Virtual Money. Real Relief

Last month, when Tim Cook was showing off Apple’s new mobile payment technology to congregants in San Francisco, a 33-year-old Pilipino woman named Jenalyn Orquiza was using her cell phone to make a payment of 450 Philippine pesos, about $10. She wasn’t using the service to tee up a credit or debit card payment, as… Read more »

David Wolman

Last month, when Tim Cook was showing off Apple’s new mobile payment technology to congregants in San Francisco, a 33-year-old Pilipino woman named Jenalyn Orquiza was using her cell phone to make a payment of 450 Philippine pesos, about $10. She wasn’t using the service to tee up a credit or debit card payment, as is the case with Apple Pay. She was just sending money—and rebuilding her life.

After super-typhoon Haiyan blasted the Philippines last November, international aid groups parachuted in to provide the usual help. All those urgent needs like food and water, as well as longer-term assistance with home construction and new roads.

But another arrival on the scene was digital money. In the Philippines, Mercy Corp partnered with a local bank (BankO) and the design firm IDEO to figure out how best to deliver financial assistance by way of savings accounts that users access from their phones.

One of the more vexing, yet rarely acknowledged, challenges with international aid is not raising money but distributing it. Traditionally, financial support for disaster victims has taken the form of cash payments—handouts, if you’re a cynic. But what happens when those payments are virtual, not physical?

There are many reasons to deploy hard currency in post-disaster situations. It’s fast, fungible, uncomplicated, and doesn’t require batteries. Although nothing guarantees that recipients won’t squander the money, research indicates that the vast majority of beneficiaries use it wisely. “People who are pretty desperate tend to make good choices with what we give them,” says Sasha Muench, director of economic and market development for Mercy Corps. Sorry, cynics.

Still, you don’t need a PhD to grasp why cash is suboptimal, particularly in less developed economies and during the chaotic weeks and months after a natural disaster. Truckloads of cash are an expensive and dangerous liability. Donor agencies also need ways to verify that recipients are who they say they are. Cash that gets into the right hands can still be stolen or extorted. Hard currency can even boomerang in the worst imaginable way, eventually financing groups intent on harming citizens from the very countries where the funds originated. (See “bankrolling Qaeda terror,” about €5 million that European governments paid to thugs in Mali.)

One crucial benefit of digital money is that it can bolster privacy. That may sound backwards to people in wealthy countries (Hi, Home Depot. Hi JP Morgan Chase.) But in the developing world, the problem isn’t so much the security of funds but how literally visible they are to others. “If we’re giving $50 to 1,000 people,” explains Muench, “in the traditional system we’d go to a village and all the beneficiaries would come to a central place, sign their names or give thumb print, and so forth. They do this in view of the whole community,” which means everyone knows who just received some dough. As soon as recipients leave that gathering place, relatives, friends, and neighbors can apply pressure for gifts or loans. With electronic transfers, beneficiaries get a text message informing them that their account has been topped off with $50. That’s it.

Digital money for disaster victims isn’t a completely new idea. After flooding in 2010 displaced 20 million people in Pakistan, the government tried to provide relief funds by way of debit cards. But that program ran into trouble. Beneficiaries often didn’t understand how to use ATMs and they hadn’t been adequately informed about the payment schedule. Worse, ATMs frequently lacked the cash to meet demand.

Following the 2010 earthquake in Haiti, Mercy Corp ran an emergency e-money pilot program. It floundered. “We learned in Haiti that you can’t go in and set up this kind of thing in a few weeks,” says Muench. Engineering the service requires a spider’s web of arrangements with banks, mobile operators, regulators, and agents on the ground armed with sufficient liquidity so that beneficiaries can toggle between tactile and virtual cash. “It took us several months to build the system before we could get aid to people,” says Sara Murray, a payments specialist also with Mercy Corp. “Several months isn’t OK.”

One vulnerability of virtual money—in post-disaster scenarios or otherwise—is reliance on network operators. Earlier this year, members of an NGO from Europe working in the Democratic Republic of the Congo tried a digital cash transfers program for about 2,000 people in an area that had been repeatedly attacked by armed militia. But when the mobile operator proved unreliable due to technical problems, network capacity hang-ups, and even suspected corruption, the NGO canceled its contract.

To get beneficiaries the money they had been promised, the aid workers had to resort to cash. Four mornings in a row they drove an unmarked car to a local bank before business hours. Hiding in the basement, they filled envelopes with Congolese francs and then waited until bank personnel had left for the day. (Only the bank director was in on the scheme.) Then, to mitigate the risk of assault or theft, they carried out “surprise” distributions as quickly as possibly. “No NGO wants to take on that responsibility in a place like that,” says Murray.

Nevertheless, there seems to be little doubt that using cell phones to make digital transactions and banking services available to people everywhere will, in time, improve the welfare of millions and millions of people. That is why USAID wants to push “beyond cash,” and the World Bank and NGOs everywhere are investing heavily in mobile money initiatives. “When poor households are entrenched in a cash economy with no access to electronic payment channels,” write Daniel Radcliffe and Rodger Voorhies of the Bill and Melinda Gates Foundation, “it drives a wedge between them and the formal financial system by making it prohibitively costly for banks, insurance companies, governments, and other institutions to transact with them.” You and I, meanwhile, have at our disposal bank accounts, credit cards, myriad loan options, banknotes if we want them, and digital tools like Google Wallet, Dwolla, PayPal, Square, and now Apple Pay. Heck, we even have Bitcoin.

Early indicators about the Mercy Corp program in the Philippines are promising. “The digital banking element has allowed us to reach significant scale—over 25,000 families—with recovery funds, bank accounts, and household-level financial literacy training,” says Mercy Corp spokesperson Andie Long. The goal is to both improve the system for getting people their money, and enable beneficiaries to climb permanently out of the costly world of cash-only financial lives. Not because electronic money or the banks that safeguard it are necessarily awesome. They are not. But because like it or not, banking means more secure financial footing, or at least scaffolding to build it.

In Orquiza’s case, it seems to be working. In the aftermath of the typhoon, she received emergency assistance. Then in July she had the option to take out a modest loan. She borrowed PhP 5,000 (about $116) to restart her business, a tiny convenience store that she runs out of her home, selling detergent, crackers, shampoo, and airtime for mobile phone users. She now makes 300-400 PhP a day, enough to cover the weekly loan payment and household expenses, with some left over for saving. All carried out on her cell phone.

A world away, Apple’s army has been busy making mobile payments sexy, or as sexy as such a thing could ever be. I’m all for it, and you should be too; reducing the friction of money benefits almost everyone. But let’s be honest: The true revolution in digital money isn’t about greasing yet another credit or debit card payment for people who can afford IPhones. It’s about making it possible for billions of people to access, transact, and save the same way you and I do: electronically.