MOBILE MONEY AS AN INNOVATIVE POVERTY ALLEVIATION INSTRUMENT

Rahmawaty, Anna N *

I. Introduction

It is no secret that access to capital and financial services can improve the lives of citizens and the operations of small businesses, yet millions of individuals and businesses are excluded from even the most basic financial services. The lack of good financial options is undoubtedly one of the reasons why poor people are trapped in poverty. They cannot sustain or even aspire to higher income because they are not able to invest in better farming tools and seeds to enhance their productivity, start a microenterprise, or even take the time to search for better paying employment opportunities (Mas and Radclife, 2010). Most of the poor do not have access to formal financial service and suffer the most during economic shocks. They have difficulty in reaching traditional bank because geographic distance, bureaucratic nature of banking services and misconception regarding the inability of the poor to repay their loans (Hinson, 2011).

On the other hand, an inclusive financial system not only has the potential of raising millions of people out of poverty, but also can foster a more

sustainable economy that is resilient to the effects of economic crises. There is substantial evidence linking financial services with economic growth and decreases in both income inequality and poverty rate. Financial development reduces income inequality and alleviates poverty rate (Beck and other, 2008). The aggregate usage of financial services appears to reduce Gini coefficients –measurement of income inequality--. Financial service has a strong positive effect on rural poverty (Pande and Burgess, 2005).

Besides that, the G20 group of countries endorsed the concept of innovative financial inclusion for poverty alleviation. One way to reach the poor in developing country to the financial service is mobile money since the cash is the major barrier of financial inclusion. For users in the developing world, the appeal of m-banking/m-payments systems may be less about convenience and more about accessibility and affordability (Hinson, 2011).

The objective of this article is highlighting mobile money for poverty alleviation, the success story in Kenya and its prospects in Indonesia. The article, therefore, is set as follow: the first section provides introduction financial inclusion for the poor; the second

14 Edisi 01/Tahun XIX/2013

* Rahmawaty, Anna N is a Junior Planner at Directorate of Evaluation of Performance Sectors Development, Bappenas

section explores the meaning of mobile money; the third section reviews the best practice mobile money in Kenya; the fourth section discusses prospects of mobile money in Indonesia to alleviate poverty rate; and the final section conclusion.

II. What is mobile money?

Since 2000, the number of mobile phone subscriptions increases each year. In 2010, there are around five billions mobile phone subscriptions worldwide (ITU, 2011). The spread of mobile phones across the developing world is one of the most remarkable technology stories of the past decade (Donner and Tellez, 2008). Mobile phone connects among people as well as shares information easily. Mobile phones, by virtue of their role as carriers and conduits of information, ought to lessen the information asymmetries in markets, thereby making rural and undeveloped markets more efficient (Abraham, 2008).

Mobile handsets offer variety of facilities, from sophisticated to basic function – call and text messages--. The prices of mobile handset divers from the expensive ones to the cheap ones. Therefore, the costumers have broad choices. Moreover, the price of mobile service airtime continues to fall. The poor afford to buy the most basic function mobile handset and become mobile phone subscription.

Graph 1: Mobile Phone Subscription Worldwide, 2000-2010

Source: International Telecommunication Union (ITU), 2011

Mobile money has been an innovative invention of bringing financial services to all people. Mobile money application works through text message/short message service (SMS). Mobile money offers a

means to reach the unbanked people. It allows them to establish and access savings accounts, store value in their handsets, transfer funds to family members, and even access credit or insurance products. All transaction occurred are authorized and recorded using secure SMS in real time basis.

Mobile money makes financial services convenient for customers, especially in rural areas and lowers the cost of business for commercial banks. Mobile money provides lower transaction cost than other alternatives such as physical transport, physical recordkeeping, and other costs. Furthermore, mobile money platforms can typically support millions of subscribers and transactions per day and are easily scaled.

The Philippines, South Africa, and Kenya are some countries which have applied mobile phone to provide financial services. Kenya has the most successful mobile money worldwide so far.

III. Best Practice: M-PESA Safaricom in Kenya

M-PESA is a mobile money application by Safaricom of Kenya. It was launched in 2007. The M-PESA’s customers reached 9 million (out of total population 38 millions) or 40 percent of Kenya’s adult population in 2009 and this number is growing. In 2011, M-PESA is being used by more than 14 million customers.

The customers use M-PESA to pay everything, such as electricity bills, school fee, grocery, and other daily expenses. They can use M-PESA anytime, day and night. Through the M-PESA software, customers can transfer money from mobile accounts on their phone handsets for others to access (Hayward, 2010). M-PESA has given good impact for its customers. The incomes of Kenyan households using M-PESA have increased by 5-30 percent since they started mobile banking, according to a recent study (The Economist).

The successful of M-PESA is contributed by some factors. Mas and Radcliffe state three sets of factors M-PESA’s market success:

1. Pre‐existing country conditions that made Kenya a conducive environment for a successful mobile money development which are strong latent demand for domestic remittances, poor quality of available financial services, a banking regulator which permitted Safaricom to experiment with different business models and distribution

15Edisi 01/Tahun XIX/2013

channels, and a mobile communications market characterized by Safaricom’s dominant market position and low commissions on airtime sales.

2. A clever service design that facilitated rapid adoption and early capturing of network effects. Safaricom had to design M‐PESA in a way that helped people grasp immediately how they might benefit from the service, removed all barriers that might prevent people from experimenting with the service; and fostered trust in the retail outlets who would be tasked with promoting the service, registering customers, and facilitating cash‐in/cash‐out services.

