Encourage a Bank Revolution by Mobile Phone

This article appeared in the San Francisco Chronicle on July 29th, 2007.

The mobile-phone revolution that is transforming the world could also turn into a banking revolution. In many countries, mobile phones are already used on a small scale for deposits and remittances. This could be scaled up to become the new bank architecture of the 21st century.

The biggest potential for m-banking, as it is called, is in India, where new mobile connections are growing at the phenomenal rate of 6 million per month. Until now, phone connections in India have been largely urban. But a new policy has provided incentives for telecom companies to set up cell phone towers in rural areas, where 70 percent of Indians live. Within five years, mobile operators expect India to have 500 million connections.

Mobile phones can create virtual accounts in virtual banks. You can look up your m-bank balance and issue instructions through text messages. Security can be ensured through multiple passwords. Even villagers without cell phones can, for a fee, use phones of local shopkeepers, who are evolving, unwittingly, into virtual tellers of virtual banks.

When a customer pays cash to the shopkeeper to recharge his m-account, it is like depositing cash in a virtual account. The customer can withdraw cash, too. For a fee, the shopkeeper will transfer money from the customer's m-account to his own, and then pay hard cash to the customer. This can be extended to the payment of bills.

But if Indian telecom companies are to offer formal m-banking services, they will need regulatory approval from the Reserve Bank of India, which worries that banks may be targets for money laundering, and so insists on a strong "know your customer" policy. The reserve bank ignores small sums transferred through the shopkeeper network, but so far will not allow telecom companies to scale up and offer formal bank accounts, interest-bearing deposits and other banking services.

As banking regulators have already done in such countries as Kenya and South Africa, the Reserve Bank of India will likely insist on telecom companies joining hands with a licensed bank before offering formal m-banking services.

Yet the Reserve Bank of India has a good reason to encourage m-banking. It has long spoken of the utopian ideal of a bank account for every family, even in rural areas. This has been a pipe dream, given the limitations of the bank branch network. But m-banking could make the dream come true, even for illiterate villagers. Such illiterates cannot handle the paperwork of a conventional bank. But they can deposit and withdraw money through smart cards that can be recharged with the shopkeepers' help.

The corruption bedeviling subsidies and cash transfers to the poor could be reduced if the sums were deposited directly in m-accounts of the beneficiaries. Today, much money allocated to the poor does not reach them — it is siphoned off by corrupt bureaucrats and contractors. Safe m-accounts could ensure that only the intended beneficiaries get the money.

Traditional bank operation is limited by the fact that large swaths of rural India lack electricity, and even electrified villages often get power for only six to eight hours at night. Mobile phones can overcome this hurdle: They need very little electricity, and can be charged at night.

Rural marketing companies have long used solar-powered batteries to run Internet kiosks in market centers. These solar batteries can charge mobile phones at night. Even tractor batteries can be hooked up to charge cell phones. So cell phones could provide m-banking to virtually the whole of rural India.

Cell phones are already being used for money transfers. Millions of rural Indians have migrated to neighboring states (and the Persian Gulf) seeking work, and they send remittances home. But their families back home are often illiterate and have no access to banks.

Money orders through the postal system reach all villages, but charge high fees. Mobile phones transfer money faster and more cheaply than the postal system, using the shopkeeper network. This is a good start, but it needs to be scaled up. That means companies need to create new mobile phone banking ventures, and regulators need to let them.