ICTworks

At the recent London Technology Salon, we debated “How Mobile Money Can Improve Development Outcomes for the Unbanked?” with 30 thought leaders in mobiles, finance, and international development. While the event itself is off-the-record, below is the synopsis of our discussion.

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Current state of the mobile money industry

The mobile money industry is growing rapidly and on a global scale with 167 services spanning 73 different countries (including 41 new service deployments in 2012). As of June 2012 there were 82 million registered mobile money customers and 30 million active users (those that use the service at least once a month). In June 2012 there were over 224 million mobile money transactions representing a total of $4.6 billion. The number of mobile money transactions over this period exceeded those of PayPal which processed an average of 196.3 million transactions per month during the third quarter of 2012.

Sub-Saharan Africa accounts for 56% of the currently deployed mobile money services – and account for twice as many registered users (in that region) as Facebook – which is impressive for an industry which is only 5-6 years old. Globally there are as many mobile money outlets as there are points of sale for Western Union – and in 28 countries there are more mobile money agent outlets than bank branches. In addition mobile money transactions have begun to represent significant proportions of national GDP – 60% in Kenya, 30% in Tanzania and 20% in Uganda. It is also important to note that mobile money is more than just M-PESA – there are now six services with more than 1 million customers, and in 40 different national markets there are at least two competing mobile money services. Finally, mobile money is a rapidly growing global industry led by 14 “sprinters” (the fastest growing services).

Challenges for the mobile money industry

Mobile money services are not always quickly adopted depending on local circumstances. Aside from the 14 “sprinters” there are also 37 mobile money services worldwide which are struggling to get traction within their domestic markets. A further challenge is that the majority of mobile money transactions still tend to be person to person (P2P) transfers or airtime top-ups with only a small minority devoted to bill payments, international remittances or savings. Indeed in June 2012 airtime top-ups represented over 60% of all mobile money transactions.

There also significant operational hurdles given that building customer trust in mobile money services takes time and these services can be difficult to roll out in rural areas. Some markets also have regulatory barriers which prevent telecommunications companies engaging in mobile money services. In connection with mobile money saving services, it was noted that in many instances there are limits to the amount of funds that can be stored on a mobile phone. In addition many customers don’t want to make their savings too easy to access – and therefore prefer to locate them elsewhere.

There are also learning gaps to be addressed – this is a comparatively young industry with lots of opportunities to link up with health, agricultural and financial inclusion objectives, but it will be some time before the full extent of this promise can be realised.

Why have some mobile money services lagged behind expectations?

It was suggested that there could be a certain incubation period required for mobile money services such as P2P and airtime top-ups to be widely adopted before this service infrastructure can be used to drive more sophisticated financial transactions such as savings and international remittances. The point was also made that the growth of P2P transfers were initially boosted in most countries by powerful network effects (they deliver increasing benefits and convenience the more people are involved/registered).

In contrast, savings, credit, and bill pay services and government to person (G2P) transfers tend not to benefit from the same incentivising network effects. In this context P2P transfers have grown rapidly because they are the most easily adopted component of the mobile money service equation. Taking the example of MPESA, this service initially responded to existing need in the form of P2P transfers and airtime top-ups – but now it needs to drive demand and change consumer perceptions to increase the uptake of new services. Other products such as savings products with micro insurance rewards are appearing in many countries but they are still in their initial stages.

Credit services by other means

It was however noted that there are still significant benefits from P2P transfers even without a more diverse provision of other financial services. For example the Mobile Enabled Community Services (MECS) programme launched by GSMA and DFID in March 2013 leverages mobile technology and infrastructure to improve access to basic energy and water services in underserved communities. In addition, in Kenya the M-KOPA system combines machine to machine (M2M) communication and mobile payments to provide an affordable solar energy powered lighting/electricity system to customers. The equipment is purchased on a pay-as-you-go basis with users making mobile payments to top-up the credit on their system.

After 12 months the customer has paid off the cost of their equipment and owns the system outright with no further payments required. This effectively offers customers a kind of pay-as-you-go based credit service which allows them to purchase and own solar energy hardware which would be unaffordable under any other context.

Do mobile money services increase GDP?

An Indian case study was cited involving a rural cooperative which previously relied upon a paper-based supply chain and word of mouth to sell its products. Once this cooperative had automated sales and orders using mobile phones (which allowed them to offer next day delivery/availability) their turnover increased by 300%. The lesson from this example is that significantly larger sales were generated by reducing the delays which were inherent in the old supply chain.

Whilst this case study did not directly involve mobile money services, the cooperative is now looking to make this transition, and it is expected that the implementation of this approach will further reduce supply chain related delay as well as permitting additional discounts from wholesalers based on bulk product purchases – therefore driving even higher sales. Whilst this example was clearly highly encouraging it was nonetheless agreed that there is still a need for more concrete measures of the contribution of mobile money services towards increasing national GDP.

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The challenge of mobile money transaction costs

An example was provided of a recent project in South Africa which was targeting between 60-70,000 citizens. In the end the decision was taken to implement the project using bank accounts instead of mobile money services. The reason for this was that the banks were prepared to charge costs of 1.30 Rand per transaction, whereas the mobile money alternative would have involved 6-7 Rand per transaction – in addition to further costs passed on to customers engaging with project. It was suggested that this situation could be partially the result of the immaturity of mobile money service markets and their current tendency not to offer discounted costs to bulk transactions.

It was also remarked that until such mobile money providers reach a higher level of scale and maturity – prepaid phone scratch cards remain a competitive option. A final comment was that the Cherie Blair Foundation are currently working with USAID to test new models capable of up scaling mobile money networks and driving the development of new innovative services.

What is the donor perspective on mobile money?

