Time for mobile money to start playing with the big boys

[Susie Lonie] Expectations of the mobile money industry are high despite a relatively low success rate as yet in this nascent industry.  The technology is improving, the operators are gaining experience, and number of services with critical mass is growing, if more slowly than we would like. To capitalise on the current wave of enthusiasm and fulfil its huge potential, mobile money needs to mature quickly.  A key element to creating a truly successful industry will be the proliferation of interoperability between mobile money services and the conventional payments infrastructure.

Most mobile money services currently work as closed loop systems, unconnected to other payment services.  This has the advantages of minimising costs, simplified operations, and providing real time transactions.  As mobile money was originally designed for the unbanked as a replacement for cash, a closed loop system was fine.  However, there is a growing demand for services opening up interfaces to make the service interoperable.  For example, to provide utility payments with real time notification to the billers’ accounting systems, and transfers between mobile money accounts and conventional bank accounts.

The biggest driver for this connectivity comes from “dual economies” with large banked and unbanked populations, and where the unbanked are transacting in an environment with significant conventional payments infrastructure on a daily basis.  For example:

  •          Many of the shops serving the unbanked use tills which are fully integrated POS systems with reporting, reconciliation and stock-keeping systems.  These retailers will not readily become mobile money agents or merchants until their POS devices can be linked to mobile money systems seamlessly, as other payment methods are. (This also implies a need for an system which allows one POS to accept multiple mobile money services, but that’s a story for another day.)
  •          Retailers, whether chains of stores or the more affluent market traders, need to be paid in mobile money then transfer their takings directly to their bank account rather than cash out at an agent then travel to a bank branch to make a deposit.
  •          A key source of earnings for the unbanked is the banked population which employs them to provide, for example, domestic services. In dual economies there is a large banked population, and a lot of domestic employment. The banked senders do not want to withdraw cash at an ATM, and then travel to a mobile money agent make deposit, and then make a P2P transfer.  For them to adopt mobile money at scale, they need the ability to transfer funds from their bank account directly to their own or their staffs’ mobile money accounts.
  •          Many dual economies have, or are developing, social payments.  The cost to the government of delivering money to the unbanked by conventional means can be a significant percentage of the amount disbursed.  The low cost of B2C mobile money transfers are an attractive alternative.  The same benefits are of interest to large scale employers paying their workforce.  However for this to be feasible at scale, the service needs to be provided with the same kind of connectivity and interfaces used to administer conventional disbursement/ payroll systems.

The time is fast approaching for the mobile money industry to “grow up and start playing with the big boys”.  Until it does, the growth potential will remain limited by its inability to interconnect.

Mobile money in the UK

[Paul Makin] When you use the term ‘mobile money’, your audience generally assumes you are referring to the phenomenon of mobile phone-based money transfer schemes in emerging markets, in particular its poster child, M-PESA in Kenya.  And there’s good reason for this; most press about mobile money focuses on emerging markets and if you visit the GSMA’s Mobile Money Tracker (http://www.mobileworldlive.com/mobile-money-tracker), it lists a large number (182 at the last count) of mobile money deployments around the world, all of which are in the emerging markets of Latin America, Africa, and South and Southeast Asia.

This may be because the data is supplied by the GSMA’s Mobile Money for the Unbanked (MMU) team and focuses on the community that the MMU team engages with, so perpetuating the view that mobile money is exclusively an emerging market phenomenon – a view that I disagree with, if not in actuality, certainly in potential.

Consider what constitutes a mobile money scheme:

·         Customers’ access to their account, for carrying out transactions or for managing their account, is primarily through the medium of the mobile phone;

·         Cash can be deposited and withdrawn via the intermediary of human ‘agents’ in local shops;

·         Cash can (sometimes) be withdrawn at ATMs;

·         Transactions are fast, and tariffs are low;

·         Registration is simpler and faster than for a local bank account.

In addition, it is fair to say that mobile money schemes are generally aimed at the unbanked market – that is, people who are unable to access traditional banking services, however basic – but I would argue that that is a characteristic of the available, under-served market, rather than any law of nature.

The dramatic growth of mobile money services in the emerging markets is a consequence of the huge size of the unbanked market in those countries, coupled with the launch of services that provide them for the first time with readily accessible basic financial services.

But there are mobile money services elsewhere, and they certainly occur in the so-called emerged markets. In the UK, for example, we have seen a number of such services being launched in recent years. A prime example is O2 Money, launched in Q2 2012. This has all of the characteristics of a mobile money scheme, as described earlier, but with one important extension to ensure its applicability to the British way of living – it has a companion card, a plastic card which allows O2 Money to be spent in shops, and which can also used for ATM withdrawals.

It must be said, though, that none of the schemes in the emerged markets have broken through in quite the same way that M-PESA has in Kenya. This is principally due to the differences in the markets. As an example, in the UK (as in other “developed” countries), people with a bank account can access the services offered by mobile money using cards on line or in person and most have access to mobile banking.

