Cashing in on the unbanked
01 January 2011 | Kavit Majithia
Mobile network operators are filling a gap in the banking system which allows them to offer financial inclusion to those underserved by traditional banks. How far can mobile money payment services go? Kavit Majithia reports.
Mobile money payments are used to provide a platform of banking for the unbanked. The services originally started to provide financial inclusion for sets of populations that were underserved by the banking structure, and as a result, operators and banking institutions capitalised on high mobile penetration to enable basic banking services through mobile phones. The services have now developed, not only for employers to pay wages to staff in Africa or Latin America, but for migrant workers in the UK to transfer money to their family’s mobile money account in Kenya, for example. In developed markets, the service is emerging as a convenient method for users to pay for bus fares, parking tickets and for store credit accounts with a mobile money account used to make purchases from stores adhering to the service.
“There are two variations of the service, developed and underdeveloped, and both of them have different needs and utilise mobile money services in a different way,” says Frederic Schepens, senior vice president, mobile financial services at BICS. “In many emerging markets the banking penetration rate is only between 10% and 20% while mobile penetration is up to 80%. This is why there has been great success with mobile money services in Kenya through Safaricom and Vodafone’s M-Pesa offering, in other parts of Africa through MTN and Globe and though Smart’s offering in the Philippines. If a particular service targets migrant workers, a person-to-person international transfer can be done via SMS. This means that the person who is not keen on doing micropayments in the first place does not have to go to a bank or to a money transfer organisation (MTO). It saves them from having to queue up to perform a transfer that could be done in seconds through a mobile phone.”
BICS has a range of initiatives in mobile money services. The company originally entered the mobile payments space to provide interaction and communication between the 77 different mobile operators, NGOs and banks that provide mobile money services around the world. Collectively, there are between 90 and 100 different mobile wallet services globally, and through BICS’s Homesend remittance hub, communication is enabled which ensures services are not replicated in similar markets.
“With another 80 to 85 mobile money deployments expected over the next few years, to connect all of these could prove to be mission impossible. Mobile operators tend to focus on launching services locally and we saw the complexity of this. Once they connect to our hub they have connection to others on the same network. Our Homesend remittance hub complies with the regulatory guidelines that mobile money service providers have to adhere to, and this service is covered by the same regulatory institutions that cover similar hubs in the banking sector, including the Anti Money Laundering (AML) unit,” says Schepens.
Impact on emerging markets
The impact of mobile money services in emerging markets should not be underestimated. For many people, the entrance and adoption of this service has changed the way that they approach banking and finance. M-Pesa (“M” meaning mobile and “Pesa” meaning money in Swahili) has been one of the major success stories of mobile money deployment in Africa. Launched in 2007, the company’s active accounts now number about 13.5 million in Kenya.
Bob Collymore, CEO at Safaricom, notes that M-Pesa started as a mobile money transfer system, and developed in to a mobile commerce platform which enables people to repay loans and pay their utility bills. Its latest innovation is to allow M-Pesa subscribers to pay for goods bought at a supermarket. “M-Pesa has become part of day-to-day communication,” says Collymore. “It is right to say that there is no single livelihood that has not been touched by M-Pesa in Kenya. Kenyans do not just send money, they M-Pesa it.”
There have been significant increases in the adoption levels of services like M-Pesa in just a few years since their launch. “Not only is a mobile operator more well known than most banks in the country, but people will have SMS mobile wallets in their hands. These replace the inconvenient methods by which people previously transferred money,” said Howard Wilcox, senior analyst at Juniper Research. “In Kenya, people used to be forced to travel by bus to pay their bills using cash, which was not safe or practical. Mobile money took off in Kenya because of the realisation that by pressing a few digits on a mobile that was run on a 2.5G network you could serve all the necessary banking needs.”
Wilcox doubts whether mobile money services in emerging markets will mean that people will now seek a bank account. However, he also doubts whether mobile money will have the reverse effect in developed countries, questioning whether people will adopt the service in the US and Europe. “It is the banking structure in places like Kenya that stops people from having a bank account, and in the same way, the banking structure in the UK means people do not need to use mobile money services. Kenya has a population of 45 million people but they only have access to 1,700 ATM machines. In the UK, there are 61 million people but approximately 63,000 cash machines, with similar figures for bank branches. In the course of time, people in both markets may decide to increase adoption of the service they do not use, or they could equally decide that their method works for them and can do exactly what they need it to do.”
