Finance for All: How Mobile Phone Networks Are Democratizing Access to Finance

Formal financial systems were not designed to operate in the economic reality at the base of the pyramid, making it difficult to deliver financial services on affordable terms to the poor. Traditional banking models, which rely on costly branch networks, are too expensive to profitably serve the poor. The absence of access to safe, affordable financial tools, including personal savings accounts, insurance, credit, and cash transfers, traps the poor in cash and the informal economy. They have limited ability to buffer their families against financial shocks, such as health crises, crop failures, and livestock deaths. As a result, the poor rely on informal, often precarious arrangements to manage their financial lives, leaving them vulnerable to predatory lenders or unable to cope with manageable problems. Small businesses and entrepreneurs are hindered by the lack of available loan capital to finance start-ups, operations, and expansion. Predominantly cash economies starve capital markets, reduce revenue to governments, and veil public and private sector payment flows in anonymity. This "cash trap" prevents businesses, governments, and donors from developing efficient models to extend vital services and invest in broad-based growth. The mobile phone industry has made significant strides in addressing this finance challenge by building a business model that can effectively and efficiently reach customers at the base of the pyramid at scale. The advent of pre-paid billing for airtime has unlocked access to mobile phone services and made mobile telephony the first self-financing infrastructure to reach the poor. Mobile money, as the natural next step of this evolution, has expanded financial inclusion by lowering transaction costs and unlocking the data needed to assess risk and better understand consumer behavior. Emerging digital transactions platforms, such as mobile money systems, are a new form of critical market infrastructure that are the new paradigm within which financial transactions in the digital economy are conducted. Evidence from mature markets in East Africa and Asia suggests that widespread access to inclusive electronic payment services like mobile money can improve individual and household welfare by providing a pathway to financial inclusion and enabling improved service delivery and enterprise through creative financing models on terms that work for the poor.