Cellphones, not banks, may be key in developing world
THE increasing digitisation of finance, and the move away from cash, could add 6 percent to the annual economic output of the world’s developing nations over the next 10 years, according to a new report from the McKinsey consulting firm’s research arm.
The report, released on Wednesday, says developing nations – and to a lesser extent developed economies – lose enormous amounts of economic potential from the continuing reliance on cash and the difficulty many businesses and individuals encounter when trying to gain access to the financial system.
The mobile phone, however, has provided a cheaper way to provide basic financial services to nearly everyone in the developing world.
The 124-page report from the McKinsey Global Institute says that 80 percent of the people in the developing world have mobile phones, and by 2020 that will rise to 90 percent.
A growing number of startups are already providing financial services through cellphones, often without a bank being involved. In Kenya, for instance, more than 70 percent of adults are using a digital money system known as M-Pesa that started less than a decade ago.
Susan Lund, one of the co-authors of the McKinsey report, said that as her team crunched the numbers on the impact of digital finance, even she was surprised by the impact it could have on the broader economy – roughly $3.7 trillion in additional annual economic activity by 2025.
“I thought this was about financial services,” Lund said. “I now think of this more like basic infrastructure for a modern economy, as opposed to just something that banks do.”
Any effort to provide more financial services to the developing world is likely to encounter both resistance and scepticism, given the somewhat spotty record of past financial projects aimed at helping the poor.
The flow of financial investments into emerging economies has, in the past, played into currency and financial crises around the world.
In the more recent past, elite institutions like McKinsey have also promoted the use of microlending in the developing world, which was aimed at bringing people out of poverty by giving them credit. But academic research has found microlending has ultimately been less transformative than many of its boosters had hoped.
Lund acknowledged the lacklustre results from microlending. She said that the economic growth projected by McKinsey did not rely much on expanded credit to individuals.
Instead, she said, most of the opportunity comes from the transition to digital payments from cash, which can significantly increase productivity and open up a whole set of economic opportunities that aren’t available when people rely on cash.
The McKinsey report said that for individuals, the average cash transfer can require three or four hours in developing countries, because of the time required to travel to, and wait at, a financial institution.
For businesses and governments, reliance on cash leads to lost time, the “leakage” of money – read theft – and missed opportunities to transact with the broader world.
Moving countries away from cash has been hard because it has required the addition of new and expensive physical facilities and bank branches. But with the spread of mobile phones, providing financial services costs 80 to 90 percent less, the McKinsey report says. In Kenya, for instance, people who used to rely on cash and services like Western Union can now send money to relatives across the country using M-Pesa.
Once people move to digital money, companies can also do so more easily and governments can distribute funds electronically, leading to less corruption and missing money. With money in a digital account, saving money and planning for the future also becomes easier.
There are many efforts to replicate M-Pesa elsewhere in Africa and Asia, but most of them have been somewhat slow to take off. India is in the midst of a large effort to move individuals into electronic financial accounts.
Lund said countries also need regulations that allow for the development of financial technology and startups that address the existing landscape. Any efforts will also face resistance from the existing financial players in developing countries.
But Lund noted that the most expensive requirement for moving forward, the mobile networks, are now in place.
“There are a lot of pieces that have to come together. It’s not so easy,” she said. “But unlike building roads and ports – at least the hard infrastructure is in place.”