Mobile Banking... Too Much, Too Soon?

Alice Liu spoke to us and extolled the virtues of mobile banking, holding the M-PESA program up as a beacon of success and a harbinger of things to come to both the developing and industrialized world. On the surface, m-banking and microfinance seem like incredible ideas. Currently, it is not profitable for banks and nonbank financial institutions to issue credit to low-income people. This is true in the wealthiest countries of the Western world and the poorest countries of central Africa. Even when issued to someone with a one hundred percent chance of repaying a loan, when the loan is small, there is very little profit for the bank to make on such a small loan. When we add the variable that low-income people inherently have the greatest chance of default on their loans and have very little collateral to post against the loan, we see why banks have historically ignored the microfinance, small loan market.
However, this market did not cease to exist because banks and other financial institutions deemed them unprofitable. Thus, the emergence of microfinance and the contemporary prevalence of microloans. While there is very little profit to be made on each individual loan, if enough microloans are made and if people repay them with interest in full, there is enough profit to be made to incentivize non-traditional financial services institutions to enter the market. The fundamental idea underlying microfinance is that people in developing countries have great, profitable ideas just as people in industrialized nations do but do not have the necessary capital to realize them. As I explained in my first blog post, since developing countries are likely still on the steep part of the development curve, there are many more significant investment opportunities than the already developed, largely tapped out market in industrialized countries where we are constantly fighting the natural progression of diminishing marginal returns. Many of these microfinance organizations were created based on the belief that the recipients of these loans will be so grateful for the opportunity that there will be very little default on these loans.
While this makes intuitive sense, the obvious problem is the technological barrier that restricts access and communication between lenders with money (in the Western world) and the people who need credit (in the developing world without the technological or digital infrastructure necessary for instantaneous communication). This is why Alice Liu believes m-banking, or the ability to use the mobile phones that many people in developing countries already have, to conduct their banking can revolutionize microfinance and the global economic market. The main problem that comes to mind is not an indictment of m-banking or microfinance but simply a reality of capitalism. When investors see a profitable market, or arbitrage opportunity, they seek to exploit it. M-banking may be so successful that it will make the microfinance market enticing enough for more profit-seeking investors to enter the market. The problem with this is that there are very few restrictions or regulations on m-banking as it is a new, emerging market. Much of governmental regulatory efforts are still trying to catch up with the ever evolving financial market that has seen nonbank financial institutions come to dominate the market in recent years. I fear that until an adequate regulatory structure is put in place to curb the inevitable predatory lending, we may be putting the cart before the horse.