Which payment system is best for when you are drunk? M-PESA!

One of the projects we have been working on for a client involves looking at the relationship between cash and electronic payments in different markets. It’s not germane why or what we concluded, but I would like to open up some discussion around the topic. If you look at (for example) the US figures, you do see growth of e-payments at the expense of cash.

…the increase in the number of card payments (47 billion) and ACH transactions (13 billion) overcompensated by far the decrease in check payments (19 billion). Some of this growth may be due to Americans replacing cash payments with electronic instruments. This is suggested by the fact that debit and prepaid cards showed the strongest growth among electronic payment instruments and they are predominantly used for the same purpose as cash payments, i.e. smaller-value POS transactions.

[From Deutsche Bank Chart in focus]

Deutsche Bank go on to conclude that

…a growing preference for electronic payments as an alternative to cash payments is not the sole driver of cashless payment growth. Changes in population, economic activity and regulation are also likely to influence transaction numbers.

[From Deutsche Bank Chart in focus]

I think that the “economic activity” category deserves more attention. You can see the effect more clearly in a country such as Kenya, where for most people there are only two payment choices: cash or M-PESA. A raft of economic activity is now floating on the M-PESA river of money, businesses that simply could not exist in a cash-only economy, so it is always interesting to try and understand why. The Journal of Payment Strategy & Systems had their Autumn issue dedicated to financial inclusion issues under the guest editorship of my old chum Kosta Peric from the Gates Foundation. It’s a good read for any of you interested in the topic, but I particularly want to draw your attention to the paper ‘The Unbearable Lightness of Digital Money” by Gianluca Iazzolino and Nambuwani Wasike from the Centre of African Studies in the School of Social and Political Sciences at the University of Edinburgh and the Financial Sector Deepening Trust in Nairobi.

I found their approach to understanding the social, cultural and economic factors around electronic money uptake and their view that a “rational calculative approach” is not adequate to understand people’s decision making (something I learned back in the days of Mondex). One clear message from their work is that different groups will have different reasons for wanting to shift from cash to digital alternatives. One man that they quote, for example, came up with a very specific use case that I’m sure we can all understand.

If you go drinking, it’s better to use M-PESA because it’s safer. Maybe you get drunk and lose your money. If you find yourself unable to dial the number, it means that it’s time for you to go home.

This kind of non-rational, non-calculative approach helps to explain the dynamic in the country, where mobile money is replacing cash but cards are not. Central Bank of Kenya statistics show a decline in the use of credit and debit cards, despite the number of Kenyans holding them rising. There are more than ten million debit cards in Kenya (and around 160,000+ credit cards), but only four per cent of Kenyans use credit and debit cards for shopping.

Electronic payments in Kenya are developing rapidly. Iazzolino and Wasike point to the approach of cashlessness in Kenya, highlighting the example of a local entrepreneur looking to expand his retail operations.

Such is his confidence in the fact that digital payment will soon gain momentum that he is set to open a furniture shop in Karagita in the near future which will do without cash.

They finish by talking about the embedding of “financial devices” in social structures, remarking that “how cash, payment cards and mobile money are used and what they stand for are entwined issues”, using the case study of chama gatherings where people want to seen pooling money. I’ve just read Bill Maurer’s new book How would you like to pay? and this has further reinforced to me the need to think more about the social context of payments to help our clients evolve their strategies around retail payments. I was thinking that this might make a good discussion topic for Tomorrow’s Transactions 2016 (a date for your calendars: it will be 20th/21st April). What do you think?


There’s something odd about a conference on Mobile Money & Migrant Remittances held in a hotel with no mobile coverage and a $25/day charge for wifi, but despite that I thoroughly enjoyed popping along and meeting up with friends from around the world there. I was on the Strategy Panel covering financial inclusion, and this coincidentally, the day after I had been quoted in Warren’s “Washington Internet Daily“:

Mobile payment systems are often treated with a lighter regulatory touch than mobile banking, to reach as many users as possible, Birch said. The need to integrate the “unbanked” into society should “tip the value” toward less regulation of low-value transactions, he said.

An entirely accurate representation of my views. A correspondent wrote in response:

Very sensible words! Not sure if you have actually read FATF’s NPM report from October 2010, but it is actually pretty good, and recommends the right thing: a light KYC regime (including no verification) for specific low risk accounts, praising the power of transactions limits and monitoring.

