Banking is essential to any modern economy, yet, 56% of the world’s total population are still unbanked. The main reasons for this phenomena are the high cost of core-banking systems and high operating costs (e.g., credit underwriting and transaction). The cost is invariably passed on to customers through transaction fees and highest lending rates. A third of the unbanked population, approximately 800 million people, live in Asia. These people, who are in the lowest income category (i.e., living on under $5/day), simply cannot afford the high bank charges. It is only natural to ask why banks currently cannot provide banking services to everyone. The fundamental problem is that the current banking systems, policies, and operations are designed for the top of economic pyramid, that is the wealthy mass market and the high net-worth individuals. For instance, small firms are significantly disadvantaged in financing business investment (e.g., due to ‘lending bias’) in many developing countries. Therefore, a new approach is required.
In the last decades, various solutions have been suggested, such as solidarity lending and village banking, pioneered by Grameen Bank in Bangladesh that delivered basic banking services for the poor. Their new banking model lowered the operating costs but increased the risk of lending, and thereby increasing lending rates. These approaches attempt to bridge the gap between the two incompatible partners: the unbanked population usually the rural poor and banks that are designed to serve the wealthy. However, most microfinance institutions (MFIs) operate based on manual processes that involve posting transactions from one accounting ledger to another with human hands. The processes is not easily scalable and are susceptible to fraud and other accounting irregularities.
The extensive penetration of cell phone networks and 2G devices in many of the world’s most unbanked regions (global mobile phone subscriptions have reached 87% of the global population and 79% of developing world’s population) suggests that mobile phone-based banking services could be the ideal solution for providing banking services to those regions. However, the current core-banking systems that support mobile phone-based banking (whether it is “Mobile Phone Banking” or “Mobile Money Services”), such as Sybase mCommerce 365 by SAP, and DELL Mobile Banking and Payments, are targeted at developed banking sectors. The core-banking systems are not only expensive for banks in emerging economies but would also incur high associated transaction cost.