The Daily Sabbatical/Harvard | Nov 2, 2011 | 9834 views

Mobile Banking for the Unbanked

Banks find it an unprofitable proposition to serve people who make less than three dollars per day


n many developing countries it's common for a person to have a mobile phone but not a bank account. In fact, more than 1 billion people fit this description, and the number is only likely to increase. To that end, many companies are considering how to give residents access to banking services via their handsets. The GSM Association predicts that by 2012, nearly 300 million of the previously "unbanked" will be using some form of mobile banking.

The Harvard Business School case study Mobile Banking for the Unbanked explores two very different examples of mobile financial service models: WIZZIT, a third-party startup that teamed with a major bank to provide standard banking services via mobile access to impoverished residents of South Africa; and M-PESA, an initiative launched by the mobile network operator Safaricom (in conjunction with Vodafone) to offer a new type of financial service to the poor residents of Kenya.

Ultimately, the more successful of the two, M-PESA, realized that the intended customers didn't really want bank accounts at all—they wanted effective ways to send money home to their families.

The case's key lesson is the importance of meeting the real needs of your target audience, not the needs as you perceive them, says professor V. Kasturi "Kash" Rangan, who authored the case with research associate Katharine Lee and teaches it in his second-year elective course Business at the Base of the Pyramid.

"The mistake a lot of us make is to look at the folks at the base of the pyramid and assume that they must need the same types of services we need," Rangan says. "Everybody needs food. We need education, and so do the poor. We need banks, so they must need banks. But that's the wrong way of approaching it. The ecosystem in which they live is very different from ours. They're on weekly or even daily wages, and their family circumstances are different. So we've really got to dig in and figure out what their real needs are and their pain points."

The problem with WIZZIT
WIZZIT entered the mobile banking market in 2004 because the mobile phone penetration rate in South Africa was almost 100 percent, thanks in large part to the onset of prepaid services that offer low-cost handsets and the opportunity to buy airtime in advance.

"A subscription model doesn't appeal to the poor at all," Rangan says. "They don't want to pay a fee for something they might not use."

Moreover, more than half of South Africa's population had no access to a bank account. This was largely because half of the population lived below the poverty line, and banks, understandably, were not eager to serve a moneyless customer base.

"Banks find it an unprofitable proposition to serve people who make less than three dollars per day," Rangan says.

Still, WIZZIT's founders thought there was a noble and viable business model in bringing banking to the poor, via a mobile banking platform that could be used on even the most primitive cell phone. They succeeded in finding an engineer to develop the platform, but quickly ran into a major regulatory roadblock. Per the South African government, only licensed banks were allowed to take deposits. The cost of a license was the equivalent of $34 million—a hefty fee for a startup—and the South African Reserve Bank was wary of issuing new permits. Hence, the WIZZIT execs began searching for an established banking partner. Time and again the top-tier banks turned them down, so the company ended up teaming with a second-tier bank, the South African Bank of Athens.

By 2009, WIZZIT was not yet profitable. The banking partnership proved problematic in that it was hard for a second-tier bank to compete with its larger brethren, which by 2008 were forced by government mandate to offer low-cost banking options for the poor. But WIZZIT also suffered because the founders failed to recognize the true needs of their target customers.

"WIZZIT essentially took a banking service like the one we have here—depositing salaries in the bank that we draw down to make payments—and decided that this is what the poor wanted, too," Rangan says. "Of course the founders were very creative in bringing the costs down dramatically and improving access, so the poor could afford to bank. The problem is that this is not the way that the poor think of money. They hardly have any savings. Their main need is money-transfer."

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