Poverty could be alleviated via the mobile finance revolution, according to development experts. There are more than two billion people in the world who survive on less than two dollars a day. However, these individuals are not destined to remain in a chronic state of poverty. An estimated 10 to 30 percent of the world’s poorest households manage to work their way out of poverty and forge a better life, according to longitudinal studies conducted over several years.
This positive lifestyle change can usually be accomplished by successfully securing and maintaining employment or through entrepreneurial activities such as starting and growing a business or via improved agricultural harvests. Conversely, roughly an equal number of households slip below the poverty line within the same time period. This reversal of fortune can often be attributed to health-related emergencies as the primary cause. However, other factors such as crop failures and livestock deaths among other expenses can quickly bankrupt a household and sink the members into poverty.
The most important buffers against extraordinary financial setbacks that often mire individuals in poverty are financial tools such as personal savings, insurance, credit, or cash loans from family and friends. However, many of these financial tools are rarely available because most of the world’s poor lack access to even the most basic banking services. It is estimated that 77 percent of the world’s indigent do not have a basic savings account. Moreover, an even higher percentage of the world’s poor lack access to formal credit or insurance products. The main deterrent to these financial products is that the poor are not considered profitable customers. Therefore, banks and other service providers do not attempt to reach them. Despite the fact studies show that poor individuals make a concerted effort to save, and in fact, often have resources saved that could generate interest if financial products were made accessible. As a result, indigent individuals often struggle to piece together informal and precarious arrangements to manage their financial lives.
Two trends indicate great promise for helping to alleviate poverty via the mobile finance revolution for the next generation of financial-inclusion efforts. The first promising trend is that mobile technology has been introduced to the developing world and spread at an astonishing pace. According to the World Bank, mobile signals currently cover some 90 percent of the world’s poor, and a current average of 89 cell-phone accounts for every 100 people living in a developing country. These revealing statistics also present an extraordinary opportunity for companies and consumers alike–mobile-based financial tools have the potential to dramatically lower the cost of delivering banking services to the world’s poor.
The second promising trend has resulted from economists and other researchers that have generated a much richer fact base from rigorous studies to inform future product offerings. In the early stages of development, both sides of the debate over the true value of microfinance programs for the poor relied mostly on observations, instinct, and unknown variables. Since the introduction of mobile finance to present day, there are currently hundreds of studies to draw data from to predict patterns and rates of success when considering implementation. These flexible, low-cost models made possible by mobile technology and the evidence base to guide their design have thus created a major opportunity to deliver real value to the poor.
The advantages of the mobile finance revolution over traditional financial models and its potential to alleviate poverty cannot be ignored. The first advantage of mobile finance lies in the fact that digital transactions are essentially free. Whereas in-person services and cash transactions account for the majority of routine banking expenses. Moreover, mobile finance clients often keep their money in digital form and can readily send and receive money often without creating significant transaction costs for their banks or mobile service providers. The second advantage of mobile finance stems from the copious amounts of data mobile communications generate, which banks and other providers can use to develop more profitable and updated services. The third advantage is that mobile platforms link banks to clients in real-time. As a result, banks can instantly update account information, send reminders, and allow clients more self-service options.
Despite its potential for success in the global community, the mobile finance revolution has major hurdles to overcome in effectively alleviating poverty. Due to the high overhead costs of administering so many small loans, the interest rates and fees associated with the microfinance industry can be steep and often reach 100 percent annually. Additionally, these same interest rates and fees can be encountered and compared to payday loan options in the United States. Moreover, several field studies have shown that even when financial tools successfully reach borrowers, the increase in entrepreneurial activity is small and there appears to be no measurable decrease in poverty rates. Despite the fact that developers have long promoted the notion that borrowing and entrepreneurship have successfully combated and elevated people out of poverty, that narrative has not yet been proven and concerns remain regarding the sustainability of these programs on a global scale.
Opinion by Leigh Haugh