As it happens, I hadn’t read the FATF New Payment Methods report, so I downloaded it to take a look and discovered some surprisingly sensible conclusions. By “New Payment Methods”, or NPM, the FATF means specifically internet payment systems, mobile payment systems and prepaid card products. My correspondent had noted, to my surprise, that some of their conclusions echo my own ranting on the topic: that is, a light-touch KYC regime (including no verification for specific low risk accounts), with attention paid to setting the right transaction limits and appropriate monitoring and reporting requirements. The report is based on a number of case studies, so the conclusions are based in practical analysis, however it must be said that they are probably not statistically utterly sound.

The project team analysed 33 case studies, which mainly involved prepaid cards or internet payment systems. Only three cases were submitted for mobile payment systems, but these involved only small amounts.

Personally, I found many of the case studies in chapter four of the report uninteresting. Yes, in some cases prepaid cards, or whatever, were used as a part of a crime, but in many of the frauds so were cash and bank accounts. One of the case studies concerned the use of multiple prepaid cards by an individual found to have 12 legally-obtained driving licences in different names (and $145,000 in cash). I’d suggest that cracking down on the driving licence issuing process ought to be more of a priority! The issue of access to transaction record is, I think, much more complicated than many imagine. You could, for example, imagine transaction records that are encrypted with two keys — your key and the system key — so that you can go back and decrypt your records whenever you want, but the forces of law and order would need to obtain a warrant to get the system key. Sounds good. But I might not want a foreign, potentially corrupt, government department to obtain my transactions for perfectly good reasons (like it’s none of their business).

The report says very clearly that the overall threat is “difficult” to assess (so some of the rest of it, I think, is necessarily a trifle fuzzy) but also that the anti-money laundering (AML) and counter terrorist financing (CTF), henceforth AML/CTF, risks posed by anonymous products can be effectively mitigated. I agree. And I also strongly agree with chapter three of the report notes that electronic records give law enforcement something to go on where cash does not. This is something that I’ve mentioned previously, both on this blog and in a variety of other fora, because I think it’s a very important point.

I said that I was not sure that keeping people out of the “system” was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can’t be tracked, traced or monitored in any way)

[From Digital Money: Anti-anti money laundering]

The report goes on to expand on the issue of mitigation and, to my mind, deals with it very well. It says that:

Obviously, anonymity as a risk factor could be mitigated by implementing robust identification and verification procedures. But even in the absence of such procedures, the risk posed by an anonymous product can be effectively mitigated by other measures such as imposing value limits (i.e., limits on transaction amounts or frequency) or implementing strict monitoring systems.

Why is this so important? As well as keeping costs down for industry and stimulating the introduction of competitive products, the need for identification is a barrier to inclusion. This link between identification and inclusion is clear, whatever you think about the identification system itself. India is turning out to be a fascinating case study in that respect.

The process would benefit beneficiaries of welfare schemes like old-age pension and NREGA, enabling them to draw money from anywhere as several blocks in Jharkhand have no branches of any bank and would save them from travelling to distant places for collecting money.

[From Unique numbers will save duplication in financial transactions – Ranchi – City – The Times of India]

But I can’t help cautioning that while customer identification is difficult where no national identity scheme exists, but there is a scheme it may give a false sense of security because obtaining fraudulent identities might be easier than obtaining fraudulent payment services in some jurisdictions or where officials from dodgy regimes (like the UK) are at work…

Prosecutor Simon Wild told the court Griffith abused his position by rubber stamping work permit applications that were obviously fake or forged using false names and references.

[From British embassy official ‘nodded through scores of visa applications’ | Mail Online]

For low risk products, then, the way forward is absolutely clear: no identification requirements, potentially strong authentication requirements and controlled access to transactions records. One small problem, though, that the report itself highlights: there are no uniform, international, cross-border standards for what constitutes a “low risk” product. But that’s for another day.

Finally, I couldn’t help but notice that the payment mechanisms that scored worst in the high-level risk table (on page 23) and therefore the one that FATF should be working hardest to crack down on is cash.

