Financial Inclusion: One Size Doesn’t Fit All

– January 9, 2019 Reading Time: 4 minutes

In a recent article, Sound Money Project contributor Brian Albrecht reviewed the findings from a recent NBER working paper on the impact of mobile banking in Sri Lanka. The authors found that the introduction of cheap (and, in some cases, free) mobile banking services had little impact on people’s savings and financial activity. Neither randomly assigned banking fees nor lower transaction costs — two of the most commonly cited reasons as to why people remain unbanked — had a significant impact on people’s behavior.

Given the excitement surrounding the potential of mobile banking, the paper’s findings might seem like a surprising disappointment. But, upon a closer reading of the mobile money literature, the results should come as neither a revelation nor a cause for concern.

Why shouldn’t we be surprised that mobile banking didn’t have a major impact in this particular study? One answer is that, when it comes to finding the best strategy for eliminating financial exclusion, there does not appear to be a one-size-fits-all solution.

It’s true that mobile money has had a transformative impact in sub-Saharan African nations like Kenya, where financial access has skyrocketed to more than 70 percent over the past decade. But the factors that caused mobile money to be such a success in Kenya aren’t present everywhere.

One of the reasons mobile money thrived in Kenya is because it proved to be a near-perfect socio-economic and cultural fit. A common denominator across nations where mobile money has achieved its greatest success is that they all have high poverty and financial exclusion rates. They therefore have a high latent demand for cheap and accessible financial services. When M-PESA — the first and most successful mobile money service in Kenya — was launched in 2007, less than one in five Kenyans were banked, and nearly half of all Kenyans lived below the poverty line (less than $1.90 a day).

Sri Lanka, in contrast, is significantly richer and more financially developed. Less than 9 percent of Sri Lankans live under the poverty line. The bank penetration rate is also quite high, with more than 70 percent of adults having access to banks. Not surprisingly, market demand for mobile money would likely be significantly lower.

Cell phones are much more deeply embedded in Kenya’s culture than Sri Lanka’s. In Kenya, cell phones outnumber adults in the population, and they had been a critical part of daily life for Kenyans even before M-PESA. Sri Lanka’s cell phone use is significantly lower than Kenya’s, despite the fact that its per capita income is four times higher. The cell phone penetration rate is only 57 percent in Sri Lanka.

Even if we acknowledge that Sri Lanka wasn’t the most fertile setting for mobile money, the trial itself suffers from a few shortcomings that may limit the applicability of its findings. For starters, it wasn’t partnered with a telecom as trusted or popular as Safaricom in Kenya. At the time it launched M-PESA, Safaricom was among the largest and most trusted firms in Kenya. This brand name capital was critical for getting early adopters to trust new mobile banking products. In Sri Lanka, no firm involved in the trial had anything near the brand name capital of Safaricom.

Many researchers also attributed the early success of M-PESA to the fact that Safaricom had a dominant market share — more than 80 percent of the market. Safaricom was thus able to profitably launch mobile money using a closed network without having to worry about working out interoperability agreements with rival telecoms. In Sri Lanka, the telecom market is much more divided. When Dialog, the nation’s largest telecom provider, released eZ Cash in 2010, it only had a 39 percent market share, meaning that customers were very limited in who they could send money to. Both nations now have multiple mobile money providers whose products are now interoperable, but in Sri Lanka’s case this development has only occurred over the past year, well after the time the study was conducted. Still, other countries have had success with mobile money despite having a more dispersed market concentration, so the extent to which market share is a factor remains unclear.

Lastly, there are reasons to suspect the study underestimates the potential of mobile money in Sri Lanka moving forward. Much of the research, which was conducted from 2011-13, occurred before the mobile money ecosystem had really developed. It wasn’t until 2012-13 that the Central Bank of Sri Lanka removed onerous regulations and allowed telecoms to provide mobile banking services under significantly relaxed guidelines. Within the first year of these deregulations, Sri Lanka’s first mobile money service — Dialog’s eZ Cash — registered 1 million users. Today, it serves more than 16 million customers, giving them access to a network of 20,000 “agent banks” across the country. Although mobile savings and money transfers aren’t nearly as high as in Kenya, the ecosystem continues to grow as more retailers and banks decide to make their services compatible with mobile money.

None of this is to say that mobile money is destined to flourish in Sri Lanka or any other setting. The main lesson from the “mobile money revolution” isn’t that mobile money is a one-size-fits-all cure to financial exclusion. It’s that the best way to bring about financial inclusion is to first get rid of regulations that prohibit private firms and entrepreneurs from finding innovative ways to reach the unbanked. These include laws that restrict competition by preventing telecoms and other non-financial companies who might have an advantage in reaching the unbanked from offering mobile payment services, anti-money-laundering and know-your-customer laws that make it prohibitively costly to register poor customers, and other repressive regulations.

We can’t predict exactly what solutions will emerge from this program of financial liberalization. The best ones will likely differ from country to country or region to region, depending on unique cultural and socio-economic factors. But what we can safely predict is that giving entrepreneurs more freedom to innovate will go a long way toward reducing financial exclusion.

Scott A. Burns is an assistant professor of economics at Southeastern Louisiana University. His research focuses on financial innovation in the developing world, including the mobile money revolution that has taken place in Sub-Saharan Africa. He has published scholarly articles in Constitutional Political Economy, Independent Review, and the Journal of Private Enterprise.

Burns earned his M.A. and Ph.D. in Economics from George Mason University and his B.A. in Economics from Louisiana State University.