Abstract
Mobile financial services are a resilient and steadfast form of digital finance. In this article, I explore the growth, future opportunities, and caveats of mobile financial services in developing countries.
Background
Financial inclusion refers to the extent of access to and availability of financial services for individuals and organizations in a society. A lack of availability and equal access to financial services can lead to financial exclusion. While it is often closely linked to the unbanked population, the reasons and nature of financial exclusion are complex and multifaceted. People do not subscribe to banking services for many reasons, such as a lack of infrastructural facilities, associated costs, and socio-religious perspectives. Furthermore, it's not just about having a bank account; it's also about how individuals can use various financial services. Figure 1 illustrates that developing countries in the Global South have a higher percentage of unbanked population.
Financial exclusion poses a global challenge, impeding balanced economic development and the fight against poverty, particularly in developing countries. However, the role of digital financial services in bridging this gap is significant. The most recent Global Findex report from the World Bank, offering data on financial services usage up to 2021, highlights an encouraging trend. Between 2011 and 2021, the proportion of adults with a bank account at a financial institution or through a mobile money provider increased by 50%, jumping from 51% to 76%. In developing nations, bank account ownership saw a 30-percentage-point surge, climbing from 42% in 2011 to 71% in 2021, largely propelled by digitalization.
The COVID-19 pandemic has hastened the digital transformation of the financial industry. Nevertheless, digital financial services have steadily increased over the past decade. According to the European Union, digital financial services refer to technology-mediated banking facilities for individuals and businesses. Among the various types of digital financial services, mobile finance, in general, and mobile payment, in particular, are the most popular. This trend has been particularly noticeable in developing countries, where mobile payments have rapidly expanded, providing financial services to individuals with limited access to traditional banking and credit options. The rapid adoption of mobile financial services, especially in developing countries, is a positive and promising development. While unbanked populations remain significantly high in many developing nations, the rapid adoption of mobile financial services underscores the progress and potential for further growth in this area. More than half of the unbanked population in the world lives in seven countries: Bangladesh, China, Egypt, India, Indonesia, Pakistan, and Nigeria. Again, more than half of the unbanked population in Bangladesh, India and Pakistan have mobile phones, highlighting the potential for growth in mobile financial services.
Based on a report from the World Bank, fintech-enabled digital financial services have the potential to lower costs for financial products and ensure speedy, secure, and transparent transactions, while offering more personalized financial services for underserved populations. However, there are concerns about the ethical and legal implications of using mobile financial services. It is crucial for these services, which mainly target marginalized communities, to uphold high ethical standards and operate within a regulatory framework. Simultaneously, the impact of mobile finance on people’s lives is also driven by how consumers perceive, adopt, and use it. In this article, I provide a critical perspective on the adoption, use, and challenges of mobile financial services in developing countries.
Usage and benefits of mobile financial services in developing countries
Several factors have contributed to the success of mobile finance in developing nations. Contextual issues play a significant role in driving the adoption of mobile finance, often spurred by business innovation and government regulations. For example, the Indian government launched the Jan Dhan Yojana in 2014 to provide every Indian with access to a bank account. Additionally, in 2016, the government's demonetization initiative caused a shortage of physical currency, leading to the rapid popularity of various mobile payment apps such as Paytm and UPI. As a result of these policies, there was a significant increase in nationwide bank accounts, particularly among those who previously lacked access to banking services.
On the contrary, the popularity of M-Pesa in Kenya across different income levels, demonstrated a rapid shift in users’ way of applying financial interaction. The success of M-Pesa is underpinned by multiple factors, including the rapid diffusion of mobile phones, economic growth and urbanization, strong marketing initiatives, and an expanding distribution network.
In Bangladesh, 13 mobile financial service providers primarily offer mobile payment services. The country receives a significant amount of remittance from its overseas migrant workforce, who mostly come from rural and underprivileged backgrounds. Mobile payment is a popular and convenient option for them to send money to their relatives back home. Due to the lack of access to traditional banking services in remote Bangladeshi villages, digital financial services have been rapidly adopted in Bangladesh. A similar trend can be seen in other developing countries such as Pakistan, Sri Lanka, and Nigeria. Both public and private sector initiatives facilitate mobile remittance payments in these countries. Figure 3 illustrates mobile payments as the predominant form of digital financial service in low-income countries.