So people with UK bank accounts are unlikely to be regular users of a mobile money scheme, and therefore a strategy needs to be developed to recruit customers that offers something beyond the basic financial services. I am of the firm belief that such a strategy can be developed, and that a successful strategy would embrace elements aimed at three different groups: the mainstream banked; the not yet banked (teenagers); and the unbanked (the poorer sections of society).

The mainstream banked will be the most difficult to attract, and the key here will be differentiators from the mainstream banks’ offerings.  As mentioned above, mobile money offers little advantage to them.

The not yet banked are a slightly easier proposition –almost all of them have a relationship with a mobile phone operator, and are very familiar with buying things with their mobile phone. A proposition is required to meet their needs, by incorporating elements such as entertainment tickets (discounts are the key) and products linked to stadiums and venues (such as closed loop payments), and the option of a companion plastic card is essential.  But ultimately, whether or not this supports an attractive business case is another matter.

But the UK unbanked are a proposition with great potential.  There are around 1.25 million unbanked households in the UK[1], equating to around 4.5 million unbanked individuals. There is a real need here, and the unbanked could form a valuable element of a broader model for a mobile money operator. And you can bet that, in modern Britain, the vast majority of these people have a mobile phone.

To those who would say that the unbanked have no money, and cannot therefore be of interest, I would point out that, in common with poor people the world over, they pay significantly more for financial and other services than any other segment: fuel, cheque cashing, and short term loans are all examples of the amount such people are forced to pay for services that the mainstream gets either for free or at very low cost.

At the core of any unbanked proposition must be the facilitation of social payments. The majority of social payments in the UK (including pensions) are delivered directly to bank accounts, and in a cost-efficient manner that is at least competitive with any mobile money offering. However, the 4.5 million unbanked recipients receive their payments by alternative means, and at significant expense to the UK Government. Giving these recipients a mobile money account, and facilitating these social payments, should be at the core of any strategy.

Access to cash is also an issue. In many of the poorer areas of the UK bank branches have been closed, and the only ATMs that remain are private ones in small shops that typically charge around £2 for a withdrawal. By adopting the agent approach of emerging markets, access to cash from the mobile money account would be greatly facilitated, and drive additional revenue into the local community.

By definition, unbanked people do not have access to the conventional banking system, and there is an opportunity for a mobile money operator to facilitate that access and so enhance their own proposition. Basic functionality, such as direct debits, should be offered in order to address, for example, fuel poverty (if you cannot pay for fuel – gas and electricity – by direct debit in the UK, you will be paying a lot more for the fuel you use). Another aspect of being unbanked is the lack of access to loans at reasonable cost (hence the controversial rise of the so-called ‘payday loan’) – there is an opportunity for a mobile money operator to create a portfolio of relevant of financial services for their customers here, in which partnerships could be formed with local organisations, such as credit unions, in order to promote savings and loans.  I am sure there are lessons that can be learned from the experiences of microfinance institutions (MFIs) in the emerging markets.

In summary, I do not believe that mobile money is exclusively a phenomenon of the emerging markets. There are significant populations in developed markets that closely match the characteristics of mobile money customers in the emerging markets, and there is a clear opportunity for the right mobile money propositions.



[1]Defined as households without access to a bank account – savings accounts are excluded.

Mobile money platform migration

[Paul Makin] In recent months we have started seeing an increasing number of mobile money operators seeking to move on from their existing platforms, and migrating to new platforms. In general, rather than any capacity issues, this appears to be due to dissatisfaction with the existing platform, be it functionality, or reporting, or security, or any of a myriad of other concerns. Unfortunately, these replacement platforms seem to be selected too hastily, often giving the impression of mild panic rather than careful consideration.

As a consequence we are being asked more and more often to recommend a platform.  This puts us in a difficult position, because frankly we are not aware of a platform out there that we can wholeheartedly recommend. Consider the two broad classes of platform: those specifically aimed at, and developed for, this emerging sector of mobile money; and those that are adapted from the banking sector usage for which they were developed.

Pure mobile money platforms are often supplied by technology-focused organisations, whose roots are in the mobile industry – these can be suppliers of (for example) prepaid airtime systems, or network infrastructure, or billing systems, though pure mobile money technology startups are also prominent in this category. These organisations generally understand the technology at a deep level, and can (usually) supply you with a reliable transaction engine. But these platforms are generally deficient in the more mundane areas that, whilst not sexy, are absolutely crucial to the success of a service – areas such as:

·         Sophisticated reporting tools, for general management of the service, and for active fraud and money laundering detection and management;

·         Proper bank-grade security features, such as role-based access controls and countersigning of value movements;

·         Support for, and integration with, internal management processes, in order to develop institutional robustness;

·         Tools for the management and training of agents and agent networks.

