BANKING ON TECHNOLOGY

Cell Phones and Other Tools Help Poor People Build Wealth

Less than 10 percent of the world’s poor people have access to financial services today. These services—savings accounts, loans, insurance, and money transfers—can help poor people manage life’s risks and take advantage of life’s opportunities. Part of the problem is that banks are few and far between in many areas of the developing world, and since poor people tend to make very small transactions, it simply hasn’t been cost-effective for commercial banks to serve them.

But new technologies might be able to overcome these challenges. In November we made a $23.9 million grant to the Consultative Group to Assist the Poor (CGAP), a consortium of some 33 development agencies, to experiment with innovations that could revolutionize the way the poor use financial services. For example, conducting routine financial transactions over a cellular telephone can be more than six times cheaper than going through the same process with a bank teller. Another innovation, biometric debit cards that use thumbprint or retina scanners, can save money by reducing fraud while giving illiterate clients unprecedented access to bank accounts and health insurance.

The first round of proposals that CGAP reviewed yielded several lessons that will help the consortium as it promotes technology among financial-service providers in the future. For example, cell-phone banking is a very popular and promising idea, but most of the proposals about it focused only on payments, not on more complicated services like insurance. Technology has the potential to make banking significantly cheaper, but it could also reduce the costs of a wide range of services that could help millions more people protect their families and plan for the future. Thus, CGAP will encourage proposals that offer a fuller menu of services in the next round.

Another challenge is regulation. Because CGAP is working with brand-new technology, the rules governing financial institutions in many countries haven’t caught up. Making sure enabling regulations keep pace with technology while still protecting consumers is a high priority.

Some of these experiments won’t work out. But some will, and they can serve as models for innovative ways of providing financial services that don’t exclude the poorest people in the world.