It has been observed that individuals who receive their wages digitally are more inclined to engage in digital payments and other financial transactions. With the rise of mobile payments and other mobile financial services, it is crucial to encourage people to open bank accounts. Many individuals worldwide still receive cash wages, which does not motivate them to have a bank account. Figure 4 illustrates how digital wages or government payments can incentivize individuals to open bank accounts.
Challenges and caveats
The top-down approach to incorporating the unbanked population into banking services may not be effective, as opening bank accounts does not guarantee continued usage. In developing economies, about 13 percent of bank accounts remain inactive, with no record of deposits or withdrawals. India is at the forefront of this trend, which is largely attributed to the government's Jana Dhan Yojana initiative, which was mentioned earlier. Many individuals who were initially motivated to open an account due to the government scheme lost interest in using their accounts. Through my British Council-funded project on Egyptian women, I discovered that socio-religious factors can significantly hinder women's financial inclusion[i]. Many Egyptian women believe that banking and finance are solely the responsibility of men. Furthermore, there is a noticeable gender gap within the unbanked population on a global scale, indicating that digital financial services may not provide a quick fix solution.
Mobile payments are often made without a formal banking account and rely on a network of mobile money agents who provide deposit and withdrawal services. These agents are not always subject to the same regulations that govern commercial banks, as highlighted by Mogaji and Nguyen (2022). This lack of regulation presents significant risks of unethical practices such as money laundering, as discussed in research studies like Babu et al. (2020). For instance, despite the growth and success of UPI in India, it has been subject to scams and iniquitous practices. According to government figures there were more than 95,000 cases of fraud involving UPI in the financial year ending April 2023, up from 77,000 in the previous year[ii].
Some of the mobile financial services enjoy a fast-mover advantage, resulting in complete dominance in the market. For instance, it is argued that M-Pesa’s monopoly in Africa’s fintech sector can be counterproductive. Furthermore, some of the micro-credit and overdraft facilities offered by M-Pesa are criticized for high interest rates[iii].
Critical success factors for mobile finance in developing countries
The success of mobile financial services in developing countries and their role in reducing financial exclusion depend on sustained customer adoption and ongoing usage. While cost-effective service provision is a significant driver, customer trust and perceived security are equally vital. Trust and security greatly influence the adoption of mobile finance and can promote the spread of these services. Therefore, mobile financial services must incorporate robust security measures and operate within strong regulatory frameworks. Mobile financial services mustn't be exploited for money laundering and scams. It's also important to recognize that mobile financial services alone cannot completely eradicate financial exclusion, which is deeply intertwined with a given country's sociocultural structure and practices. For example, addressing the gender gap in financial inclusion necessitates a shift in sociocultural perspectives on gender roles. Finally, mobile finance should encompass various financial and banking services, encouraging consumers to access the services necessary for their financial well-being and independence.
Dr Bidit L. Dey
Associate Professor in International Marketing
Sheffield University Management School (the University of Sheffield), UK
LinkedIn: Bidit Dey | LinkedIn
References:
Babu, M.M., Dey, B.L., Rahman, M., Roy, S.K., Alwi, S.F.S. and Kamal, M.M., 2020. Value co-creation through social innovation: A study of sustainable strategic alliance in telecommunication and financial services sectors in Bangladesh. Industrial Marketing Management, 89, pp.13-27.
Mogaji, E. and Nguyen, N.P., 2022. The dark side of mobile money: Perspectives from an emerging economy. Technological Forecasting and Social Change, 185, p.122045.
Further reading:
Nguyen, L.T., 2023. Financial Inclusion through Mobile Money in developing countries: the case of Vietnam. In Digital transformation, cooperation and global integration in the new normal (pp. 121-141). Vietnam: Finance Publishing House.
[i] 9781464818974.pdf (The Global Findex Database 2021, by the World Bank)