Globalization and rapid technological advancement – and the struggle to keep pace with change – has altered global society in profound ways. Aside from producing the wealthiest individuals in the history of mankind, these forces are also responsible for the fact that less people live in abject poverty today than in any other point in history. Despite these laudable accomplishments, globalization and its ecclesiastics still has its critics. Though their critics acknowledge that less people live in poverty today, they believe that the progress has been counterbalanced by the exponential widening between the world’s rich and poor. These criticisms are certainly not unfounded—encapsulated succinctly in a recent quote by Scott Galloway, a Professor of Marketing at NYU Stern School of Business: “It’s never been easier to be a billionaire, but it’s never been harder to become a millionaire.” Though Galloway’s comments were meant to be hyperbolic, a recent study from MIT tells a slightly different story.
According to Tavneet Suri, an economist at MIT who was raised in Kenya, much has changed in her home country over past decade. What used to be an economy relatively closed off to the rest of the world is now one where the majority of people are paying bills and sharing money with one another through cellphones. For several years, Suri has been studying the development of mobile banking in Kenya and how it is rapidly altering the ways people save money and interact with each other in times of need. In her most recent study entitled “The Long-run Poverty and Gender Impacts of Mobile Money”, Suri and her team demonstrate the potential of the technology: uplifting an enormous 194,000 Kenyan households out of extreme poverty (defined as living on less than US$1.25 a day).
This is the first study detailing the decade-old technology’s impact on poverty — specifically how it encourages saving, reduces transaction costs and offers an option to find funds in the case of an emergency. But that alone doesn’t mean that mobile-money is the cure to extreme poverty, nor does it mean that Kenya’s success can be easily replicated elsewhere.
According to an article published in ‘In Theory’, a Washington Post column that covers emerging ideas, “development economics is a field of study filled with fool’s gold. Time and time again, programs are introduced to end poverty only to result in, well, about the same amount of poverty. For several countries, mobile money has been no exception; economists have long puzzled over why the model hasn’t been nearly as successful outside Kenya. It seems to have foundered in India, and earlier this year, Vodacom discontinued its mobile money services from South Africa after it failed to attract much growth.”
So, what factors enabled Kenya’s success? Gebelhoff of ‘In Theory’ says there are 3 keys factors to consider:
First and foremost, Kenya had a regulatory environment conducive to building out an efficient mobile-money services infrastructure. Because transactions are limited by value and frequency, in addition to phones being password protected, superficial fears that the technology would encourage crime never materialized.
Secondly, Kenya’s mobile market is dominated by a single operator — Safaricom, a subsidiary of the U.K.-based Vodafone. Because so many people already had access to the company’s money-sharing product, called M-PESA, Safaricom was able to scale up mobile banking quickly and effectively. It also put a lot of investment into M-PESA early on and worked on getting the business model right before it took off.
Finally, says Suri, this is a product Kenyans need. While only half of the population has a bank account, banks and other financial institutions are spread out and difficult to access. Mobile money offers financial services Kenyans ordinarily would not have.
The major takeaway here is that effective access to financial institutions is extremely important in developing economies. This is an idea that many economists refer to as “financial inclusions”—one of those buzzwords from yesterday that quickly waned in popularity. This latest research offers good evidence that having a place to put money that’s safe and easily accessible can make the lives of poor people considerably more efficient than cash-reliant economies.
This research is of course interesting to other developing regions, such as Latin America and the Caribbean. Noticing the difficulty in accessing finance in many Caribbean countries, forward-thinking companies like the Jamaican GraceKennedy Money Services (GKMS), Quisk, and Conec have already began rolling out iterative solutions to this problem. In regards to the usage of financial instruments in the region, The Center for Latin American Monetary Studies (CEMLA) has conducted interesting research on the topic of financial inclusion. According to CEMLA only 3% of adults report using mobile phones for financial transactions, and a reported 10% using some form of electronic payment systems. At an overwhelmingly 58%, the most common method for making deposits is still at bricks-and-mortar banking branches, followed by ATMs at 19%. In terms of withdrawals, just over 50% mentioned using ATMs while 33% reported using bank branches. CEMLA notes that “the region generally appears to be far behind the rest of the developing world”.
As more and more correspondent banks sever their relationships with the Caribbean, the current dynamics of financial transactions in the region appear unsustainable. However, where government regulators see chaos, some entrepreneurs see opportunity; enter companies like Bitt.
Bitt is a Barbados-based financial-technology (FinTech) company launched last year that is targeting the ‘underbanked’ population in Barbados. The company’s solution is built on blockchain, the underpinning technology of digital currencies like BitCoin. In a nutshell, blockchain allows a user to securely digitize their financial assets and transfer them without the need for costly intermediaries. What Bitt has done is digitized the Barbadian dollar and created an IOU that can be sent and received between Bitt customers. The company hopes to use its platform as a foundation to eventually compete against remittance giants like Western Union and MoneyGram.
Abed Gabriel, CEO of Bitt, has issued a call for unity in the region in the hope that more entrepreneurs, regulators, and governments will consider leveraging technology to develop next generation money services for the Caribbean.