In rural areas of Mexico, up to 91 percent of the population cannot access a bank account, making it difficult—if not impossible—for many Mexican families to save.
On the other hand, up to 52 percent of the rural population owns a cell phone.
So, asks Alfredo Cuecuecha, Ph.D., why not use cell phones to bring banks to rural communities?
Cuecuecha, president of El Colegio de Tlaxcala in Mexico and a former professor of economics at IberoAmerican University in Puebla, presented his research on “branchless banking” at a July 2 seminar sponsored by Fordham’s Center for International Policy Studies (CIPS).
His talk, “Remittances and Financial Innovation in Mexico,” presented the reality of remittances, the money sent from migrant workers in the United States back to their families in Mexico. As the primary source of income for many families, remittances inevitably have an impact on Mexican communities.
“Mexico receives the third largest amount of remittances in the world, only after India and China. In 2007, it reached a historical peak of $26 billion,” Cuecuecha said. “And it’s reasonable to believe that remittances can generate positive effects.”
Often, Cuecuecha said, individuals living in less developed economies cannot verify their income, because, for instance, they do not keep formal financial records. Without verifiable income, many families cannot establish credit.
Remittances, however, provide a potential solution.
“Remittances now arrive via wire transfers,” Cuecuecha said. “They [come via]well-established and highly regulated businesses that are forced by law to generate receipts for the users of the system. And in some cases, businesses dedicated to remittance reception are associated with banks. Consequently, income verification is easier for households with remittances.”
Moreover, Cuecuecha added, with increased income from remittances, families can spend more on education, housing, health, and micro-enterprises—all of which help chip away at poverty.
But remittances are far from being the solution for all ills in less developed economies, he said.
“In order to finance large investments, [for instance, opening a business,]you need lump sums. In Mexico, remittance reception is no more than 3,000 pesos, or $214, per month. So if ever a household wants to make a large investment, they’ll have to save.”
In a country where more than two-thirds of municipalities do not have a bank, saving securely is a challenge. That’s where branchless banking comes into play.
Banks have begun to tap into the resources of cell phone technology to make transactions. Through mobile banking—or M-banking—deposits, withdrawals, payments, transfers, and other transactions can be performed through SMS, the text messaging system that cell phones use.
Many countries are already using this technology, especially in sub-Saharan Africa.
“If technology can reduce the costs of operation for banks, then some banks will be able to locate in rural areas,” Cuecuecha said. “[Rural] people will be able to have access to the financial system for savings, investments, credits, and insurance services.”
Over the next few years, Cuecuecha will conduct a study in the Mexican state of Tlaxcala, where only 37 percent of urban municipalities have access to a bank and rural municipalities don’t have any at all.
He and his team will hold a “financial intervention” for certain households, providing cell phones and education on the M-banking system, as well as workshops in financial planning, consumer protection rights, and planning for small businesses. The families’ financial outcomes will be compared with those of households that did not use M-banking.
In a sense, he said, revamping the financial system would bring this population from living in the year 1369—the year before modern banking was invented—up to 2012.
“Banking is not only about having a bank account—it’s also learning how to use it,” Cuecuecha said. “But the new technology is actually very easy to use, if you know how to turn on a cell phone.”