Are remittances through mobile banking the key to financial inclusion in ECA?

This post is written by Anna Fogel, SBI Associate Consultant.

Photo credit: enrin.grida.no

With more than 215 million people living outside their countries of origin, remittances play a major role in the economic development, GDP and poverty alleviation efforts of many countries. An estimated $350 million in remittances was received by developing countries last year, according to the World Bank, which is three times the amount of official development assistance and exceed foreign direct investment in many countries.  The trend of increasing remittances continues to grow and is projected to reach $1.5 trillion by 2016. This impressive volume has attracted attention from mobile banking operators, whose business model depends on high-volume, low-cost transactions. CGAP’s Chris Bold, in December 2010, dubbed remittances the “final frontier” of mobile banking.

In Europe and Central Asia, remittances have a particularly prominent role in the regional economy. Many of the top remittance recipients in the world, measured as a percentage of GDP, are in this region, including Tajikistan where remittances were equal to more than 35% of GDP in 2009 and Moldova where remittances equaled 23% of GDP in 2009. According to World Bank calculations, which measure official flows and therefore are generally undercounting, remittances equal more than ten percent of GDP in six countries in the region (Tajikistan, Moldova, Kyrgyz Republic, Bosnia and Herzegovina, Serbia and Albania). IFAD estimates than 30% to 40% of remittances flow to rural areas, critical in many Eastern European and Central Asian countries which have agrarian-dominated economies and high percentages of rural populations.

The business case for mobile banking in Eastern Europe and Central Asia differs from the case in other parts of the world where mobile banking has excelled, such as urban Africa and South Asia – where high-density, high-volume populations allow for an efficient operating model. Countries in ECA generally have relatively small populations with much lower density and high rural populations. However, remittances present an opportunity to develop a compelling business case for mobile banking in the region, allowing companies to establish the infrastructure for mobile banking and financial inclusion and expand services from remittances to other financial services. There are a number of examples of commercial and development-led mobile banking initiatives throughout the region:  Russia has one of the largest mobile banking services in the world with more than 100,000 automated payment terminals, with many major banks, such as CitiBank and Russian Standard Bank, and mobile companies, offering mobile banking services; services use advanced ATMs that allow cash-in as well as cash-out; in Georgia, IFAD’s Financing Facility for Remittances is working with the International Organization of Migration to establish a favorable regulatory and policy environment for remittance transfers through mobile banking, lowering the transaction cost in particular for transfers to rural areas; and in Romania, a number of commercial banks and microfinance institutions began offering mobile banking services over the last few years. Other countries in the region have shown increasing interest in creating an enabling environment for mobile banking, including Tajikistan, whose National Bank visited Pakistan in December to visit the National Bank of Pakistan and many of the major commercial players – including Tameer, UBL and State Bank of Pakistan – to understand the regulatory and commercial environment necessary to promote mobile banking.

There are a number of challenges to offering remittances through mobile banking platforms – regulatory environments that restrict remittance providers; a lack of trust in the financial sector, exacerbated by the recent financial and economic crisis; and limited financial institution infrastructure or capacity on the receiving end allowing recipients to withdraw their remittances in cash. However, the potential is continuing to grow: according to a study from Juniper Research, $55 billion in international remittances will be transferred via mobile devices by 2016. In ECA, offering remittance services through mobile banking offers the opportunity to financially include large populations of unbanked, rural communities. Currently, according to the GSMA mobile money deployment tracker, out of more than 120 services, fewer than 15 offer international money transfer.  In the coming years, remittance flows in Europe and Central Asia are a critical area in which mobile banking could add significant value.

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4 thoughts on “Are remittances through mobile banking the key to financial inclusion in ECA?

  1. Perhaps it is not the key, but mobile money can definitely be a trigger to improve financial inclusion through efficient and competitive delivery of remittances to many of the poor and underbanked rural communities in ECA.
    In a large part of those rural areas, financial literacy is a key issue in financial inclusion posing a barrier to the use of mobile money and advanced ATMs, self-service kiosks or cashless money in the short term.
    In practically all of these underserved places, there are post offices. On average, there are 10 or more post offices in rural ECA versus 1 (one) bank branch . These post offices play in e.g. Kyrgyzstan, Moldova, Romania, Armenia, Ukraine an active role in delivery of state pensions and social benefits and collection of utility bills, school fees, taxes and other simple financial services and process often a higher volume of payment transactions -but small-value- than all the banks do. For most post offices in ECA, this is the main activity, and generating revenues in the range of 40% up to more than 85%. It is also the business line with growth potential in contrast to traditional mail flows that face decline.
    The ecosystem in ECA for financial inclusion could therefore benefit a lot from making better usage of the existing 110,000 post offices for cash-in and cash-out of mobile money, and as a channel for financial inclusion and literacy learning the unbanked to use cashless money with confidence. It would fill in gaps in the rural financial infrastructure, and attract people scared by banks through the postal channel with its public, non-bank image. That would require building more effective partnerships with efficient regulation. These new partnerships between mobile telecom networks, money transfer operators , banks to leverage inclusion via the existing postal networks could help to reduce the real cost in remittance delivery given the proximity of the post offices and provide the potential to increase competition in the last mile. As the post offices are state-owned, the main challenge might be to reach a consensus between the owner and regulator of the postal services and the financial and private sector .

    • Good point Hans, having just visited Wizzit in South Africa, it is clear that the postal infrastructure can be a key component in building a mobile banking ecosystem, particularly in rural areas. However, the public-private partnership element is a key challenge in terms of negotiating regulatory as well as bureaucratic obstacles, particularly I would imagine in some ECA countries.

  2. Hi Hans,

    Thanks for your comment and insights. You make very strong points that we’ve recognized as well, both in terms of leveraging existing post office infrastructure and identifying financial literacy as a key issue. In terms of financial literacy, mobile banking presents a potentially powerful channel for overcoming some literacy barriers. As you know, many low-income or rural mobile phone users in ECA are illiterate or lack financial literacy. However, given their comfort with mobile phones, it can be an effective way of incorporating this population into the financial sector. While I agree with you that there should be a greater focus on literacy and education programs in order to facilitate broader financial access, mobile phones may be a good tool to use to generate initial interest and buy-in and to introduce aspects of financial services to an underserved population.

    In terms of leveraging the existing post office infrastructure, we have also recognized this potential and have begun to explore this delivery channel. We are working on a follow-up article to examine the business model for mobile banking in ECA, particularly focused on how it will differ from the business model we’ve seen in other high-density, high-poverty areas, so please check back again soon!

    All the best,
    Anna

  3. Hi guys, any analysis on the impact for black market and taxes? Many people prefer the informality because it is accompanied by other benefits such as untraceable and taxless incomes. Your thoughts.

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