Overview

What is the problem?

The poorest people in the world (those on around $2 a day or less) mainly use cash. This is costly for them to handle and it’s costly for institutions to handle, meaning that they have less access to ways of handling shocks, exploiting opportunities, and managing risk.

What are possible interventions?

Digital banking and payment systems and then financial products targeted at the poor built on those systems.

Who else is working on it?

Gates Foundation, World Bank, CGAP, several tech startups.

Why did we look into this area?

GiveWell recommended charity GiveDirectly uses the M-Pesa mobile money system to do its cash transfers[^1] and altruistic startup Sendwave also uses M-Pesa to facilitate its no-fee remittance service. This tipped us off to the idea that a digital payments system could allow other promising projects to be built on top of it as well as the direct benefits of that payment system.

Also, financial systems are well suited to software solutions, as we can see in the developed world with e-banking and online payments.

Our investigation so far has consisted of reading introductory materials in the area, listed at the end.

The problem

The poor mainly use cash and usually don’t have a bank account.

Their use of cash is directly costly to them because it requires transportation and it is insecure. It’s indirectly costly to them because companies like banks pass on the cost of processing cash to their customers[^2]. The poor thus tend not to have access to the formal financial system and so are limited in how they can make payments and access loans and savings products.[^3]

Who else is working on this?

The Gates Foundation has identified digitally-based financial tools for the world’s poorest as one if its goals.

The Consultative Group to Assist the Poor is “a global partnership of 34 leading organizations that seek to advance financial inclusion”.

AFI Global is “a global network of financial policymakers from developing and emerging countries working together to increase access to appropriate financial services for the poor.”

There are also companies and charities developing technology to solve this problem.

What are possible projects?

Extend mobile money systems to areas where they are less widespread. Mobile money has been widely adopted in Kenya but this level of success hasn’t been repeated elsewhere in Africa [^4] and there is some research on what is needed for a successful mobile money implementaiton.

Create digital payment systems for specific common use cases such paying remittances, salaries, or bills.

Build financial services such as saving, loans, and insurance on top of existing digital finance systems such as mobile money. Target these to the needs of the very poorest.

Work to remove barriers to digital finance adoption. For example lack of electricity, mobile coverage, or internet access may be obstructing adoption in some areas.

The World Bank paper The Opportunities of Digitizing Payments has a useful list of challenges for digital payments, many of which could have technical solutions.

Key uncertainties

Neglectedness: The presence of the Gates Foundation in this field suggests that it might not be very neglected. Also, there are already private companies working in this area, suggesting that the financial incentive will attract companies to solve these problems. We don’t understand the area in enough detail to spot specific subproblems that are more or less neglected.

Impact: We don’t have a good idea of what works and what doesn’t work in this area. For example, how beneficial is switching from cash to digital? Which financial products are most useful for the poor?

Next steps

You can investigate this area further by:

Reading the Gates Foundation’s strategy overview on financial services for the poor.

Reading Portfolios of the Poor. This book explains in depth how the poor manage their finances and the problems they face.

Reading Poor Economics Chapters 6, 7, 8, and 9. This is particularly useful as it explains some of the weaknesses of existing financial services for the poor.

Reading the World Bank’s The Opportunities of Digitizing Payments which clearly outlines the benefits of digital payments and barriers to their spread.

Talking to someone at one of the institutions listed in the section ‘Who else is working on this?’ above.

Going to a developing world country and talking to potential customers to understand the problems they face, perhaps following the methodology outlined in Lean Startup or The Startup Owners Manual.

Contact us and tell us you’re thinking of working on this problem. We’ll help you with your research and strategy and put you in contact with relevant people we know.

Additional Resources

GiveWell’s page on economic empowerment

List of Grants made by the Gates Foundation for Financial Services for the Poor

An Interview with Rogher Voorhies, who runs the director of the Gates Foundation’s Financial Services for the Poor initiative

Innovations for Poverty Action’s studies of interventions for financial inclusion

The World Bank’s report on financial inclusion

Consultative Group to Assist the Poor

Tobbin, Peter. "The Adoption of 'Transformational Mobile Banking' by the Unbanked: An Exploratory Field Study." Communications & Strategies 86 (2012)

References

[^1]: GiveWell’s review of GiveDirectly says “GiveDirectly told us that it chose to work in Kenya due to the robustness of M-Pesa as a mobile banking platform and the large population of people meeting its criteria who have access to mobile technology” [^2]: The Gates Foundation’s Financial Services for the Poor strategy overview “However, the existing “bricks and mortar” banking system doesn’t work for poor people, in part because most of their transactions are conducted in cash. Handling cash transactions is costly for banks, utilities companies, and other institutions, which pass along the costs associated with storing, transporting, and processing cash to their customers.” [^3]: “The unbanked are people without formal bank accounts who operate in a cash economy; they are limited in their ability to take loans, maintain savings, or make remote payments (MEDHI & RATAN, 2009)” - Tobbin, Peter. "The Adoption of 'Transformational Mobile Banking' by the Unbanked: An Exploratory Field Study." Communications & Strategies 86 (2012) [^4]: “So far the most successful deployment of transformational m-banking services is Safricom's M-PESA in Kenya (MORAWCZYNSKI & PICKENS, 2009). Since its launch in March 2007 it has been adopted by 11.7m customers (corresponding to 54% of Kenya's adult population and 73% of Safaricom's subscriber base). It processes more transactions domestically than Western Union does globally (MAS & RADCLIFFE, 2010). However, the success story of M-Pesa in Kenya has yet to be repeated anywhere else in Africa.” - Tobbin, Peter. "The Adoption of 'Transformational Mobile Banking' by the Unbanked: An Exploratory Field Study." Communications & Strategies 86 (2012)