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Wednesday, September 01, 2010

Guest Post: The Power of Unleashing Payments at the Base of the Pyramid

By Ignacio Mas

M-PESA in action,

Editor's note: This is the first entry of a two-part series focused on the promise of mobile payments, contributed by Ignacio Mas from the Financial Services for the Poor Program at the Bill and Melinda Gates Foundation. 

Imagine if every business or individual in a country had a convenient way of making small payments instantly to anyone, anywhere in the country. You might do so directly from your mobile phone, or, if you first need to load cash into your account, from one of several neighborhood stores. This service would be easy to use, affordable, and secure. Kind of how mobile prepaid works, but a lot more flexible: your stored prepaid balance would be freely transferable to anyone; it could be used to buy anything and not just airtime; and it could be converted back into cash at those same outlets where you load prepaid value.

Far-fetched? Not at all, remember that mobile operators have a version of that running in every country. In Kenya, for instance, by buying a prepaid card you can make a "deposit" of cash into your airtime account with value of as little as 15 US cents at any of 100,000+ outlets across the country. If such a narrow proposition centered exclusively around airtime works for mobile operators, why can't we build a broader, more flexible proposition that works for any type of payment?

Safaricom has gone beyond its prepaid airtime offering and built such a system in Kenya. Their M-PESA mobile transfer service is now used by almost 50% of the population, who among themselves do more transactions than Western Union does globally, and who are able to perform full cash in/out at 20,000 participating stores nationwide.

Sure, going from supporting e-commerce (buying airtime) to banking entails some extra risks and concerns that need to be addressed. But with today's technology there's no reason why the system needs to be any less secure than what you or I accept when we use our debit card at a restaurant or the ATM. And regulators should insist that the investing or on-lending of funds are performed exclusively by fully regulated banks. Imagine then that a fairly standard set of prudential, operational and consumer protection measures were in place as well.

If all this was possible, what would it mean for poor people? Everything would change.

Informal networks of families and friends would be able to better support each other to develop their opportunities and to get by in times of need. You wouldn't have to rely only on people living close by, whose fortunes are likely to be quite correlated with yours.

Microentrepreneurs would be able to launch businesses without having to worry about costly cash collection, disbursement, transport and reconciliation processes. You wouldn't need to send someone to collect money from customers or to send goods to your customers ahead of getting the money. You could retain direct control over who gets paid for what, when, why, and you would have instant visibility of how much each customer paid.

Financial institutions would be able to package transactions profitably into savings, loans and insurance products. Now they mostly shy away from marketing such products to the base of the pyramid because of the high cost of collecting and disbursing small amounts of cash. Microfinance would have a much more solid economic footing.

Government and public entities -often the biggest payers and collectors- could operate much more efficiently, and would now have the tools to combat corruption at all levels. There would be less leakage in the distribution of social benefits and pensions.

Think of electronic micropayment platforms as a massive engine for social, business and financial innovation. Universal access to electronic payments ought to be a key policy objective.

The rise of mobile phones has demonstrated that when people know each other, the main thing they want to do is to talk to each other. What is the second thing people want to do when they associate? To trade with and pay transfer value to each other. It might take us a while to get there, but in the end the mobile payments wave will be no less momentous than the mobile voice tidal wave we are in.

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