P.S. I apologise to the conference organisers for my radio silence during the event, but I belong to the #canpaywontpay tendency: I can afford $25/day for wifi (since I’m not paying, I just expense it to the compnay) but I won’t pay it, because it’s outrageous. No wifi means no twitter, no blog, no buzz. That’s not how conferences should be in 2011.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Including everyone

As a chap named Bill Gates wrote recently,

Technology can be a major force to advance financial inclusion, which can help improve the lives of the poor in the developing world.

[From Untitled]

He’s absolutely right, of course. People who are trapped in the cash economy are the ones who are most vulnerable to theft and extortion, most likely to lose their hard-earned notes and coins or have them destroyed by monetary policies, pay the highest transaction costs, lack credit ratings or references and (in an example I heard from Elizabeth Berthe of Grameen at the Digital Money Forum this year) most likely to have their life savings eaten by rats. So what should be done? Well, having governments take the problem seriously and set targets is a good start.

the RBI target of ensuring 100% financial inclusion in villages of 2,000 plus population in the state by March 2010… banks could adopt the RBI’s advice of making use of the business correpondent-BF model, as per the guidelines, to extend the banking services.

This was in keeping with the RBI’s decision to launch a renewed drive for opening up of no-frills accounts in respect of families who do not have a bank account, on the basis of the data relating to the public distribution system.

[From Banks urged to take steps to ensure 100% financial inclusion – dnaindia.com]

To continue with this specific case, it has proved very difficult to translate these targets into action in the heavily-regulated Indian market.

Adding to their presence, the cost of operating a bank account and the cost of transaction for banking services —which includes deposits, withdrawals, credit and other banking products — is not only high for the consumers but also for the banks. This leads to little penetration and reduced delivery of services in order to bring the large number of potential un-banked/under banked population under the mainstream banking system.

[From Financial Inclusion In India]

As far as I can see, banking is a really expensive and really inflexible way to obtain inclusion, and as we all know, there are better ways to obtain inclusion with new technology. In particular, new technology when combined with the business correspondent model mentioned in connection with the RBI guidelines above ought to be delivering more transformation.

A Wharton School study pegs the cost of a transaction at a bank branch at around $1 (Rs. 45). At an automated teller machine, it goes down to about $0.40. And done through business correspondents, the cost drops even lower to $0.10.

[From Banking on technology to bridge financial inclusion gap – Economy and Politics – livemint.com]

Another way forward might be to treat mobile payments as a first step on the ladder to inclusion and try to find a way to bring mobile payments to the mass market and then use the mobile payment platform to deliver other financial services. Naturally, give our work on the project, I can’t resist highlight M-PESA in this context.

This is why, I believe, that the success that Vodafone (through its subsidiary Vodacom) achieved in Tanzania is so important. It was reported that more than a million subscribers have signed up on the service (Read here), but indications at the Congress were that this number has now more than doubled. The fact that Vodafone has demonstrated that they can duplicate the success of mPesa in other countries, is of significant importance. This means that the Kenya experience was not a fluke, and that Vodafone has learned what it takes to make these roll-outs work.

[From Mobile Banking: Vodafone prove mPesa repeatability]

I hate to keep going on about M-PESA, but our experiences advising Vodafone in the early days of this project contain a number of useful lessons, in particular about the relationship between new entrants and regulators. But I wanted to make a different point.

A couple of years ago we were doing some work for a client who was thinking of developing something like M-PESA. I won’t name them, obviously, but I hope no-one will mind if I mention one of our recommendations. Our Head of Mobile Money, Paul Makin, who worked on M-PESA when it was still whiteboard scribble, was asked what he would have changed in the original specification if he had had the wisdom of hindsights, and his top priority was APIs for MIS access. This is why I wasn’t surprised to see this in a report from the front line.

Data from M-PESA cannot directly be imported into the management information systems (MIS) at MFIs. For KADET, this means all payments made through M-PESA have to be manually input into their MIS, another opportunity for human error to affect the process.

[From Mobile Payments: the Devil is in the Details « Kiva Stories from the Field]

(I strongly urge you to read this short and fascinating article about real experiences linking to M-PESA in the field, by the way.) Taking the mobile payments transactional data and providing corporate access is, I think, a key plank in the inclusion strategy. In Kenya, financial institutions have already started to use M-PESA transaction data as a substitute for a credit rating when looking at providing loans and I’m sure that new opportunities will arise due course: with the wisdom of hindsight, better corporate interfaces would have accelerated this process.

