“Big is Beautiful,” an addendum

In a recent “The Optimist” column for Foreign Policy, New America fellow Charles Kenny touched on many of the key topics that the Global Assets Project team has focused its attention on over the last year: mobile-banking, conditional cash transfers, microsavings, and electronic money, to name a few. The article, “Big Is Beautiful”, highlights how large banks that invest in technology and electronic money (e-money) can do more to fight poverty and increase financial inclusion than traditional microfinance/microcredit initiatives in the developing world. Kenny specifically mentions the unbridled potential for banks (and governments) to not only accelerate m-banking projects, but also to bridge mobile money and biometric technology with government aid programs and formal microsavings products.

As the recent Andhra Pradesh microfinance crisis painfully revealed, many microcredit borrowers take multiple loans to cover previous ones and then find themselves in an unsustainable cycle of debt. While microcredit is still a positive financial tool for some, it is not a panacea for poverty alleviation. By contrast, microsavings products are often overlooked, but are equally important financial services for BoP consumers. While m-banking’s achievements in offering cheaper and easier ways for the poor to manage money have been well covered here, linking microsavings with existing m-banking networks is the next logical step, as Kenny advocates. Kenya’s M-KESHO, a mobile savings service tied to a bank account, allows customers to safely deposit electronic money into an interest-bearing savings account through their mobile phones. It also integrates microinsurance and microcredit services as well.

Kenny also explains that governments too, have a real opportunity to piggyback off of mobile money initiatives when it comes to the delivery of subsidies, social protection, and aid. Once an m-banking program with wide distribution is in place, governments can directly distribute aid and subsidies to recipient’s accounts. They no longer have to disburse cash or in-kind subsidies physically, a system mired in corruption and inefficiency. Instead, governments can instantly send electronic benefits to people’s accounts, accessible through their phones. It provides a much less expensive alternative to governments, is more transparent, and reduces corruption. BoP recipients will also benefit from a faster and easier way to access these direct payments, especially in the aftermath of natural disasters. As Kenny notes, mobile money services are particularly well suited as payment outlets for the increasingly popular and expanding network of Conditional Cash Transfer programs around the world. We have taken this idea one step further and along with Henry Jackelen, outlined “A Third Way for Official Direct Aid”. The soon to be released paper advocates for donor countries to support programs that send e-money directly to qualifying BoP recipients in the developing world.

Beyond m-banking and e-money, the article also explores the important role that biometric technology is playing in safeguarding the transaction and movement of mobile money. Already embracing this technology, India’s national Unique ID project takes fingerprints and iris scans of all of its users. This is done not only protect account holders, but also to make transactions easier for those that are financially illiterate. Governments and banks are both embracing biometric technology for its potential to curb fraud and improved the efficiency of transfer programs.

Many thanks go to our colleague, Charles Kenny, for bringing these important topics to the forefront of global development. Indeed, it’s an exciting time to be in the asset building field. Look for the GAP team to further explore these initiatives (and others) in future papers and blog posts in the coming months.