To promote effective regulation of branchless banking, especially mobile banking, CGAP, DFID, and the Alliance for Financial Inclusion (AFI) have organized the third Global Leadership Seminar for high-level policymakers and regulators who set policy for branchless banking, including mobile banking. CGAP’s Technology Program and AFI are supported by the Bill & Melinda Gates Foundation. This week we’re blogging from the seminar. One session on branchless banking from the consumer’s point of view (download the presentation here)  was chaired by Daryl Collins, a Senior Associate at Bankable Frontiers and co – author of the influential Portfolios of the Poor: How the World’s Poor Live on $2 a Day. The book draws on year-long surveys of financial diaries from families in Bangladesh, India and South Africa. The surprise conclusion: many of the people they tracked were not living hand-to-mouth. Rather, the poor often rely on a variety of complex tactics and tools to manage money.

How are people who live on $2 a day different from, say, the people who are reading this blog? How would you sum up the financial needs of poor consumers?
When it comes to major cash flow, like incomes, most of us have got a predictable pattern and we can plan our financial lives. Poor people have low, unpredictable incomes,  where it’s hard to have mechanisms to siphon off income to save money, service a loan, etc. We’re used to having a monthly or biweekly pattern to our financial lives as we get paid a regular salary on a regular basis. Having a predictable pattern means being able to plan your financial life. If you’re talking about people who don’t have a salaried job, their income is irregular. Many of the people who live on $2 a day don’t have that predictability and so their financial lives revolve around mitigating uncertainty.

Talk a bit more about the issue of unreliability and informal financial services.
It is crucial to be able to leave your money in a safe place. Formal services generally offer more safety than informal services, but the problem is that formal services are less convenient. This isn’t just about transaction costs - the time and money spent on a bus or taxi ride as you get to the bank. It’s not even about waiting in line for a long time at a bank branch. It’s also about the mental accounting behind making transactions. If people think they can get at their money more easily, when they want it, then they will feel comfortable about shifting away from informal devices and towards a formal service.

What can we learn from “Portfolios of the Poor” that applies to branchless/mobile banking?
You need to make a service convenient and flexible. So if someone can walk up to a banking agent in their neighborhood and make a transaction, they’ll use it. Formal financial instruments, such as a bank account, are not always flexible enough to meet the demands and challenges created by the irregular cash flows that many poor people live with day in and day out. So making services more affordable and geographically closer to the poor – something that mobile banking does – can help expand the reach of the formal financial system.

The real story here is about expanding the reach and reducing the cost of formal financial services to  better meet the needs of poor consumers.
Yes. We have seen that poor people manage their money in a variety of ways, not all of which work well. The services they have available to them are not lined up with their cash flows. Informal financial instruments, such as savings clubs, do a better job at matching cash flows to savings points and being more convenient. But informal services tend to have their own costs, which really center on unreliability. Branchless banking may help people begin to tilt their portfolios towards more formal uses.  But we need to be realistic about how quickly this might happen.  People are not about to leave informal instruments and go completely into the formal. it’s a subtle shift that will grow over time.

-Daryl Collins, as told to Jim Rosenberg

Next: The consumer experience in Brazil and Kenya, and implications for policymakers.