One way to cope with an emergency is to borrow money from family and friends. But that typically doesn’t work when a disaster strikes a whole area. Sending and receiving money over larger distances, when transferring cash from person-to-person is impractical or impossible, can be very expensive. There are a litany of costs, from communications, to finding and traveling to agents, to the actual financial cost of the transfer. And don’t forget the cost of delay—in an emergency, delays in receiving needed funds can have big consequences.
One way mobile payments could have substantial short-term benefits for poor households is by speeding up and lowering the cost of emergency transfers and remittances. A new paper by William Jack and Tavneet Suri provides evidence that mobile payments are doing just that: enabling remittances to increase risk sharing and improve consumption smoothing.
The paper looks at how usage of the ever-popular M-PESA in Kenya minimizes the transaction costs associated with remittances. The authors hypothesized that M-PESA users would show less consumption response, but higher remittance response, to shocks and have larger networks of risk-sharing participants. To test their hypotheses, the authors used panel data to measure changes in consumption and transfer behavior during periods of shock among M-PESA users and non-users.
The authors find evidence that transferring money via cellphone allows for more frequent transactions and apparently larger risk-sharing networks (in other words, there are more people sending money both ways during and after emergencies). Non-users and those who lack access to agent networks show drops in consumption during financial crises. M-PESA users do not – suggesting they can more easily smooth risk via remittances. The authors acknowledge alternative mechanisms associated with being an M-PESA user like increased savings and credit-worthiness that may affect consumption smoothing. However, findings show that very few remittances are used for debt repayment according to self-reports. As for participant networks, the authors find that remittances actually originate from closer distances but that M-PESA allows for reaching deeper into networks. M-PESA users are more likely to receive money from more people and reach out to a larger portion of their networks.
This paper echoes the findings of an earlier study of the use of mobile payments to transfer needed funds after an earthquake in Rwanda by Joshua Blumenstock, Nathan Eagle and Marcel Fafchamps. That paper suggests that the transfers are indeed about risk-sharing rather than altruism.
While neither of these studies is definitive, they are encouraging. One of the most obvious ways that mobile payments can provide short-term benefits for poor households is by enabling them to better pursue one of the chief purposes of household money management: smoothing consumption. That can be hardest during emergencies. Minimizing the damage wrought by shocks can help households hold on to gains from better times.
What remains to be seen is the impact of mobile payments on the ability of households to build assets and protect gains from those they would rather not share with. One of the plausible theories behind commitment savings products is that they enable savers to protect their gains from others who would lay claim on them. Easing transfers may help risk sharing and better protect households during emergencies but limit the ability to build assets over time.