Mobile Money for the Unbanked (MMU) is an initiative developed by the GSMA development fund, aimed at accelerating mobile money services for people that do not have access to banking services and live on less than $2 a day. The project aims to provide financial services to 20 million unbanked people by 2012. Banking and mobile penetration rates in countries in Africa and Latin America are provided through the MMU’s Mobile Money Deployment Tracker service, which indicates that there is a higher mobile penetration rate compared to the banking penetration rate in up to 37 countries in Africa and 28 countries in the Americas.
“Imagine if smartphones had existed when the banking system was created, or in 1958 when credit cards were created. There is no way the systems would have been designed in the same way. They would have leveraged the communication ability of a smartphone,” says David Schropfer, partner at telecoms research firm the Luciano Group. “I don’t know if a traditional banking account is even necessary, and I don’t think that a mobile money account pushes people to a bank account. Banking could be centred on a phone because everybody has one. There is no longer the need to walk into a traditional retail bank, even in developed markets.”
Developments in the US
Despite a slow uptake of mobile money services in the US, the announcement by AT&T Mobility, T-Mobile USA and Verizon Wireless that they will provide a mobile payment network that utilises the mobile phone, is sure to have a significant effect on the US market.
The three companies announced the joint venture in November 2010, which will provide mobile money services to their existing 200 million consumers, who will have access to the newly formed Isis mobile commerce network. Isis is working with Discover Financial Services’ payment network, currently accepted at more than seven million merchant locations in the US, to develop an extensive mobile payment infrastructure for the joint venture. Barclaycard US is expected to be the first issuer on the network, offering multiple mobile payment products. The service aims to provide consumers with an application on an Isis-ready phone, and holding the phone near an electronic reader at a checkout counter will enable the phone’s microchip to transfer encrypted information to a bank or credit card company and enable the desired purchase.
Michael Abbott, CEO at Isis says: “While mobile payments will be at the core of our offering, it is only the start. We plan to create a mobile wallet that ultimately eliminates the need for consumers to carry cash, credit and debit cards, reward cards, coupons, tickets and transit passes.”
Prior to this announcement, Schropfer described US mobile money services as “not even being in its infancy.” While he concedes the initiative will change the way mobile banking is approached in the region, he questions Isis’ aim to displace the credit and debit card.
“The obvious route would involve an all-out attack on core business model of Mastercard, Visa and the other major players in the payments industry,” Schropfer says. “That would certainly be an expensive battle; entertaining, but inefficient. Hundreds of millions of dollars would need to be spent trying to get the Isis brand as recognised and ubiquitous as Visa. Isis would also need to spend a considerable sum building the network infrastructure that would replace all the functions that Visa handles today.”
Sprint has been active in the mobile money space in the US, but is not part of the Isis deal. Sprint provides customers with access to its Sprint Mobile Wallet service at participating retail checkouts and allows personal account registration and universal PIN registration to purchase goods, therefore displacing the need to enter credit card information every time a consumer makes a purchase. Kevin McGinnis, director of consumer applications at Sprint says: “Sprint chose not to be a part of Isis because we are committed to an open philosophy, which means embracing the players in a broader ecosystem. We believe in embracing the existing brands that are already in the ecosystem.”
Difficulties for telcos
For the mobile network operator, the advent of mobile money services is a way of tapping in to a market that presents huge potential. However, it puts telcos outside their usual business arena. They have to comply with banking regulation when adopting new customers and run checks to ensure new customers are not on a financial blacklist, linked to terrorism or carry bad debt. Orange France Telecom launched its Mobile Money segment in African country Ivory Coast in 2008 and has extended its operations to six regions in the continent. Philippe Millet, senior vice president at Orange Money admits the challenges the company faces in complying with the banking structure and adapting its telco-centric business to partner with banks in Kenya, Uganda, Botswana and Jordan.
