Another day and another discussion about the relationship between electronic payments and economic growth. I referred back to this:
The fact that converting cash into e-payments directly lead to an uplift in the macro economy of a region.
Hannes is absolutely right to highlight the central point. I've read an excellent book on this and related topics called "Banking the World — Empirical foundations of financial inclusion". As I wrote in a review of this book, the title is a little misleading since what many people in the developing world want is not access to formal banking at all but access to transactional payment services (that might be provided better on a utility basis by mobile phone operators or retailers as much as by regulated bank) and access to semiformal and informal sources of capital.
The various chapters had some numbers that I couldn't help but snaffle for use in presentations! Half of the world's adult population do not use formal financial services to save or borrow; Having a mobile phone increases the chances of being banked across-the-board by around 12%; Singapore has 600 bank branches per 1000 km² of land area whereas Ethiopia has less than one. That latter point begs an obvious question: does Singapore have lots of banks because it is rich, or is it rich because it has lots of banks? You would think that the former clause explains everything, but it doesn't and this book deals with that latter clause. Why? Because the availability of private credit leads to economic growth and with no access to private credit and the other financial tools necessary for entrepreneurship, the poor will remain so.
To a technologist like me, there is no doubt about what to do. The mobile phone is cause for optimism. I know how to connect the excluded. But connect them to what? A great many policy makers seems to see banks as the end point, whereas I think it's the non-banks that can really make a difference. We (as a society) want banks to be risk averse, heavily regulated and tightly controlled. This makes them good for society as a whole but does not necessarily make them good for the least well-off in society.
I should say, by the way, that the book is actually a useful collection of chapters written by a variety of experts and will be of interest to anyone working in this field. It's not only for those working in the developing world! There are a great many lessons we can draw from the examples here to help us deal with the difficult problem of excluded groups in the developed world right now. Look at the US, where attempts to raise the total social cost of payments to new highs and to reattribute those costs toward poorer members of society seem to be going well.
Chase and PNC have both been launching ATMs that churn out exact change to the dollar, allowing customers to withdraw denominations as low as $1 and $5.Chase (JPM, Fortune 500) has rolled out between 350 and 400 such ATMs over the past 18 months, and the count is expected to double by the end of the year. Customers can type in the withdrawal amount, opt for "custom denominations" and select how many bills they want in denominations ranging from $1 to $100. The new machines, located within branches or drive-thrus, even have the capability of dispensing coins, a service that will be piloted soon and eventually rolled out nationwide.
I loved the way CNN presented this story. Further down the page we see
Related: ATM fees hit record high, free checking accounts decline
Related? I'll say. The solution for the less well-off in society is efficient near-bank transaction accounts and electronic payments at POS, not expensive checking accounts and $3 ATM fees on a $9 withdrawal. It's time for some social policy in this field.
Finally, and nothing to do with payments, I would just say that I found the chapter on the role of social capital particularly interesting. I am very curious about the relationship between formal, informal and social institutions as providers of financial services into otherwise excluded groups because the new technology allows a great many possibilities beyond the "standard" bank account. The detailed statistical examination in this chapter distinguishes between the social capital of individuals and the generalised trust in a society and shows how the ability to build up social capital delivers access to both informal and semiformal capital. (By contrast, access to formal capital depends more on generalised trust.) I have to say that the book made me even more convinced that electronic transaction networks, whether through mobile phones or agent networks or whatever, have a direct impact on the lives of the least well-off. I read, to give one example, that fertiliser use depends on the farmer having savings at the right time. Therefore the financial tools to overcome this problem contribute directly to alleviating hunger. This isn't theoretical or esoteric work, it's practical and vital work.
Secure electronic transactions sometimes sounds like a rarefied and esoteric area of interest and expertise. It isn't.