stick their foot in the door in the next five years, they will be disintermediated. Banks ignore these markets at their peril. It’s a huge opportunity. The time is now.” (c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved.

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