“We adopt a Know Your Customer project, which collects information on interested customers and we then feed it back to the banks, which will authorise a check,” says Millet. “We are not used to doing this and it is a challenge. We need to ensure the entire ecosystem of mobile money is built along an economic value chain. The service can be used as a B2B service, and the chain starts with a person coming in to a shop and buying bread through electronic money. This electronic money is passed on to pay the salary for the shop assistant or driver, and to pay for utility bills and general expenses.”
Mobile money has its uses in times of crisis too. Following the Haitian Earthquake in January 2010, which killed up to 230,000 people and destroyed the country’s telecoms and banking infrastructure, there was an obvious need for basic mobile money services. Advisory services firm Open Revolution was approached by international NGO Mercy Corps to look at mobile banking services as an earthquake response initiative. “We arrived two weeks after the earthquake,” says Michael Catalano, chief network officer at Open Revolution. “Our task was to support Mercy Corps and assess where mobile wallet services could be launched in the region. The main challenge of implementing mobile money services in a devastated area is people expect this to be a quick fix, but it doesn’t work like that. You cannot just roll out mobile wallet services overnight.”
Mercy Corps has partnered with the Trilogy Group and its network operator Voilla to provide network services that aim to roll out mobile wallet services to 100,000 Haitians over the next nine months. There was already a need for mobile money services in the country – before the earthquake less than 10% of the population was banked and the mobile penetration rate stood at 37%. The earthquake simply accelerated implementation of the service. Says Catalano: “It is not our job to go in to a region and say that technology is the solution. It is our job to establish what types of technology gets integrated into services that make sense.”
A European model
In Europe, operators have taken a different approach by enabling convenience payment methods and by targeting a younger generation. In Belgium, BICS has launched a payments service branded Ping Ping, which allows consumers to link their bank account with a store value account, enabling a range of micro payments and ultimately adding a level of protection to a person’s finances. “An account like Ping Ping can also be a nice trigger for youngsters as a first stepping stone to having a bank account,” says Schepens. “It is independence for the child; it is a way for the younger generation to get acquainted with the financial system and also a way for parents to impose restrictions on the Ping Ping accounts so they can bar children from purchasing things like cigarettes and alcohol.”
The past year has seen significant developments in the space, especially in France and the Netherlands where partnerships have been formed between the three largest operators and the three largest banks to increase mobile money services and awareness, and perhaps replicate the model set in Belgium. The Belgian ecosystem allows customers to use their mobile phones to make micro payments for a range of services, including bus rides and paying for parking in 16 cities. Up to 50% of the population in Antwerp is using the service to make vertical payments, including person-to-person and billing. Schepens notes that, without any marketing, there is already a 5% penetration rate. “One market may be using mobile money because it is fun and it is technologically innovative and new, and another will be using it because it saves users an hour of their day. The gulf between its uses in developed and developing markets is phenomenal,” adds Schropfer.
Case Study: PAY PAL™
Paypal became a wholly owned subsidiary of Ebay in 2002 to serve as a platform for people to use as a neutral payment service to purchase goods from the site.
Paypal recently partnered with Verifone Systems, a US-based electronic payment technology provider, to develop a VX series system that will enhance point-of-sale systems, encrypt Paypal’s payment app and bump technology with Verifone’s user base, extensive portfolio of point-of-sale terminals and electronic cash registers.
In the EU, Paypal is registered as a bank and has an interest rates system, like a conventional bank, to give customers a return on their savings. Howard Wilcox, senior analyst at Juniper research believes the Paypal money payment app can serve as a social function for person-to-person payment. “The Paypal app can be downloaded on the iPhone, Android and Blackberry and if you are with someone sharing the cost of a meal or a round of drinks it is an easy way to conduct person-to-person payments on the spot. Paypal usage has increased significantly in the UK. It is a different animal there compared to anywhere else.”
A service like Paypal has hardly any overheads. It has no branches and the little human interface that exists with its customers costs a fraction of what a traditional bank spends on salaries. Wilcox anticipates that internet-run banks could be the future for the entire sector.