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Research Highlights

Mobile Banking in the Developing World

nicholas economides opinion

The researchers find that users are willing to pay a fee of about one percent to avoid the risk of robbery in walking an extra kilometer with cash.

Can you transfer money from person to person using your cell phone? Not easily in the US, but very easily in Tanzania, Kenya, Uganda and a number of developing countries. In these countries, with sparse retail banking branches, mobile telecom networks have emerged as major providers of financial services, bypassing traditional banks. In this first study of its kind, “Mobile Money in Tanzania,” NYU Stern Economics Professor Nicholas Economides and Przemyslaw Jeziorski of the UC Berkeley Haas School of Business analyze individual-level mobile money transaction data from Tanzania and propose a more efficient fee structure for the mobile banking networks.

A significant portion of the population in Tanzania uses mobile banking networks to transfer money to others, safely transport money and store money for short to medium periods. Money transfers using mobile banking are much more efficient and much cheaper than using the traditional method of relying on a bus driver to transport cash. As expected, long distance transfers are much less sensitive to fee changes than short distance transfers.

Besides transferring money to others, Professors Economides and Jeziorski find that the mobile money network is also used extensively to transport money for short distances without a transfer and to store money for short to medium periods of time. These uses are a reaction to high crime. The researchers find that users are willing to pay a fee of about one percent to avoid the risk of robbery in walking an extra kilometer with cash. Similarly, users are willing to pay a one percent fee to keep their money safely for an extra day in the network, rather than keep it at home.

Despite high cash-out fees, most users cash out after a single transaction, and the money does not circulate as it would in a full-fledged banking network. This is because the pricing structure is inefficient, says Professor Economides. He and his co-author propose an “incentive-compatible” pricing schedule that improves efficiency without harming any party. In the proposed pricing schedule, cash-out fees that follow a mobile banking transfer would be set to zero, while people who put money in and take it out themselves would pay a positive fee but less than if they were transferring the money to others.