The world’s poor have more urge to save, but are constrained by not enough safe places to put their money. Using new technologies, alternative distribution channels and new partnerships everyone can have a safe place to save, according to study by a top official of Bill and Melinda Gates Foundation.

It is estimated that half of the world’s population does not have access to financial services. In developing countries, over 70 per cent of the population is excluded. Of the estimated 2.6 billion people living on less than $2 per day (almost 40 per cent of the world’s population), less than 10 per cent have access to formal savings products.

According to the paper titled “New opportunities to tackle the challenge of financial inclusion”, the world’s poor use savings to protect against shocks.

“We tend to think of the poor as a uniform mass of people who trundle along. The reality is that if you observe a group of poor people over, say, five years, a significant fraction of them will have escaped poverty during this time. The problem is that just as many will have fallen back into poverty because of some kind of shock. A health problem, a failed crop can set them back many years. But if people had good savings cushions or insurance mechanisms, they would be able to weather these shocks without setting them back many years,” Ignacio Mas, deputy director of Bill and Melinda Gates Foundation pointed out in the study.

According to the paper, the main problem of access is the high transaction costs that both customers and financial service providers need to incur to contract with each other. A large cost component is handling the cash payments that underpin most financial transactions (deposits or repayments, withdrawals or disbursements), while other costs are informational such as to establish their identity or proof of residence as required by regulatory authorities, and it is costly for a credit provider to ascertain customers’ character and financial condition.

Meanwhile, when people transact infrequently or in small amounts, or when they are located in remote or low-density areas, these transaction costs can wipe out the profitability as perceived by financial service providers. Financial institutions, especially large commercial banks, do not have the business model that allows them to deal with the triple whammy of low savings balances, small transaction sizes and a large number of customers.

Mas noted that formal institutions have not typically seen much profit in offering savings and there is now a historic opportunity to use emerging technology, especially mobile phones, to enable very small banking transactions to happen through local non-bank retail agents in a secure way that gets the economics right for both clients and banks.

“We’re optimistic such models can transform the economics of financial service delivery, which will in turn give poor people more tools to manage their lives and plan paths out of poverty. The key to reducing microfinance transaction costs is to push the conversion of hard cash into electronic value as close as possible to where people live and work. Leveraging increasingly ubiquitous mobile communication networks, developing countries can leapfrog to a banking system that is built into the retail fibre of every community,” he added.