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Money talks

“You might say the poor are supporting the poor more than the rich are.”

Money talks

Improved phone technology could revolutionise how people from developing countries support their families, says Simon Batchelor.

Grace works in Nairobi. When she wants to send money home to her father in rural Kenya, she doesn’t use cash but pays him in mobile phone air time. She purchases prepaid “pay as you go” airtime at her local Duka (shop), and sends a code via text message to her father, so he can make use of it. Sometimes he will put the airtime on his phone so he can talk to Grace or other relatives and friends, but often he sells it on to local merchants.

Grace’s father, like many poor people, does not have a bank account. When Grace wanted to transfer money to him through a bank it was a slow, painstaking and expensive process. Before the phone, the only other option was to send cash. Alongside many others throughout Africa, she would give an envelope of cash to a bus driver who (for a fee ranging between 30 to 100 Kenyan shillings per 1000 cents) would take it upcountry. Surprisingly, perhaps, this system worked most of the time, and the cash arrived at her father’s – though the risk that the driver would ‘lose’ the money was always there, and the transfer fee was quite high.

Now, the innovative use of airtime as a “virtual currency” promises to provide the poor with a more secure way of transferring money. The growth of mobile phone use in Africa has been far greater than most people anticipated, but this doesn’t mean there will be a constant demand for airtime. Should people no longer need the extra airtime, then it would become a worthless currency. So, while, at the moment, the supply and demand seems to match, what would be more useful would be an actual electronic ‘e-currency’.

Mobile phone companies have been talking about “Stored Value Accounts” (SVA) on phones for a long time. In Japan you can pay merchants or drink dispensers by pointing the phone at a terminal and transferring money from the SVA. This technology has been slow in reaching Europe and America – the delay put down to the complexities of banking regulations and money transfer. Africa, however, is forging ahead with such ideas.

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In Zambia the telephone company Celpay, have developed a SIM based mobile phone payment system. By buying a Celpay SIM card users can access banking services. They can transfer money from their bank account into a Celpay account using the phone, or, if they don’t have a bank account already, by depositing cash at a partner branch. Once this is done, purchases can be made via SMS by entering the amount to be paid into the phone and authenticating the transaction with a PIN. The money is instantly transferred into the merchant’s Celpay-enabled account. Merchants pay a commission of 3.4 per cent of the total transaction amount.

This exciting innovation in phone use offers real possibilities to Grace and her father and great potential for other phone-enabled financial services. Credit and saving accounts have huge significance in people’s livelihoods, but the poor have generally been ‘unbanked’. Many microfinance institutions, recognising this need, have introduced creative products to help the poor save, get credit and transfer money. Making these available on the phone could offer considerable opportunities for people in poor communities.

Take Grace’s cousin, Joy, for example, who works in Britain as a nurse. She also likes to send money (remittances) home to her family, but – like many migrants – she doesn’t have a bank account and has to use a money transfer company.

International remittances like these are not a drop in the ocean. The African economy is increasingly being supported by its own people abroad, opposed to by aid from other countries. Globally, more than $100 billion is sent by migrant workers back home to their families. Up to twice that amount again may be sent through informal channels. To put this in context, the formal remittances alone are roughly twice the total official development assistance sent to these countries. In effect, you might say, the poor are supporting the poor more than the rich are.

But what can technology do to improve this flow of international remittances? Currently the average transaction cost for that $100 billion is 12 per cent, and the lower the amount of money you send the higher the price.

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This means Joy and her father are losing a significant proportion of their hard earned money to the transfer systems. In response, DfiD commissioned a report to “encourage competition among money transfer operators to ensure openness and lower costs”. The result was a website specifically to help Joy and other migrant workers find the best possible way to send money home.

Nevertheless, Joy is still faced with a real dilemma. Should she send a little home every month and lose a high proportion of it in transfer costs, or save for the whole year and make a larger lump sum transfer, only to see her savings eaten into by her own emergencies?

This is where new technologies, including the mobile phone, could be significant. Telephone companies say that the technology for SVA accounts and transfers of money is not difficult, and could be implemented immediately, costing as little as four per cent for small amounts. However, there are complex rules safeguarding the transfer of money, and banking regulations have been tightened in many countries due to recent terrorist activities. This is holding back these developments – despite the fact that proponents of phone transfers argue that all transactions are logged on the server and could be interrogated for suspicious activity.

We can see how Grace and Joy transfer their money and could do so better in future. But are phones helping them to actually generate money? In “Loose talk saves lives (page 4), Matthew Bishop argues that the economic gains from phones are relatively clear – they have calculated that the gain per hundred phones is greater in developing countries than in developed countries.

For Grace’s father the equation is much simpler. Just one phone in a village makes a difference. He benefits from the technology. He and many of his friends have found the phone useful for emergencies, and of course for keeping in touch with friends and family. Recent DFID research confirms that at the village level, “where there has been an improvement in access to phone connections there is a positive impact on livelihoods”.

More information at

www.sendmoneyhome.org

www.telafrica.org

www.gfusa.org/technology_center/village_phone/

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