- Problem: 80 percent of the 2.5 billion people who live on less than $2 per day have no bank account, no insurance, and no access to credit. Shut out of the formal economy, the world’s poor must rely on cash and trading in physical assets such as livestock and jewelry to pay for goods and services and manage their daily financial lives.
- Barrier to Progress: In the current system, there is no real incentive for banks to serve the poor. Lacking access to even the most basic financial services, the people who can least afford to, must use costly and risky informal payment methods to send and receive money.
- Solution: Expanding access to the kinds of financial tools and services most of us take for granted could help alleviate some of that risk, dramatically reduce fees, and provide a critical lever to help people lift themselves out of poverty.
Published in Partnership with Forbes
Imagine if you had no savings account, no checking account, no ATM card, no way to get a reasonably-priced loan, and no ability to insure your most valuable possessions.
For most of us living in the developed world, these kinds of financial services are something we not only take for granted, but also rely on to build financial security and buffer us from unexpected events.
But for most of the 2.5 billion people living on less than $2 a day, saving money can be expensive, sending money to a loved one can be risky, and a single unforeseen incident such as a bad harvest or major illness can push people even deeper into poverty.
Poor people do have assets. Their intellect. Their labor. Their savings. The problem is that they don’t have the financial tools to capitalize on these resources. They are trapped in an inefficient cash economy that robs them of opportunities to insure themselves against risk, invest in their productivity, and ultimately lift themselves out of poverty.
In short, it’s expensive to be poor. The people who can least afford to often lose a significant percentage of their income and savings to costly transaction fees and risky savings schemes. In Ghana’s Kejetia Market, for example, small business owners who are barely getting by pay up to 5 percent of their savings every month, just to keep their money safe. And poor people who rely on physical assets such as livestock and jewelry to manage their finances, can lose up to 25 percent of the value of their money every year.
Just as millions of people have lifted themselves out of poverty over the last two decades by adopting new farming techniques, expanding access to basic financial services could provide a critical foothold for millions more to climb out of poverty.
And the most cost-effective and sustainable way to move people, even those living on less than $2 a day, into the formal financial system? Shifting from cash to digital transactions.
The good news is that a significant part of the infrastructure required to offer a new model of safe, affordable financial services already exists. Leveraging the rapid growth of existing mobile networks and the near ubiquity of cell phones, new digital payment systems can reduce transaction costs by up to 90 percent – making it possible for financial institutions to create innovative new financial products tailored to the needs of the poor.
A lot of people have heard of the fantastic growth of mobile money in Kenya with M-Pesa, and that’s now expanded to other countries in East Africa. According to a recent survey, mobile financial services now reach nearly half of households in Tanzania, and more than 40 percent in Uganda. In Zimbabwe, more than 3 million people use the technology, and in Bangladesh, there are over 5 million users.
In Malawi, Opportunity International Bank created a program that enables poor farmers to deposit the profits from their harvests into digital savings accounts. A study found that participating farmers saved six to seven times more than those without accounts, meaning more money was available to buy seeds and fertilizer, resulting in even larger harvests and more money to save for the next planting season, school fees or a wedding.
The shift from an informal economy based on cash and physical assets to one based on digital payments would benefit everyone involved. Providing millions of the poor with access to savings accounts, credit, and insurance, would help protect and preserve their limited resources and give them new tools to live better, more productive lives. And for banks and other institutions, it would open the door to a vast new market – a third of the world’s population.
A unique private-public partnership – the Better than Cash Alliance – is laying the foundation for further progress in this area. Working together, Citi, the Ford Foundation, the Gates Foundation, MasterCard, the Omidyar Network, UNCDF, USAID, Visa, and other partners, are exploring new ways to spur this transition from cash to digital payments. Since its start just a year ago, the Alliance has gained commitments to digitize payments from six countries and from 10 development organizations.
This is great momentum, although there is more work ahead to build support among policymakers, the private sector, development organizations and financial services sector.
For example, just as ATM machines today provide a seamless global network of financial service points, we will need to build a vast cash-in/cash-out system reaching into some of the most remote and poor places on earth. And, we will need to find new ways of bringing together partners who might be unlikely to work together in other circumstances.
It can be done. If we work together, we will look back on digital financial inclusion as one of the most important innovations to improve the lives of the world’s poor.