In a significant move this summer, Safaricom, Kenya’s leading telco, has extended its innovative mobile money service, M-Pesa, to Ethiopia. Ethiopia is Africa’s second most populous country and is considered the “last frontier” of digital banking. M-Pesa helped integrate tens of millions of unbanked individuals into Kenya’s financial system, allowing people to store and transfer money using their mobile phones. Recent research by Wharton doctoral candidate Aparajita Agarwal and Wharton management professor Valentina Asenova highlights the transformative impact of these mobile money platforms in emerging economies.
Over the past decade, mobile money has become a dominant force, particularly in regions such as sub-Saharan Africa, Latin America, and South Asia, which suffer from a lack of credit market infrastructure, commonly referred to as “institutional voids.” It has emerged. These gaps hinder access to financial products and services, impede business growth, and limit economic productivity. The research by Agarwal and Asenova shows how mobile money platforms, through their unique capabilities and mechanisms, can effectively fill these institutional gaps and promote financial inclusion and economic development.
“Mobile money platforms can be useful in areas where credit information is scarce and infrastructure is poorly developed,” said Agarwal, lead author of the paper. “Mobile money platforms provide alternative data, bridge infrastructure gaps and create positive spillover effects on economic activity of various players in the market.”
Mobile money promotes financial inclusion in three important ways
Named after the Swahili word for “money,” M-Pesa’s entry into Ethiopia marks a change in the financial landscape. These platforms are distinguished by not only capturing economic value, but also creating it, disrupting existing industries and expanding market transactions. Distinguishing features of mobile money platforms include data-driven business models, decentralized value creation, and as more people use the platform, the value of the service increases for both users and service providers on the platform. This includes “network effects.”
The authors argue that these features enable mobile money platforms to address institutional gaps in credit markets in three important ways.
1. Create a digital record of your financial activities.
First, we validate users by evaluating digital data on the platform. Mobile money operators play a vital role in providing an alternative means for lenders to assess credit worthiness, especially for people without an established credit history. Platforms like M-Pesa enable lenders to make informed decisions regarding loan approvals by creating a digital record of users’ financial activities. “These platforms create a digital record of users’ financial activities, such as their recent transactions. This data helps lenders determine whether they can repay a loan or not,” Agarwal explained. .
2. Simplify access to financial services.
Second, it provides simplified access to financial services. Mobile money platforms connect various financial services and products provided by partners such as banks through a decentralized network. This one-stop-shop approach bridges the gap created by limited access points such as bank branches in emerging economies and facilitates the distribution of financial products. “Mobile money provides a one-stop shop to access all financial services,” Agarwal said.
3. Establish a large network of users.
Third, these platforms leverage network effects to accelerate growth, allowing them to quickly scale and reach millions of new users who previously lacked access to banking services. M-Pesa has more than 51 million customers in seven African countries. This not only strengthens financial access but also acts as a bridge to established financial groups such as banks, credit unions and microfinance institutions, facilitating credit access for both individuals and businesses.
“These loans help individuals and small businesses expand their growth and improve productivity. Without credit, small businesses cannot grow,” said Agarwal, highlighting the flaws in the traditional financial system. did.
Policy reforms can expand financial inclusion and sustain growth
To reach these conclusions, this study takes a closer look at the impact of regulatory changes that allow non-banking entities, including mobile network operators and fintech startups, to implement mobile money platforms. The authors analyzed data from more than 71,000 adults across 78 countries before the 2014 reform and about 80,000 adults after the 2017 reform and found that they initially did not receive formal financial services. It was found that only 11% were available. After the regulatory changes, the use of mobile money increased and access to credit from formal financial institutions increased significantly, with the reform increasing the likelihood of borrowing by 22%.
“This increase was even more pronounced for women, the poorest and the least educated,” Agarwal said, noting that mobile money platforms are important in expanding access to financial services in emerging and developing countries. He suggested that he had played a role.
This research has important implications for policy makers and regulators. The findings suggest that regulatory reforms that welcome new entrants into the financial services sector can increase financial access. “By enabling the launch of these platforms, governments can further encourage collaboration between mobile money platforms and traditional financial institutions, thereby fostering innovation and co-creation in the financial sector. ” said Asenova. “This will enable policymakers to contribute to sustainable growth and development by providing more products and services on the rails of mobile money.”
[Knowledge at Wharton first published this piece.]
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Fair Observer.