10 Ways USSD is Revolutionizing Mobile Banking in Developing Countries

In the realm of financial technology, Unstructured Supplementary Service Data (USSD) has emerged as a game-changer, particularly in developing countries. This simple yet powerful technology is bridging the gap between traditional banking systems and the unbanked population, revolutionizing the way people access and manage their finances. Let's explore ten significant ways USSD is transforming mobile banking in developing nations.

1. Expanding Financial Inclusion

USSD technology has become a cornerstone in the drive towards financial inclusion in developing countries. Unlike smartphone-based banking apps, USSD works on any mobile phone, including basic feature phones. This universal accessibility has opened up banking services to millions of people who previously had no access to formal financial systems.

In countries like Kenya, where M-Pesa (a USSD-based mobile money service) has become ubiquitous, the percentage of adults with access to formal financial services has skyrocketed. According to the World Bank, the share of adults with a mobile money account in Sub-Saharan Africa has increased from 12% in 2014 to 33% in 2021, largely due to USSD-based services.

2. Facilitating Instant Money Transfers

One of the most transformative aspects of USSD-based mobile banking is the ability to transfer money instantly, regardless of location. This feature has had a profound impact on domestic remittances, allowing urban workers to send money to their rural families quickly and securely.

For example, in Bangladesh, bKash, a USSD-based mobile financial service, processes over 6.7 million transactions per day. This ease of transferring money has not only improved financial liquidity in rural areas but has also reduced the risks associated with physical cash transfers.

3. Enabling Micro-Transactions

USSD technology has made micro-transactions feasible and cost-effective. In many developing countries, traditional banks often have minimum transaction amounts that are too high for day-to-day purchases. USSD-based services allow users to transfer even small amounts of money, supporting micro-businesses and encouraging saving habits among low-income populations.

In India, for instance, the USSD-based *99# service allows transactions as low as 1 rupee (approximately $0.01), making it possible for people to save and transact in amounts that suit their financial capacity.

4. Improving Bill Payments and Utility Services

USSD has simplified the process of paying bills and accessing utility services. Users can now pay for electricity, water, cable TV, and other services directly from their mobile phones, eliminating the need to queue at payment centers or banks.

In Nigeria, the USSD-based GTBank *737# service processed over 80 million transactions in 2020, with a significant portion being bill payments. This convenience not only saves time for consumers but also improves revenue collection for utility companies.

5. Enhancing Agricultural Finance

In many developing countries, agriculture forms the backbone of the economy. USSD-based mobile banking has revolutionized agricultural finance by providing farmers with easy access to loans, insurance, and market information.

For example, in Kenya, the One Acre Fund uses USSD technology to disburse loans to farmers and collect repayments. This system has reached over 1 million farmers, significantly improving their productivity and income.

6. Streamlining Government-to-Person (G2P) Payments

Governments in developing countries are increasingly using USSD-based mobile banking to distribute social benefits, pensions, and subsidies. This approach reduces administrative costs, minimizes leakages, and ensures that beneficiaries receive their payments promptly.

In Pakistan, the Benazir Income Support Programme uses USSD technology to distribute cash transfers to over 5 million beneficiaries, many of whom are women in rural areas. This system has significantly improved the efficiency and transparency of social benefit distribution.

7. Promoting Savings and Investment

USSD-based services are not limited to basic transactions; they're also encouraging savings and investments among populations that traditionally kept their money "under the mattress." Many mobile banking platforms now offer savings accounts and even simple investment products accessible via USSD.

In Ghana, MTN Mobile Money users can invest in government treasury bills directly from their phones using USSD codes. This has democratized access to government securities, allowing even small-scale savers to earn returns on their money.

8. Facilitating Merchant Payments

USSD technology has transformed how small businesses operate in developing countries. Merchants can now accept payments via mobile money, reducing the risks and costs associated with cash handling.

In Tanzania, Tigo Pesa's USSD-based merchant payment service has over 71,000 active merchants, ranging from small street vendors to larger retail outlets. This system not only improves sales for businesses but also provides a digital trail of transactions, which can be useful for accessing credit in the future.

9. Enhancing Credit Scoring and Lending

The transactional data generated through USSD-based mobile banking is proving invaluable for credit scoring. This is particularly significant in countries where many people lack formal credit histories.

M-Shwari in Kenya, a savings and loan product offered through M-Pesa, uses USSD transaction history to assess creditworthiness and offer micro-loans. Since its launch, M-Shwari has disbursed loans to millions of Kenyans who would have been considered "un-lendable" by traditional banking standards.

10. Improving Disaster Relief and Aid Distribution

In times of natural disasters or humanitarian crises, USSD-based mobile banking has proven to be an efficient channel for distributing aid. It allows for quick, targeted, and transparent distribution of funds to affected populations.

During the Ebola crisis in Sierra Leone, the government used a USSD-based payment system to distribute hazard pay to healthcare workers. This system ensured timely payments and reduced the risk of fraud, demonstrating the versatility of USSD technology in crisis situations.

Conclusion

USSD technology has undoubtedly revolutionized mobile banking in developing countries, addressing many of the challenges that traditional banking systems struggled with. Its simplicity, accessibility, and versatility have made it a powerful tool for financial inclusion and economic development.

However, challenges remain. Issues such as network reliability, user education, and regulatory frameworks need ongoing attention to ensure the continued growth and impact of USSD-based mobile banking.

As we look to the future, USSD is likely to remain a crucial technology in developing countries, even as smartphone penetration increases. Its role may evolve, perhaps integrating with more advanced technologies, but its fundamental strengths – simplicity and universal accessibility – will continue to make it a cornerstone of financial inclusion efforts in the developing world.

The revolution brought about by USSD in mobile banking is not just about technology; it's about empowering millions of people with the tools to participate in the formal economy, save for their futures, and improve their livelihoods. As this technology continues to evolve and spread, its impact on economic development and poverty reduction in developing countries is likely to be profound and long-lasting.