This is the short of thing I expect to discuss more when I’m on the panel on Financial Inclusion at the forthcoming Mobile Money and Migrant Remittances conference in London on 16th-18th May 2011. They’ve got a great set of speakers, including Forum friend Elizabeth Berthe from Grameen and John Maynard from Vodafone, and I’m really looking forward to it.

In an act of astonishing charity, the wonderful people at ICBI have given me a two-day delegate pass for the conference — worth an amazing ONE THOUSAND FOUR HUNDRED AND NINETY NINE POUNDS — to give away on this blog as a competition prize. So if you are going to be in London on those dates and you’d like to come along to meet some of the global leaders in the mobile and remittance space, all you have to do is be the first person to respond to this post telling me when Western Union, the founders of the electronic money business in 1871, finally shut down their telegraph service.

In the traditional fashion, this competition is open to all except for employees of Consult Hyperion and members of my immediate family, is void where prohibited and has been risk-assessed under all relevant guidelines. The prize must be claimed within three months. Oh, and no-one can win more than one of the Digital Money Blog prizes per calendar year.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Expected and unexpected

It’s uncontroversial to note that mobile money in the developing world is having more of an impact than mobile money in the developed world.

While the UK may have an extremely effective online banking model, the Afghan necessity-is-the-mother-of-invention mobile banking model is certainly more interesting than the UK where banks have finally woken up to the fact that the occasional commercial and putting more five-pound notes in cash machines is not innovative enough for a supposedly technically developed country.

[From Afghanistan shows the UK how mobile banking should be done – Telegraph]

So if you’re going to start a cash-replacement technology it makes sense to start it in a place where the use of cash is disastrous as opposed to a place where it’s merely inconvenient and expensive. But is it just all about cost? I don’t think so, because mobile deliver additional functionality as well: it means new applications as well as lower-cost transactions. This is recognised at the highest levels.

One of the interesting things about new technology is because so many countries in Africa have come late to the development, they’ve actually leap-frogged and the applications that they’ve developed for mobile telephony, for one, are far more advanced than many of the things you’ll see in this country… We are interested in how we can, as the U.S. Government, tap into those mobile networks to provide information that people can use very directly on their phones, in their communities, whether it’s tele-medicine, tele-banking, all of that.

[From Diplomacy Briefing Series – Conference on Sub-Saharan Africa – Poten & Partners]

This is you would expect. In the development world, there is little retail financial services infrastructure so there is a great pull to use new technology to provide that infrastructure. This had led to innovation, and some of that innovation may drive new products in the developed world. But the extent to which the innovation in mobile money is developing has some interesting implications for society, and one of them is that this new infrastructure based on mobile provides a means to deliver social inclusion. Why? Ignacio Mas and Dan Ratcliffe from the Gates Foundation are concise and explicit.

Cash is the main barrier to financial inclusion.

[From Mobile Payments go Viral: M-PESA in Kenya – pymnts.com]

Cash isn’t just quaint, it’s a drag on development. Professor Njuguna Ndung’u, the gorvenor of the Central Bank of Kenya, speaking at a time when M-PESA volumes had already surpassed Ks 1 billion per day, pointed out that micro-banking, insurance services and mutual funds need low cost delivery channels and the mobile phone is the way to provide them. Quoted in SPEED magazine (Spring 2010), he said that

The Kenyan authorities are creating an enabling legal and regulatory environment comprising: The National Payment System Bill that will strengthen the oversight mandate of the central bank; The Proceeds of Crime and Anti-Money Laundering Bill; and an amendment to the Banking Act to enable banks to use non-bank agents to extend their reach (and these non-bank agents will use mobile technology to reach customers even if the banks do not).

In a relatively short time, M-PESA has become a standard and widely accepted mechanism for exchange and in some circumstances it is already preferred to cash.

I have personally witnessed this at 11:00pm at night when a colleague made a payment recently to a taxi-driver in Nairobi when such a message was received, and the taxi-driver’s response was that we did not have to wait 10 mins that we could go, M-Pesa was good for the payment. This is trust.

[From Details | LinkedIn]

I wonder if this was the same taxi driver mentioned in a post over at the GSMA.