It was suggested that from the donor perspective sustainability is a key priority for mobile money services – focusing on the following outcomes:

• Financial inclusion
• Reliability of money transfers
• Disseminating funds in the context of disasters and emergency relief
• Creating new markets

Whilst mobile money services have the capacity to address these objectives, it important to remember that it costs approximately $7 – $10 million over three years to deploy a mobile money system from scratch. Banks are unlikely to support such projects – the main driving stakeholders will be the mobile network operators.

Provocation – do donors distort the mobile money market?

The question was posed as to whether donor funding distorts the market for mobile money services. It was contended that traditional donor metrics are based on scale which incentivises investing in projects or services which can reach the largest numbers of people. In Kenya this logic would advantage larger players such as MPESA at the expense of smaller operations such as Orange Money or U-Cash. In Tanzania this would incentivise donor investment in Vodacom or Airtel above smaller start-up mobile money services.

However if donors are effectively picking winners to exploit the scale and reach of their networks and customer base – this risks diminishing competitive market forces and increasing transaction costs. Mobile money service providers are businesses and therefore need to extend their services at a price point which recovers investment.

Responses – do donors distort the mobile money market?

It was suggested that the donor community is primarily looking to deliver impact in the countries in which it invests. However, there are also instances of mobile money markets developing in the absence of donor support. Taking the example of Somaliland – an enclave of 3.5 million people in northern Somalia which is seeking international recognition as an independent state – mobile money services have become the primary financial infrastructure in that region without any donor investment. DFID currently supports the mobile money services market in general as well as offering investment to individual firms and projects.

Most mobile money “sprinters” are competing with each other within the same national jurisdiction – and most mobile money services break even after successfully operating for two years. In reality donors tend to offer support to larger players in a context where they serve 20% of a particular market – but not in circumstances where they control 80%.

Differing definitions and approaches to financial inclusion

The concept of financial inclusion can often have multiple definitions. Does financial inclusion mean the entire population has fully fledged savings accounts – or just that they are able to make easy P2P payments? The answer is that financial inclusion is a journey which begins with P2P transfers and incrementally progresses towards more sophisticated services including insurance, savings and credit. The World Bank model for delivering financial inclusion projects an 18 month period to graduate an individual from poverty with a series of key steps.

Mobile money services are not targeted at the poorest citizens (given the inherent cost of devices and top-ups). There are also further components of financial inclusion – such as keeping a financial diary to develop a historical record which can help to secure credit in the future. It was suggested that mobile money services – in conjunction with other important elements can serve as a key driver for guiding individuals through the duration of this 18 month period of incremental financial development.

Barriers to adoption and implementation – limited interoperability, investment and capacity

It was suggested that donors should have a role in promoting interoperability between different mobile money service providers in order to provide increase choice and value for consumers. In response it was argued that interoperability is certainly a long term goal – but in the short term it can mean additional costs are passed on to the customer. It was acknowledged that there is significant frustration on behalf of organisations seeking to “plug in” to mobile money service networks.

In many instances low cost mobile money platforms have been successfully rolled out – but with limited functionality as a result of insufficient investment. This makes it challenging for such networks to accommodate the delivery and engagement aspirations of NGOs and donors. One potential solution is to foster the adoption of open application programme interfaces (API’s) to deliver more integrated and interoperable platforms.

Barriers to integration and cooperation with the banking sector

It was remarked than in many instances telecommunications companies are not the main barrier to the deployment of mobile money services – whilst banks are often slow to embrace these services. Part of the reason for this is that banks need to ensure they are compliant with fraud and security regulations. In addition banks will often be operating older legacy IT systems which are not compatible with more modern application programme interfaces….etc.

However it was conceded there are examples where banks are engaging with mobile money providers. The Cherie Blair Foundation has partnered with mobile money service provider Tigo (usually the second largest operator in most markets) and USAID to train 4,150 women entrepreneurs as mobile money agents. The objective of the project was to enable women mobile money agents to become profitable and seek new customers while increasing the profitability of mobile money service providers and enhancing their links to financial institutions such as banks.

Technological barriers to adoption and roll out

There are three key technology blocks which underpin the delivery of mobile money services:

• Backend functions including – integration, switching and application programme interfaces
• Backend functions including – the store value platform
• The access channel – via a mobile device (typically SMS in many cases)

It was conceded that in comparison to credit card technology which has universally agreed and interoperable standards – mobile technology is more fragmented. There is also a need to consider voice and browser user interface options in addition to SMS-based approaches.

It was also remarked that some telecommunications operators are charging rates of up to $10,000 per month for mobile money service providers to offer unstructured supplementary service data (USSD) functionality to their customers (allowing up to 182 alphanumeric characters to be sent via a real-time connection which supports two-way data exchanges).

Final comments

• The International Rescue Committee (IRC) responds to disasters or humanitarian emergencies by initially mapping the financial infrastructure of the country concerned and proceeding to work with the key available financial stakeholders. This can involve working with banks, farmers groups, collective marketing committees and mobile money service providers (such as MPESA in Kenya).
• Mobile network operators are in a good position to serve as incubators for solutions which are self-sustainable; offer the right mix of stakeholders – and align the interests of these different stakeholders by recognising their incentive structures and business motivations.
• It was commented that it is important to consider mobile money services from the user perspective – particularly in terms of whether there are any barriers to adoption in connection with literacy/language skills or religious values. There is also a need for providers to concentrate on providing financial services and products which are focused on the needs and aspirations of their customers and end users.
• Success will also depend on offering more user friendly systems such as voice-based interfaces. French mobile money firm Tagattitude is currently using a system of voice sounds to authenticated customers using its services – as is the mobile money service arm of BRAC Bank in Bangladesh. Furthermore MPESA operations in India, Afghanistan and Egypt are deploying interactive voice response (IVR) systems for mobile money transfers.