In contrast, platforms evolved from the banking sector have many of these features already (with the exception of the mobile money-specific features, obviously), but they fall down in their adaptation to this new sector:

·         They are too closely fitted to the conventional operational and management structures of a bank;

·         The terms on which they are offered generally mirror the conventional business models of banks, for example by tying costs directly to customer numbers, which makes the platforms unattractive to mobile money operators (including banks wishing to offer mobile money services).

So what is to be done? Well ideally I’d like someone to offer Consult Hyperion and its Associates the chance to specify and manage the building of a second generation mobile money platform  – after all, we have probably unrivalled experience in this sector, amassed since 2004, across a range of mobile money operators and platforms. But back in the real world, I’d recommend that mobile money operators follow the conventional path of service development the world over:

·         Work out precisely what your organisation wants and needs, and document it in a detailed, formal Requirements Specification. And don’t limit this to just the technical requirements.

·         Use the Requirements Specification as the basis of an RFP, and issue it to as many reputable suppliers as you can identify.

·         Formally score the responses you receive, in order to establish an audit trail of decision making.

Generally, I’m hoping to see mobile money move over the next few years from the current ‘gold rush’ state, to a more prosaic ‘business as usual’ state of mind.

Regulation of mobile money in emerging markets

[Paul Makin] There have been many articles written in recent months about the regulation of mobile money in emerging markets, and to those of us who work in this field every day of our lives much of the talk sounds remarkably misinformed. For example, the suggestion is that mobile money has not taken off in some markets because of the failure of the key players to “define, articulate and communicate the benefits of using the service to prospective customers”.

On this analysis, it seems that we in the industry have simply failed to develop services that meet customers’ needs. I beg to differ. There are shortcomings, yes, but I strongly argue that the effect we’re seeing is the result, in most cases, of misguided regulation.

There is one country that illustrates this well. For the most well-intentioned of reasons, Nigeria has ended up with mobile money regulation that is spectacularly far from what the market needs. Consider the following points.

First, the question of sustainability.  More than almost any other business, mobile money depends on scale – so licensing 19 operators in Nigeria (9 yet to launch), all of whom have to start from scratch, almost guarantees that all will struggle for a long time to build a self-sustaining business. Surely what we all want is a healthy mobile money sector, and if that means limiting licences to three or four, at least in the early years, would that not be a price worth paying?

Second, no mobile operators have been licensed, though they may operate a platform as suppliers to a licensee. This is reportedly because the Nigerian Regulator has seen the success of M-PESA in Kenya, and does not like what he sees. I have heard similar comments from regulators a number of times in the past, and I really struggle to see precisely what harm M-PESA has done to Kenya.

Third, the hot topic of interoperability. Almost all regulators love this one (and the Nigerian Regulator is no exception), as it sounds so good; make sure that everyone can send money to everyone, regardless of operator, and try to enforce efficiency by making all the operators share agents. But this is simply nonsense. The “send to everyone” requirement is most efficiently met by allowing all schemes to implement a “send to unregistered customer” capability (which, by the way, is not a money laundering risk if it is implemented properly, as a message to the recipient to tell them there is money waiting for them, and all they need to do in order to withdraw it is to register – the promise of money is always a good incentive). Further, it is common for people in sub-Saharan Africa to carry multiple SIMs, so the idea of being registered for multiple mobile money schemes will hardly be a shock to them.

The other aspect of interoperability that regulators seek to enforce is agent sharing. Let’s pick that apart for a moment. I, as a mobile money operator, must invest money in equipping an agent, in ensuring that their premises are suitable, that they have sufficient cash on hand, and (most importantly) in training them and their staff, together with regular refreshers as they turnover staff. Once I’ve spent all that money, all of my competitors can then come along and use that agent without making any investment, because interoperability requires it. Please tell me then, why is anyone surprised that there has been insufficient investment in agent networks?

There is one aspect of interoperability that neither the regulators nor the mobile money industry have so far addressed in any meaningful manner, and that is in ensuring mobile money acceptance in shops and at small merchants. As a mobile money customer, the utility of any scheme is vastly increased as the number of places I can spend my money increases – would anyone in Western Europe be impressed with a scheme that could be loaded at a local shop, but all you could then do with the money is to send it to a relative, or pay a bill?

Shop/merchant acceptance is the next frontier of mobile money. I just hope the regulators don’t enforce solutions based on the old technology of switches and acquiring networks – but that’s a subject for another post.

Susie Lonie, Vodafone

[Live from London] Susie Lonie is making a presentation on Vodafone’s M-PESA scheme in Kenya. She’s just rather bravely attempted a live demonstration of M=PESA in London, sending 1,000 Kenyan shillings from one phone to another. And it worked — we all saw it with our own eyes!!

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