Africa's cellphone boom creates a base for low-cost banking

The first bank-by-phone system is designed for poor South Africans, enabling saving and access to credit.

Cellphones are already used for music downloads, text messaging, and video games. But here in South Africa, they are beginning to perform another function: personal piggy bank.

With the new technology, a grandmother in rural area can receive money from her son, working hundreds of miles away, with the beep of her cellphone. A teenager can buy groceries with a few punches of keys. Not a coin need change hands.

It's a high-tech solution designed to help poor people here who never have had access to banks, cash machines, or credit cards. And it's another example of using digital technology to fast forward development in remote areas.

Earlier this month, one of South Africa's main cellphone networks and one if its largest banks launched a new cellphone banking system that they hope will bring millions of poor South Africans into the official economy for the first time. The venture hopes to build on the rapid spread of pre-paid cellphones to create a whole new banking system, one designed for low-income users that have long been under-served or ignored by traditional banks.

"There's a large number of individuals who are unable to access banking services because conventional banking is expensive, relative to their income. And physically we don't have banking facilities in remote areas," says Herman Singh, director of technology engineering at Standard Bank, which has partnered with cellphone company MTN Group on the project. The goal, he says, was to create a form of banking "that would be very easy to register for, and that we could run at a low cost."

MTN Banking replaces a physical bank with a system that uses a patented security mechanism, and requires only a phone call and a government-issued identity number to subscribe. There are no monthly charges, only fees for each transaction.

Each account is linked to an ATM card - upgradable to a MasterCard debit card - that can be used nationwide, and that can be used to deposit and withdraw money. The founders also envision the creation of a network of traders who will be able to make transactions in remote areas. The government will also be able to use the accounts to deposit millions of dollars in monthly pensions and grants, helping the elderly receive needed funds without long walks to disbursement centers.

For many poor South Africans, the system offers a first step into a world that can help them save, send, and receive money. With a few key punches, they can send money to a relative or pay for goods without ever seeing a paper bill - a benefit in a country with a high crime rate.

And if cellphone banking works in South Africa, the two companies hope it will help change banking throughout Africa, much of which remains a cash economy. "We believe that this very simple but very well-designed product has the potential to revolutionize banking on the African continent," says Mr. Singh.

Nationwide, fewer than half of South Africans have access to a bank. Traditional banks are often located far from poor South Africans, or require documentation to open an account, such as proof of income and address, which many lack. Bank fees in South Africa are also some of the highest in the world.

Without access to a bank account, many poor South Africans are stuck in the informal, cash economy. They can't save securely, borrow money, except at very high interest rates from microlenders.

"A transaction bank account is a key to getting access to the [financial] system more generally," says Jeremy Leach at the FinMark Trust, which works to make financial services more accessible to poor people in the region. "There's a misunderstanding that the low-income people do not need financial services because they're low-income. That's an incredible myth."

He hopes easier access to banking will encourage people to save more, and to put their saving - often kept in cardboard boxes under beds or invested in informal groups known as "stokvels" - to better use. South Africa currently has one of the lowest savings rates in the world.

Nearly 80 million Africans now have cellphones, more than twice the number that have land lines, according to the International Telecommunication Union. In Ingwavuma, a rural town in a remote corner of South Africa's KwaZulu-Natal province, there are two ATMs. The nearest bank is a 90-minute drive away.

News of the new initiative hadn't reached here yet, but many say it would be welcomed. "I think people will use it if the fees are low enough," says Ali Fikak, as he repaired a phone for a waiting customer in his small shop. "This area is poor, but even here lots of people have cellphones."