The Mobile Alternative to Banking: Patterns of Financial Transactions in Emerging Countries

This paper explores patterns of financial transactions at the individual level in order to establish the effects of mobile money’s usage in a variety of country case examples. Data from the Financial Inclusion Insights program was analyzed for Bangladesh, India, Kenya, Nigeria, Pakistan, Tanzania, and Uganda, to establish differences between individuals who use mobile money services and their non-user counterparts. This analysis builds on previous research into the household level effects of the widely popular M-PESA services in Kenya to see if financial transaction patterns can be replicated in other country data. Contrary to previous literature, mmoney usership was not a consistent predictor of transaction frequency and transaction distance for the country cases where data was available. To examine m-money’s potential as a complement or substitute to formal banking, usage frequency of bank account services was regressed on m-money usership, which was interacted with personal bank account ownership. Finding suggest that m-money encouraged bank account usage in the country samples where mmoney was less prevalent overall, and discouraged bank account usage in the country samples where it was more prevalent. Overall, this study finds considerable difference in the effects of mobile money by country, as well as discrepant effects when interacted with bank account ownership. THE MOBILE ALTERNATIVE TO BANKING 4 The Mobile Alternative to Banking: Patterns of Financial Transactions in Emerging Countries Introduction As telecommunications networks are affording broader access to mobile phone services in developing regions of the world, the increasingly interconnected environment has both social and economic implications at the household level. Financial services have been one sector to successfully leverage this network with the offering of mobile money services. Mobile money, mobile financial services, or m-money as it is frequently named, refers to the use of mobile phone devices as a means to provide or supplement financial services. Mobile money accounts allow users to store and transfer money electronically without the use of a bank branch, by controlling deposits safely in an account on a mobile phone device. M-money has received considerable attention for its promising potential to provide financial services to customers of all socioeconomic and demographic characteristics. Relative to formal bank accounts, m-money could have lower transaction costs and fewer of the barriers to access and provision, which would in turn facilitate financial transactions for its customers. The present research explores the effects of mobile money’s expansion into seven emerging countries and the resulting individual level effects seen through survey data of financial transactions using mobile money and traditional banking venues. Findings suggest that mobile money users are often significantly different from their non-user counterparts, but that differences vary by country making it difficult to establish consistent patterns of results. Potential risk-sharing effects of m-money were not in line with previous findings, as there was little evidence that m-money usage was associated with an increase in the frequency or distance in the cases of Bangladesh, Pakistan, and Nigeria where data was available. The effect of mobile money usage on determining the frequency of using formal bank account services seems to vary depending on whether an individual is considered THE MOBILE ALTERNATIVE TO BANKING 5 formally banked, thus there is an interaction effect of m-money usage and bank account ownership in determining how frequently an individual uses bank services. Overall, M-money usage seems to encourage bank account usage in the countries where m-money is less wellestablished: Bangladesh, Nigeria, and Tanzania. However, it is an insignificant or significantly negative in predicting bank account usage in the countries where m-money usage is more prevalent: Kenya, Uganda, and Pakistan. This suggests that mobile money cannot be characterized as either a substitute or complement to formal banking services. Most previous research on the household-level effects of mobile money usage has been carried out for the expansion of M-PESA and other mobile money systems in Kenya, finding that mobile money services have greatly eased financial transactions and encouraged household risksharing and consumption smoothing. This paper extends the research into other emerging country environments experiencing newfound access to mobile banking. Reported financial transactions using mobile money services and bank accounts are examined among individuals in Bangladesh, India, Kenya, Nigeria, Pakistan, Tanzania, and Uganda. The empirical analysis examines how users of mobile money differ from non-users in their transactional patterns—in particular the frequency and distance of payments between household members—and whether usage of m-money services is a substitute or complement to bank account usage. A preceding descriptive analysis of the data shows that usage of formal banking and usage of mobile banking are associated with many of the same individual features. In demographic characteristics, both groups are more often urban residents, male, and achieving higher education levels. Mobile money users are also associated with greater usage of bank account services. These overlapping characteristics make an analysis of mobile money’s effects on formal banking patterns impossible without simultaneously examining their propensity to use formal banking. Thus, this THE MOBILE ALTERNATIVE TO BANKING 6 regression analysis makes use of interaction terms between dummy variables for mobile money usership and bank account ownership. The purpose of the analysis is to tease out the competing effects of having access to mobile money and utilizing a formal bank account in transactional patterns. A. Functions of Mobile Banking Mobile money, or mobile financial services, refer to the ability to access and utilize an electronic form of money by means of a mobile phone device. The term encompasses mbanking, an electronic account that holds and transfers deposits. Users establish this account through an agent, by transferring currency into electronic holdings called e-float. Mobile financial services refer to mobile payments; transfer or remittance payments which may be person-to-person (P2P), between individuals and businesses or the government; mobile savings; mobile credit; and mobile insurance. P2P transfers, however, remains the most widely-used form of the service, as few providers have expanded their product and service capacity to offer other such forms of financial services. P2P transfers represent two-thirds of the value of mobile money services for the unbanked, or $3.2 billion globally (GSMA, 2013). M-money services are disbursed through a network of transactional points, wherein customers and agents can interface and set up account transactions using basic mobile phone devices. M-money users can transact using an established account on their mobile phone device, or by going through an agent location to make or receive a payment. There are many different models for the provision of these services in different emerging markets. Some are offered entirely by banks, others are offered entirely by Mobile Network Operators (G-Cash in Philippines), some involve a partnership between a bank and a telecommunication provider, while others are independently provided (Celpay in Zambia) (Tobbin, 2012b). THE MOBILE ALTERNATIVE TO BANKING 7 The flow of remittances and remote payments between friends and family is an important function for mobile money. Current migrations occur on a large scale, affecting how households control internal finances. According to Mas & Morawcynski (2009) such demand for moneytransfer services prompted the overall growth in the market for M-PESA in Kenya. The migration trend for male heads of the family and the younger population to seek work in urban centers dictated an increase in the flow of money transfers to the families remaining behind. Indeed, the widely successful M-PESA branded itself as a means for customers to “send money home” (Mas & Ng’Weno, 2012). Savings is not often an explicit function of m-money accounts, but is enabled for users by the means of deferred payments. An m-money user may hold repository funds on the account between conducting transactions. In a survey by Jack, William, and Suri (2011), the changing financial usage of M-PESA was studied as it became further established in Kenya. M-PESA users tended to increase savings behavior in subsequent survey rounds. Those who were registered for M-PESA were 32 percent more likely to report having some savings, holding socioeconomic variables constant (Demombynes & Thegeya, 2012). Bank-integrated mobile money systems are beginning to offer interest-bearing accounts, a good indication that the financial ecosystem is moving towards formalized savings products for mobile money users. Provision of credit lines through mobile money accounts is uncommon, but the industry has seen more potential in partnering with microfinance institutions. BanKO in Bangladesh entered the retail microfinance business in 2012 by using mobile phones as the sole source of loan disbursement and repayment. This model shows the potential for scalability brought about by lower cost transactions using branchless operations. A BanKO account allows for mobile payments, insurance, savings, and credit, recording the customer’s history of repayment in order THE MOBILE ALTERNATIVE TO BANKING 8 to determine credit eligibility (CGAP, 2013). Musoni launched the first mobile microfinance institution by utilizing Kenya’s M-PESA network. Although the service has branch locations, it benefits from faster transactions relative to the traditional check and cash practice, and can more easily track client repayment. Additionally, companies