3. Business execution strategies that helped M‐PESA rapidly reach a critical mass of customers. The strategies are Safaricom made significant up‐front investments in building a strong service brand for M-PESA and leveraged effectively its extensive network of airtime resellers to build a reliable, consistent retail network that served customers’ liquidity needs.

According to the players, the Bank Regulators, Agents, and Donor take its own role in M-PESA’s success achievement. For the Bank Regulators, The Central Bank of Kenya, is in the process of finalizing regulations that will allow non‐bank outlets and platforms such as M‐PESA as a channel for formal deposit‐taking. Moreover, the broad and dense network of over 16.000 agents across Kenya makes M-PESA’s successful. These agents provide the retail interface and are like small banks for the consumers. And the Donor, UK Department for International Development (DfID) has a role in spotlighting the need for mobile payments and funding the early risk demonstrate.

IV. The Urgency Mobile Money in Indonesia

In Indonesia, it is estimated that there are nearly 160 million unique mobile telephone subscribers, with numbers still growing (USAID, 2011), yet many of these people, who mostly live in rural areas, do not have access to a bank account. In 2011, the gap between those with telecommunications access and those with formal financial services access is approximately 100 million (USAID, 2011). Moreover, there are six mobile telephone service providers. Each of them expands service coverage area and tries to cover whole Indonesia’s area, even to the remote areas.

Mobile money is crucial to Indonesia as providing services throughout the archipelago and in remote areas is challenging, a country where 63 percent of the population lives in rural areas (BPS, 2011). The transportation cost from resident to bank is quite expensive, particularly for those who live away from the main islands. In fact, the cost of transport may be larger than the banking transactions. Therefore, households who live away from the main islands are more than twice as likely not to have a bank account as those in more central area, especially for those living where more costly water transport is involved.

The unbanked people in rural areas are left to choose moneylenders for accessing money. These lenders come to the poor houses offering credit facilities with very high credit interest rates. Numerous poor people end up with very high debts to the moneylenders, which they cannot afford to repay. Mobile services would provide similar services at more competitive rates, thereby eliminating such services. Moreover, mobile money would make easier to transfer money, particularly for those work in big cities and have families live in remote areas.

Mobile money also would make Government of Indonesia’s poverty alleviation programs, such as Direct Cash Transfer/BLT, more effective. In implementing BLT program, the postal service acts as an institution for distributing the cash to the targeted groups. Receivers of cash transfer must queue in postal service offices. The distribution process is not efficient because receivers pay transportation cost, have to wait for hours in hot crowded facilities, and are at risk of being robbed. On the other hand, using mobile money, the receivers do not have to stand in the line to get the cash. And they can spend the money right away.

V. Conclusion

Mobile money makes people, particularly the poor ones who live in remote areas, can access financial services. So far, M-PESA of Safaricom in Kenya has been the most successful mobile money application worldwide. It is proved that M-PESA’s customers’ incomes are increased since they started using the application.

In Indonesia, mobile money has a bright prospect as it has the potential to provide financial services for those who are left outside of the traditional banking system. Such a service is an effective and efficient way to transfer money from government to the

16 Edisi 01/Tahun XIX/2013

poor as well as for businesses and farmers to conduct transactions.

--o0o--

Rahmawaty, Anna N. is a Junior Planner at Directorate of Evaluation of Performance Sectors Development, National Development Planning Agency (Bappenas). The writer is thanking to Brian Dusza.

References

Abraham, Reuben. 2007. “Mobile Phones and Economic Development: Evidence From the Fishing Industry in India.’ Information Technologies and International Development Vol. 4, No. 1, pp. 5–17.

Aker, Jenny C and Isaac M. Mbiti. 2010. “Mobile Phones and Economic Development in Africa.” The Journal of Economic Perspective Vol. 24, No. 3, pp. 207-232.

Badan Pusat Statistik

Donner, Jonathan and Camilo Andres Tellez. 2008. “Mobile banking and economic development: Linking Adoption, impact, and Use.” Pre-publication draft. Asian Media and Information Center

Hayward, Chloe. 2010. “Kenya: M-PESA Miracle.” n/a.

Hinson, Robert. 2011. “Banking The Poor: The Role of Mobiles.” Journal of Financial Services Marketing, suppl. Special Issue: Financial Services for the Poor 15, pp. 320-333.

International Telecommunication Union. 2012. http://www.itu.int/ITU-D/ict/statistics/

Jack, William., Suri, Tavneet and Robert Townsend. 2010. “Monetary Theory and Electronic Money: Reflection of Kenyan Experience.” Economic Quarterly Vol. 96, N0. 1, pp 83–122.

Joseph, Michael. 2011. “Bringing Mobile Money to the World.” The World Bank.

Mas, Ignacio and Amolo Ng’weno (2010). “Three keys to M‐PESA’s success: Branding, channel management and pricing,” unpublished, January.

Mas, Ignacio and Dan Radcliffe. 2010. “Mobile Payment go Viral: M-PESA in Kenya.” n/a.

The Economist. Sept 2009. “The Power of Mobile Money.” http://www.economist.com/ node/14505519

USAID. 2011. “Accelerating Mobile Money in Indonesia Opportunity Assesment.” Washington D.C.

17Edisi 01/Tahun XIX/2013