June 28, 2011

Branchless Banking Terminology

We’ve recently featured a series of posts about our branchless banking work, including posts on branchless banking in Pakistan, better development through mobile banking, and designing financial inclusion. Recognizing that some of these concepts are not yet commonplace, we thought we’d offer our perspectives on them. This post will focus on branchless banking terminology, but we plan on offering explanations of other concepts in the Reboot domain in the next few weeks. These definitions are gleaned from our own understanding and from previous posts on Reboot Ideas. If you’re curious about a term or idea you dont see below, please comment in the space below or send us a tweet (@theReboot).

Financial Inclusion:
To anyone living in the US, it may seem like there is an overabundance of banks and financial services. In parts of New York City, banks are as ubiquitous as Starbucks. Throughout the US, credit card offers arrive in the mail almost daily. Yet, in other parts of the world (and in certain parts of the US), a large swath of the population is excluded from these financial opportunities. Many of the world’s poorest live without access to basic financial services such as savings, insurance, payment services, and basic credit. Or, they access them in informal, unregulated (and hence costly and risky) markets. These services are often crucial to one’s economic survival. As Panthea explains in “Mobile Money: Why ‘Innovation’ Misses the Point”:

“Savings allow us to decrease our risk in handling cash and insurance allows us to protect against economic shocks, payment services help us save time that can be spent in more productive ways, and basic credit allows us to use current assets to capitalize on future opportunities.”

The push for financial inclusion is an emerging movement that addresses these global imbalances. Through the affordable delivery of financial services to traditionally underserved populations, financial inclusion brings the world’s poorest into a formal, regulated, and accessible banking system. There are numerous methods for making these financial services more inclusive. With mobile phones becoming ever closer to being a ubiquitous platform throughout much of the developing world, people can make payments and transfer money (see below for more information on mobile banking). Through microfinance institutions, impoverished communities can receive small lines of credit to start businesses (visit CGAP for more resources). Ultimately, by providing underserved populations with low-cost alternatives to the traditional banking system, financial inclusion can help more and more people control their own economic destiny and lift themselves out of poverty.

Branchless Banking:
Branchless banking is a strategy for delivering financial services without relying on physical bank locations. In many parts of the world, physical banks are few and far between. Often, people in these bankless communities lack access to much-needed financial services. However, through branchless banking alternatives, people can take advantage of these financial services without a physical bank. Often, branchless banking involves creating third-party bank outposts (such as a retail store) and implementing mobile banking platforms.  The retailer may act as a “human ATM,” and branchless banking customers can make banking transactions via their mobile phones and then deposit or withdraw cash through the retailer. Card-based systems are another way to deploy branchless banking.

Branchless banking and mobile banking are often used interchangeably, although this isn’t quite accurate. Mobile banking is a form of branchless banking, but as outlined above, there are also other forms of branchless banking that do not use mobile platforms at all. In general, when talking of new financial service delivery models in the developing world, we prefer to use branchless banking as a more inclusive term. To learn more about Reboot’s work around branchless banking, please see our post “Towards Inclusive, Relevant Branchless Banking in Pakistan.”

Mobile Banking:
Mobile banking is increasingly popular both in the developed and developing world. However, as user realities and potential applications are very different between these two contexts, this definition refers primarily to mobile banking in developing markets. Mobile banking allows users to open bank accounts, access basic banking services, transfer funds, and save money through their mobile phones. In a basic mobile banking model, customers deposit funds by giving cash to specialized agents, who then credit customers’ mobile accounts using SMS (short message service, or text message) or other mobile-phone based applications. Using SMS or these applications, mobile banking subscribers can transfer funds from their mobile account to family and friends, or make payments to registered retailers. Fees are, on average, 19 percent cheaper than traditional banks for comparable services. (This definition adapted from Panthea’s upcoming post on the Health Unbound blog).

The financial concepts addressed in this post are just one of many areas where traditional services are being redefined through the use of information and communication technologies. Other fields from education, to healthcare, to the form and function of government are also being drastically restructured by new tools, processes and business models. In the coming months, we’ll continue to compile definitions that are helpful to understanding these changing realities.For more information on financial inclusion, branchless banking, and mobile banking, be sure to check out the resources below.

Further Resources:

Center for Financial Inclusion

Consultative Group to Assist the Poor (C-GAP)

The Institute for Money, Technology, and Financial Inclusion (IMTFI)

Microfinance Gateway

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