Money Goes Mobile
The relationship between payments and banking has come under the media spotlight lately, partly because of the latest technological breakthroughs in this area, but also because of a number of wider cultural and business changes. Although many of the issues behind these changes also exist in the developed world, they are probably most clearly visible in the developing world, where the lack of existing infrastructure means that technology and business change tend to come together.
The market now emerging as a result of these changes is often referred to as ‘branchless banking’. The concept revolves around finding a way of providing access to banking and payments through non-bank distribution channels. Why is this important? For two clear reasons: in many (if not most) emerging countries, the majority of people simply don’t have bank accounts and those that do have bank accounts may live a long way from their bank.
Brazil offers a good example of how this set-up works in practice and also how technology, business and social factors can co-evolve in this way. In Brazil, payments account for nearly four-fifths of branchless banking transactions. In fact, 90% of the people in Brazil who use some form of branchless banking are using it to make utility payments and other non-interpersonal payments. And of those people, only 5% have a bank account. Now, since most of the transactions are payments and most of the people don’t have a bank account, you might wonder why they don’t just use their mobile phones instead of going to retail outlets. Now they are beginning to.
For obvious reasons, the role of the mobile phone in this process will be key. Now mobile banking providers have both the products and the implementation experience needed to open up much wider markets, and mobile operators are using their own agent networks to deliver payment services. This model provides us with the possibility of a market whereby providers compete through shared agent networks to deliver simple services, which are made cost-effective through the communication processing and authentication capabilities of the mobile handset.
Since the agent network is shared (transparently and competitively priced to all providers), providers will have to compete on the basis of product design, marketing, branding and operational efficiency. This may well be a novel competitive approach for some players and one can certainly imagine that people more skilled in competing on that basis may well have considerable success even if payments, for example, are not their core business.
For the last couple of years, Consult Hyperion has been working with Vodafone in the mobile payments area, as well as a microfinance project known as M-PESA. For us, it is an exciting project, as it highlights the way in which digital money can really make a difference in the world.
At the end of last year, Africa had 135 million mobile subscribers and is expected to have 400 million subscribers by the end of 2010. Like Brazil, many African countries have vastly more mobile subscribers than they do Internet connections or bank account holders. Thus, there are substantial populations with mobile phones but no access to financial services.
According to a report called ‘Micro-Payment Systems and Their Applications to Mobile Networks’ – commissioned by the Information for Development Program (infoDev), in partnership with the International Finance Corporation and the GSM Association – a large proportion of the population in many developing countries are excluded from the banking system and forced to use cash, which is of course far less secure and flexible than electronic payments. For these people, however, the good news is that mobile phones can now be effectively used to deliver financial services.
M-PESA offers a good example of this potential. Launched in Kenya at the end of last year, M-PESA is a partnership between Safaricom, Vodafone Group Services, local microfinance organisation Faulu Kenya, and the CBA bank. It uses a secure SIM toolkit application on mobile phones to transfer money between pre-paid electronic money accounts. People load these accounts through the same top-up network that they use to add credit to their pre-paid mobile, visiting retail outlets to hand over cash. Then, using a simple menu on the phone available in either English or Swahili, customers can transfer money to anyone else in the system, including ‘human ATMs’ who will, for a small fee, provide them with traditional paper currency.
One of the first uses of the system has been to support the distribution of microfinance loans and to collect the repayments on those loans, but since it also can be used as a general-purpose cash-replacement service, many companies working in this area are fully expecting to see it develop even further as it gains in popularity. Already, the ability to purchase airtime using M-PESA has been taken up enthusiastically.
M-PESA provides a valuable case study of digital money in action: it involves replacing cash with electronic money; it is for the mass market; it radically reduces transaction costs (for the least well-off); it provides new functionality (including remote payments); and, most of all, it provides an infrastructure that delivers capability and efficiency to the microfinance world, thus stimulating new growth, business and opportunities.
As such, the project is being watched closely by mobile operators around the world as a way of targeting the multi-billion pound international cash transfer industry long dominated by companies such as Western Union and MoneyGram. Remittances sent by nearly 200 million migrant workers to developing countries totalled £102bn last year, according to the World Bank. The GSM Association, which represents more than 700 mobile operators worldwide, believes this could quadruple by 2012 if transfers by SMS become the norm.
The main argument against these new services is that criminals or terrorists can exploit them – and these issues will clearly need to be addressed if we want to win over the general public and see significant growth in mobile transactions. It is possible that people might use false ID to obtain a mobile subscription or use a prepaid phone, but this is no different from criminals who obtain bank accounts in false names.
However, suppose the CIA notices that my pre-paid phone is sending money to Osama bin Laden a couple of times a week. The fact that they don’t know who I am, but they do know my phone number – and therefore the phone numbers of everyone else I’ve been talking or sending money to – and pretty much where I am sounds like pretty useful information to me. Much more useful, for example, than knowing that I showed up a Western Union office with a fake ID and walked out with untraceable cash.
All that aside, there is a more compelling argument for mobile payments – and M-PESA clearly illustrates this. Mobile payments reduce transaction costs for people who don’t have much money and this is why we will see them spreading beyond developing countries. We can already see that the M-PESA model works: both the technology and business works, and most experts agree that it will continue to go from strength to strength, especially given the opportunity potential. Plus, as so many of these potential users are people who are excluded from conventional banking and payment networks, the impact of the mobile will be truly transformational on a grand scale.
So what about mobile payments for the rest of us? It may seem a bit of a stretch to imagine that the likes of G-Cash, M-PESA, CellPAY and others might have Europe in their sights, but why not? In the UK, banks and post office branches are steadily being withdrawn in rural areas and it is becoming too expensive to service customers in those areas through conventional networks – so why not use the mobile networks?
What if the next wave in financial services actually strays from the norm – out go the same old some boring bank accounts, credit cards, statements and the like – and instead we begin to see schemes like M-PESA combined with branchless banking? Any financial institution could provide the line of credit used to fund the pre-paid account at the heart of the scheme, so it is not as far-fetched as it might sound.
The question is: would I, as a typical consumer, be happy to hand money over to the Carphone Warehouse (for example) for a pre-paid, SMS-accessible account? I don’t see why not. The trust in the brand is the dominant factor, not whether it happens to be a financial services brand. Although customers like the convenience of mobile technology, there must be proper security, of course, to underpin the brand trust. Carphone Warehouse will soon be launching their own pre-paid card, so customers will become comfortable with the idea of obtaining payment services from them – then it’s a small step to move those payments away from cards and into phones.
Translating trust in the brand into confidence about the technology and services doesn’t seem insurmountable despite the consumer concerns about security. In fact, I would think that the security issue ought to translate into a major positive: after all, if you lose your money staggering home from the pub down a country lane in the middle of the night, it’s gone; but if you lose your phone, the operator knows where it is and they can shut it down immediately, anytime and anywhere.