High transaction costs are one of the most significant barriers to financial access in developing countries. Mobile money has dramatically reduced transaction costs and has extended a more affordable payments system to historically unbanked households, beginning to integrate them into the wider financial system.
Efficient financial systems and broad-based financial access are crucial for economic growth and reducing poverty and inequality (Beck et al, 2007). Yet access to the formal financial system remains limited across much of the developing world. Some 70% of adults in sub-Saharan Africa and 55% of adults in South Asia are outside the traditional banking system (WDI), with the majority of those excluded being poor and/or living in rural areas. Prohibitive distances to the nearest financial services point, high costs of account maintenance, and fees for effecting transactions all exclude the poor from the formal banking system. Mobile money allows users to deposit, withdraw, and transfer funds on their mobile phones without holding an account at a formal financial institution, reducing transaction costs. Affordable, broad-based access to financial services has the potential to benefit both individuals and firms, with positive spillover effects driving broader economic growth.
This brief looks at how mobile money can broaden and deepen financial inclusion in developing countries, increasing financial resilience and reducing poverty. It will also discuss the benefits of government adoption of mobile payment services and the critical role for government in appropriately regulating mobile money. The scope of this brief is limited to factors within the remit of policymakers; as such, it does not delve into business model decisions of mobile network operators (MNOs).
1. Mobile money improves financial inclusion and resilience, reducing poverty and furthering economic growth
Mobile money has lowered transaction costs and enabled users to improve their financial wellbeing through improved management of existing financial resources and more effective risk-sharing. It has also influenced job choices and reduced poverty, particularly in female-headed households
2. Government usage of mobile payments services offers significant benefits
Governments can use mobile money to effect social transfers and pay civil servant salaries with reduced leakage and lower delivery costs, and collect tax payments using mobile money which may eventually increase formality and expand the tax base.
3. A flexible regulatory framework that is appropriate to the risk posed by mobile money services works best
To strike the right regulatory balance, the component systems of mobile money should be unbundled from one another, with regulation being developed for each component that is proportional to the level of risk posed by different services.