Mobile banking in microfinance

Mobile Microfinance

Mobile Banking in Microfinance

Microfinance is greatly aided by developing mobile banking technologies. One of the great hindrances to microfinance had been the lank of institutions engaged in microfinancing operations; the advent of mobile banking allows for the same banks that already offer such services to bring them to a much larger proportion of the world's poorer populations (CGAP a 2009). Especially in rural and remote areas without adequate infrastructure even for point-of-sale or ATM microfinance transactions, wireless networks and satellite communications still make mobile banking possible. This gives the bank a broader pool of borrowers, decreasing the bank's costs per borrower and increasing both the bank's profits and its ability to make loans (CGAP b 2009). Costs to the borrower are also reduced in terms of travel time and expenses and the cost of time delays.

Microfinance itself is untraditional, but at first it followed traditional models of banking insofar as its transactions with banking customers. Experimentation with other delivery methods showed that point-of-sale and other branchless transactions conducted through third party agents reduced transaction costs by to as little as a thirtieth of the costs associated with branch-based transactions (CGAP a 2009). Initial results of mobile banking observations suggest that these drastically reduced costs are cut in half again when point-of-sale agents are cut out of the loop and mobile phones and other devices are introduced. In addition, this increases the amount of competition in microfinance, even in areas with an accessible branch location (WorldBank 2008). Though microfinance was never a profit-heavy venture, this competition could further reduce costs to borrowers.

Cash transactions, of course, still require a physical agent working on behalf of the banking institution, but even costs associated with these agents show a decline when mobile banking is made available (CGAP b 209). The essential strengths of mobile banking in microfinance, then, are the reduction in transactions costs to both banks and consumers, and the flexibility that mobile banking provides. This flexibility leads both to increased competition and increased utility, and the broader pool of lenders reached through mobile banking allows for a further reduction in transactional costs and an increased ability and willingness for banks to engage in microfinancing operation in more areas. The already noted effects of microfinance not only on direct participants but on communities where such services are available suggests that the widespread microfinance brought by mobile banking could help to establish economic growth and stability in wide regions of the world (CGAP a 2009).

The mechanisms for mobile banking's reduction of transaction costs are not all immediately apparent. Among the more obvious reasons is the simple elimination of overhead and initial construction costs for new bank branches. Though such costs are shared by all banking customers, it requires a sizeable initial investment on the part of the bank, and customers might not be plentiful enough to make the sharing of these costs feasible for either potential customers or the banks. With mobile banking, not only are the overhead costs of a physical branch eliminated, but many transactions can actually be conducted without any contact between the customer and bank personnel. This further eliminates costs associated with branch banking while allowing more affordable access to more complex services.

This reduction of overhead costs is observable in other forms of branchless banking, as well, as can clearly be seen in the massive reduction in costs when point-of-sale third party agents were introduced to the microfinance arena (CGAP a 2009). Additional transaction cost savings are introduced by mobile banking with the removal of these third party agents in a large number of transactions; only cash transactions require the physical presence of an agent. The spread of mobile phones puts technology capable of bank interfacing directly in the hands of many potential customers, increasingly including the poor (CGAP a 2009). The cheaper technology costs and availability of mobile banking devices is responsible for the spread of microfinancing services, and the larger the pool of customers is the more enticing and affordable it becomes for banks to offer such services.