By Diana Brazzell, Footnote
This article was produced in consultation with Harvard University's John F. Kennedy School of Government and was originally published on Footnote, a website that brings academic research and ideas to a broader audience.
Imagine you live in a small village in rural Kenya. Your daughter attends university in Nairobi and needs financial support to buy textbooks and pay her rent. How do you send her money if you, like many Kenyans, don't have a bank account or internet access?(a)
In the U.S., the answer would be simple. In fact, you would have an abundance of options: PayPal, Venmo, online banking, checks, money orders, or good old-fashioned cash. Many people around the world, however, don't have access to the financial services some of us take for granted. Two billion "unbanked" adults, mostly in developing countries, face barriers to tasks as simple as receiving wages or sending money to family members. Without access to banking services, their finances are unstable because they don't have a good way to save for the future or borrow in times of need.(b)
Getting people access to formal financial services is called financial inclusion and it is a critical part of equitable economic development, says Jay Rosengard, Adjunct Lecturer in Public Policy at the Harvard Kennedy School.1 Research shows that by lowering transaction costs and helping spread risk and capital across the economy, financial inclusion improves the livelihood of individual families and spurs local and national economic growth.2 Financial inclusion can be particularly powerful for women and other marginalized groups who have traditionally been excluded from the formal economy and had less control over their own finances.3
When up to 90% of your population doesn't have a bank account, how do you bring them into the financial system quickly and easily? Rosengard believes Kenya has struck on a promising solution: mobile banking.1 His latest research paper shows that, thanks to mobile banking, the share of Kenyans with access to a financial account jumped from 42% in 2011 to 75% in 2014.(c) Financial inclusion skyrocketed among the poorest citizens, from 21% of people with a financial account in 2011 to 63% in 2014, growth of more than 200% in just three short years.
"The magic of mobile banking lies in its simplicity and low cost," said Rosengard. "All you need to get started is an old-school flip phone, available for less than $10 U.S. dollars, and a banking SIM card. Then you can send and receive money over text message, no smartphone or special app required. Customers mostly rely on the service for person-to-person (P2P) payments, but are increasingly using it to pay merchants, utility companies, and other businesses."
Rosengard's research finds that mobile banking has transformed how Kenyans manage their money. On Safaricom's M-PESA, which is by far the most popular service in the country, 19 million users now send 15 billion Kenyan shillings in payments each day - the equivalent of $150 million U.S. dollars. This growth has allowed Kenya to zoom past other countries when it comes to financial inclusion. The share of people with access to a financial account in Kenya is more than double that of other sub-Saharan African countries and almost triple the typical rate in low-income countries worldwide.
This mobile banking revolution has also created greater financial stability for Kenyan families. A 2014 study found that people using M-PESA were able to handle major hits to their income - such as a bad harvest, a job loss, or a failing business - without having to curb their household's consumption.4 The primary way they weathered these storms was by getting help from family and friends through funds sent over M-PESA. In comparison, the study found that Kenyans who did not use M-PESA had to reduce their household spending by an average of 7% in response to financial challenges.
For developing countries where traditional banking is limited, Rosengard sees mobile banking as a potential shortcut to financial inclusion. Nations that already have a robust banking sector and widespread access to financial services, like the United States and South Africa, can depend on existing banks to offer services online, with upstarts like PayPal and Venmo pushing the envelope.
In developing countries, however, a tool like mobile banking can be transformational.5 Rosengard explained how, instead of growing the conventional banking sector's physical presence and slowly bringing the "unbanked" into the system, mobile banking allows countries to immediately bring financial services to the masses in a cheap, accessible way.
Mobile banking isn't the first new technology that has helped countries leapfrog certain stages of development and progress more quickly. Cell phones had this impact in sub-Saharan Africa in the 2000s. As mobile phone ownership boomed, countries were able to skip over the landline telephone phase and rapidly bring modern communication to their citizens. The rate of cell phone ownership in Kenya (82%) is now almost as high as in the United States (89%).6
Could mobile banking foster a similar transformation, bringing financial services to the masses and spurring equitable economic development? Rosengard and other experts think so.
"For the Kenyan family able to send their daughter money for school, mobile banking could mean the difference between her dropping out to work or graduating, securing a better career, and, down the line, being able to send money back home in times of need," Rosengard said. "Now multiply that impact by the two billion other unbanked people across the world whose lives could be changed by a cheap flip phone and a simple banking program, offering a path to more equitable, inclusive economic growth."
- (a) According to the World Bank, only 43% of Kenyans accessed the internet within the past year and 55% have an account at a financial institution. For comparison, 87% of people in the U.S. use the internet and 94% have a bank account.
- (b) While financial inclusion is less of a problem in developed countries, it is still a major barrier for the poor. In the U.S., for example, 6% of adults do not have a bank account and 24% do not have a debit card.
- (c) The World Bank defines having access to a "financial account" as having an account at a bank or other type of financial institution, such as a credit union, microfinance institution, or cooperative, or using a mobile money service, such as mobile banking, within the past year.
- Rosengard, Jay. 2016. "A Quantum Leap over High Hurdles to Financial Inclusion: The Mobile Banking Revolution in Kenya." Faculty Research Working Paper Series, RWP16-032. Cambridge, MA: John F. Kennedy School of Government, Harvard University.
- Cull, Robert, Tilman Ehrbeck, and Nina Holle. 2014. "Financial Inclusion and Development: Recent Impact Evidence." Washington, D.C.: Consultative Group to Assist the Poor.
- Villasenor, John D., Darrell M. West, and Robin J. Lewis. 2015. The 2015 Brookings Financial and Digital Inclusion Project Report: Measuring Progress on Financial Access and Usage. Washington, D.C.: Center for Technology Innovation, Brookings Institution.
- Jack, William, and Tavneet Suri. 2014. "Risk Sharing and Transactions Costs: Evidence from Kenya's Mobile Money Revolution." American Economic Review, 104(1): 183-223.
- Klapper, Leora and Dorothe Singer. 2014. The Opportunities of Digitizing Payments: How digitization of payments, transfers, and remittances contributes to the G20 goals of broad-based economic growth, financial inclusion, and women's economic empowerment. Washington, D.C.: International Bank for Reconstruction and Development, The World Bank.
- Pew Research Center. 2015. "Cell Phones in Africa: Communication Lifeline." Washington, D.C.: The Pew Charitable Trusts.