A conversation I recently had with a taxi driver in Kenya illustrates why talk of the death of banks is unfounded. He explained that M-PESA is one of a portfolio of financial tools that he uses to manage his money, and that his bank is an indispensible part of that portfolio. In fact, I’ve come to believe that mobile money services can increase, rather than dampen, demand for traditional banking services

[From Mobile Money and the Demand for Banking | Mobile Money Exchange]

I’m sure that this is true, although it may not necessarily mean that traditional banking services should be delivered through traditional bank channels.

Equity Bank Ltd., Kenya’s largest provider of small loans, plans to more than double the number of accountholders this year after forming a partnership with Safaricom Ltd., East Africa’s biggest mobile-network operator… Safaricom and Equity Bank announced on May 18 an initiative where Kenyans will be able to open bank accounts through Safaricom’s mobile money-transfer service known as MPESA.

[From Equity Bank of Kenya Aims to More Than Double Accounts in 2010, CEO Says – Bloomberg]

This service has, at the time of writing, already led to something like 750,000 new accounts being opened, so it’s absolutely clear that mobile money provided by non-banks not only does not compete with banking services it can actually turbocharge them. But back to the streets of Nairobi

Last week as I was coming from the office @ about 5.30am (I work late sometime). I noted a group of not so sober men lined up in a M-Pesa retailer, the men had spent the whole night drinking and were making cash withdraws to clear the debt to the pub. The M-Pesa integration allow them to withdrawal from their Bank account. To me saved money should not be this liquid.

[From Details | LinkedIn]

This is a fabulous quote, on so many levels, and I will inevitably use it to make some convoluted “joke” about liquidty in the future. Nevertheless, it is worth using it to flag up the point that even for digital money fanboy such as yours truly, not all of the consequences of spending at the speed of light are positive. But there are other, wider consequences of M-PESA’s great success in Kenya.

I’d say that there is at least as much of a lack of innovation in mobile money because MNOs are simply trying to copy M-PESA.

[From Are banks the bad guys in the mobile money innovation debate?]

This is a perspective that I’ve heard expressed more and more in mobile money circles throughout the year. It has a negative effect, I think, because there were special circumstances and factors around M-PESA.

In any case, from a global perspective, the runaway success of M-PESA is likely to remain the exception, rather than the rule, for mobile money deployments. In most markets, one provider won’t be able to get a big enough head-start to generate the powerful network effects enjoyed by Safaricom and the net result will be several modestly-successful mobile money services in each country.

[From Don’t be Seduced by the Magic of M-Pesa | Mobile Money Exchange]

I’m sure it’s true that M-Pesa will remain the exception. It cannot be replicated in South Africa, because apart from anything else it would be illegal: the rules there require bank involvement so M-PESA there is a different kind of beast. But remember how Visa started as BankAmericard? In some countries this will be the more likely path surely: one provider will launch, get some traction and then competitors will join and compete no longer on the network but on products and services built on the network. Another impact will come in the retail value chain as M-PESA continues to grow at point-of-sale (I’m told on good authority that there are some bars in Nairobi that will only accept M-PESA). It has signed up Kenya’s second biggest supermarket chain already. What will happen?

Conrad Sheehan, founder and CEO of mPayy, tells Econsultancy: “If you’re going to introduce a mobile carrier into that value chain without raising the price, something’s gotta give. You have to lower the price to the merchant.”

[From In mobile payments, credit card companies might be a third wheel | Econsultancy]

That simply isn’t true, since the mobile carrier might have some alternative source of revenue. In a recent podcast in the Tomorrow’s Transactions series, Michael Joseph (CEO of Safaricom when they launched the highly successful M-PESA service) points out that he was interested in profitability through customer acquisition and reduced churn. As with the example of NTT DoCoMo in Japan, there is a suspicion that the carriers could give the payment system away for free if it generated enough other revenue for them and that they’ll keep this up their sleeve for when there’s is competition. So is M-PESA generating other revenue? Well…

according to Safaricom’s annual financial statements released just a few days ago accounted for 9 percent of company revenues in the last fiscal year, for a total contribution of USD 94.4 mil (Ksh 7.56 bil). M-PESA revenues grew 158% over last year’s figure of USD 36.6 bil (Ksh 2.93 bil).

[From Proof mobile money can make money? M-PESA earns serious shillings for Safaricom]

M-PESA accounts for almost half of all Safaricom’s data revenues.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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