The rise of mobile money fuels entrepreneurship

At the turn of the century, 2.3 billion people — more than half the world’s population and most of them in developing countries — had no access to a bank.

They had no secure way to build a nest egg, no way to protect their money from theft and no way to borrow in an emergency. Without a path to build credit, buying a home, financing a farm or growing a small business was often out of reach.

That picture looks different today. The latest figures from the World Bank show that roughly 1.3 billion adults, or 21% of the population, remain unbanked, even as the global population has grown.

What changed?

A big part of the answer is the rise of mobile money, according to a series of studies by Professor Audra Wormald at UNC Kenan-Flagler Business School. Mobile money lets people send, receive and store cash using a basic cell phone and get a foothold in the financial system.

“When we think about the grand challenges facing society, poverty alleviation is at the forefront, and a key piece of the solution is financial inclusion,” Wormald says. “When you can access your money, you can better manage different shocks that come your way. You can start a new business. And you can invest in your children’s education.”

The global unbanked, she argues, became a solvable problem with the creative use of digital technology.

“These technologies, and the entrepreneurs that built them into workable solutions, created markets that reached people left out of the traditional financial system,” she says. “In less than a generation, they brought more than a billion people into the financial fold for the first time.”

But the story of who pulled it off, her research suggests, has a twist: The most established, well-resourced companies didn’t always win. The lessons apply beyond financial services, to entrepreneurship, international expansion and regulation.

How David beat Goliath

Wormald’s professional interests are varied, but in her research she keeps coming back to one question: How can business be a force for good?

“I’m interested in how new technologies and markets get created, especially when they can help crack some of the world’s more intractable problems.”

Mobile money is a prime case study, she says. Take something as simple as remittance patterns common across Kenya, where many young people move to the city for work and send money back to family in rural areas.

“Before mobile money, that meant spending hours physically carrying your duffel bag of cash from Nairobi to a more remote village,” she says. “It was time-consuming, tedious and potentially dangerous.”

Using a dataset she built from firm records, news interviews, trade body reports, field visits to Kenya and interviews with entrepreneurs, Wormald has spent years digging into the sector’s rise.

Her first paper on the topic, co-authored with Sonali K. Shah of the University of Illinois at Urbana-Champaign and Serguey Braguinsky and Rajshree Agarwal, both of the University of Maryland, College Park, was published in the Strategic Management Journal.

In it, she examines the different players who built the industry, and why some succeeded while others struggled. There were big multinationals, with money, infrastructure and established customers. Vodafone, for instance, launched the M-Pesa platform in Kenya and had the resources and telecom networks that should have made it the industry’s presumed Goliath. But Vodafone mostly expanded into countries where it already ran a mobile network, tying its footprint to its existing business.

Then there were well-funded tech startups from wealthy, Western countries. Obopay, founded by a U.S. entrepreneur, built its own systems and launched first at home before expanding into India, Kenya and Senegal. The technology was solid, but Obopay didn’t forge the partnerships it needed to adapt to unfamiliar markets.

The startups that often came out on top, finds Wormald, were locally rooted and working with a fraction of the resources of the others. Fundamo, for example, based in South Africa, partnered widely, teaming up with both multinationals and local mobile network operators rather than going it alone.

“That’s how it learned to build the backend of the business, including the financial software and the workarounds for spotty mobile coverage, and how it eventually launched in dozens of countries without being boxed in by any one partner,” says Wormald. “Other local startups took a similar approach and found success, too.”

In other words, the native-born Davids beat the Goliaths. “Ordinarily, we’d think of these developing-country startups as disadvantaged: They’re smaller, have fewer resources, and more limitations,” Wormald says. “And yet it was these local entrepreneurs who could see how to use the infrastructure already available to them and build a fundamentally new approach to secure financial transactions.”

The secrets to success

Wormald’s second paper with the same team found that the companies that pulled ahead tended to share a few traits and strategies.

One was mission and a willingness to collaborate. Companies driven by an interest in poverty alleviation, not just profit, tended to build longer, more durable partnerships — the kind needed to survive the inevitable setbacks of building something from scratch.

Another was a willingness to experiment. Nobody knew at the outset what customers wanted from mobile money: peer-to-peer transfers, microfinance, a way for employers to pay wages or something else. The companies that went full steam ahead on a singular strategy often failed. But the ones willing to test and adjust figured out demand and built around it.

This also explains one of the study’s more counterintuitive findings: Mobile money didn’t take hold the way most new technologies do, developed and refined in wealthy countries first, then exported to poorer ones. The traditional banking model, she says, simply couldn’t be scaled across borders.

Formal banking depends on infrastructure that’s taken for granted in wealthy countries.

“Things like secure payment networks, identification systems or physical bank branches require costly, complex systems that aren’t available or feasible in a lot of places,” Wormald says. “That’s why formal bank branches haven’t been adopted at scale in poorer countries, leaving huge numbers of individuals excluded from financial services. Mobile money as a solution needed to work amidst these challenges and reach more people.”

Regulatory tensions

Wormald’s third paper on the topic, a solo effort, explores the African countries where mobile money emerged and how each one approached regulation. The study is conditionally accepted at Strategic Management Journal.

Mobile money sits at the intersection of telecommunications and financial services, so regulation was inevitable. The open question was how and when. Like any new technology, it puts policymakers in a bind. If they regulate early, firms get clarity and customers get protection, but rules built for a technology that hasn’t finished forming can stifle innovation. If they regulate later, companies get room to experiment, but customers bear the risk in the meantime.

In mobile money’s case, many countries that regulated early typically applied existing banking rules that were too heavy-handed for the tiny transactions typically involved. The result was lower mobile money adoption in those countries compared to countries that waited to introduce regulations. This reduced mobile money’s potential for reaching the unbanked and likely deterred other firms from entering the industry.

Her research suggests that regulating too soon can do more harm than waiting until the technology is better understood, at least for industries still taking shape. It’s a finding she believes has relevance for other new technologies, including AI.

Already, the world is testing two different approaches. The European Union has moved toward a comprehensive, tiered risk framework. The U.S., meanwhile, has not yet passed federal legislation, relying instead on a patchwork of state laws that look different in each state.

“Regulators can’t be assumed to fully understand a brand-new technology,” Wormald says, “and the core risk, including with AI, is that policymakers might end up regulating the wrong harms, while missing other harms that aren’t yet visible. This limits the opportunities for experimentation that’s needed to see the full picture.”