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Iqt quarterly winter 2011 realini

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RECOGNIZING THE VALUE AND OPPORTUNITY OF MOBILE MONEY

RECOGNIZING THE VALUE AND OPPORTUNITY OF MOBILE MONEY


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  • 1. IQT QUARTERLYREcogNIZINg ThE vALUE ANd oPPoRTUNITYoF MobILE MoNEYBy Carol RealiniThere are five billion mobile phones in use around the world, providing unparalleledaccess to communications and mobile applications.1 This is having a profound effecton the lives of consumers, business infrastructure, and the way governments tacklechallenges. Specifically, mobile ubiquity has brought extraordinary communicationaccess to those that never had it before.Now, a growing number of mobile money applications payments today. Some predict recent legislation andare expanding upon this and, in the process, changing economic conditions will mean that this number willthe way traditional bank customers choose to be increase in the coming years. At the same time, theserved, which opens up opportunities to reach an number of mobile banking users around the world isunprecedented number of new customers. With this expected to surge more than 16-fold to 894 million bynew access come great opportunities and challenges. 2015, according to Berg Insight, an industry researchThe challenges include ensuring security and risk firm based in Stockholm. Clearly, this representsmanagement when offering financial services through a fundamental shift in how people bank, send andthese new channels and with this vastly expanded receive money, and pay for goods and services.access. In addition, mobile money applications What is Mobile Money?represent an opportunity for governments everywhereto improve financial efficiency and security. As a roundabout way of defining mobile money (aka mobile financial services, mobile banking, mobileThe vast majority of people worldwide are unbanked payments), let’s first answer the question “How doesor under-served. In the U.S. alone there are over 40 mobile money get started?” For consumers, adoptionmillion families who are underserved by traditional of mobile money typically starts with one specific needbanking models.2 Additionally, it is not just consumers then quickly moves to multiple, more complex usesthat are underserved. The vast majority of sellers of as consumers gain experience and comfort. Threegoods and services accept payment by only cash and specific use cases stand out as driving adoption inchecks. According to studies from the Philadelphia the U.S.: sending money; getting paid money; andFederal Reserve, 80 percent do not accept electronic transferring money — instantly, securely, and easily1 International Telecommunication Union (ITU) http://www.itu.int/ITU-D/ict/material/FactsFigures2010.pdf2 The Center for Financial Services Innovation http://cdcu.coop/files/public/AbateD2.ppt IQT QUARTERLY WINTER 2011 Vol. 2 No. 3 15
  • 2. IQT QUARTERLYwith a simple command, text message, or smart financial fraud, and money laundering that need to bephone app based on user prefers. managed. And, while there are significant differences in the data and tools available in developed versusNext, let’s look at what form mobile money takes or developing markets, in order to manage risk andthe structure of mobile money. Is mobile money a way security, mobile financial service providers have toto initiate a credit or debit transaction from an existing know something about the identities of users, thebank or credit card account? Is it a new account origin and destination of funds, and have the authoritywhere money is loaded into the mobile account and to conduct transactions with those funds. Addressingthen transactions happen from this new account? Is these challenges in developing markets also createsit a “wallet” where consumers have all their financial an opportunity to migrate existing underserved usersoptions available and then make choices depending to a more secure transaction environment than thoseon what they are buying? The answer is that mobile they currently use. For example, there is certainlymoney is all of the above. Consumers want the option opportunity to migrate government disbursementsto move money directly from their own bank account, to underbanked recipients to a much more secureset up a companion mobile account similar to how process, and there is an opportunity to develop greaterPayPal operates online, or use a debit or credit card. transaction transparency by moving cask and checkProviders need to provide and regulators need to allow transactions to digital transactions initiated through afor a spectrum of options if they want to provide mass mobile device.market solutions. In all cases, since mobile usershave an expectation of immediate results, solutions Managing risk in a mobile environment requires thatthat allow instant movement and access are strongly providers collect and store data in a secure mannerfavored in an increasingly mobile-centric world. and make that data available only to those that must have access. Providers use the following methods toMobile money has the power to change the global accomplish these goals.economic picture — and it is due to more than justtechnology and mobile communications infrastructure. Know Your customer (KYc)Mobile phones have extensive distribution networks To conduct mobile payment transactions, the providerbuilt out to sell handsets and prepaid minutes. must be able to authenticate the identities of bothIn countries that lack good physical banking the sender and receiver. This is required to preventinfrastructure, like Kenya and India, the mobile players both money laundering and financial risk to theare transforming their retail networks into banking provider. Normally, this involves the collection ofaccess points which enable enrollment, cash loading, personal identifying information (PII) such as name,and unloading (agent banking). This brings new access address, date of birth, and identity credentials fromto large numbers of consumers and businesses, prospective users. In less developed regions, identityoffering them their first banking products while credentials can be an issue and solutions are oftenaddressing the physical infrastructure limitations of tailored to meet regional realities. This PII is validatedthe current bank branches and ATMs. It may start by against third party databases, such as credit bureausproviding them with simple mobile prepaid accounts or banks, and checked against Office of Foreignfor money transfer or mobile recharge, but that is just Assets Control (OFAC) and other restricted entitythe tip of the iceberg. Once the enrollment is done and lists. Lastly, users can be subjected to knowledge-the user starts transacting, they easily migrate to, and based authentication in which they are presenteddemand, a more complete banking relationship and with questions to which only they should know thevalue added services. We see this in both Kenya and answers. Where ID failures occur, there are follow upIndia where Obopay offers both types of services — discussions with the prospective user and requests formobile prepaid and mobile bank accounts. Experience hard copy identity documentation.leads to the conclusion that these same consumerswill adopt other services when they are offered. In addition, transactions involving movement of funds from individuals to businesses present a financial andRisk and security credit risk to the service provider. In these cases, it isAs a front end channel to a financial transaction incumbent upon the provider and the banks that standsystem, the mobile device is in many ways similar to behind the transactions to understand the nature ofa PC. There are risks associated with data security, the business and the financial health of the business or retailer. 16 Vol. 2 No.3 Identify. Adapt. Deliver. ™
  • 3. IQT QUARTERLY Mobile money has the power to change the global economic picture — and it is due to more than just technology and mobile communications infrastructure.Funding source Authentication only mobile device allowed to access the user’s account. Transactions on that device will require the input of theA mobile financial system must provide ways to get mobile PIN that was established at registration.money into and out of the network. Providers mustadhere to basic anti-money laundering requirements, In the case of PCs accessing an account, the providerincluding proper KYC, understanding the source funds, uses methods to establish and ensure a trusted deviceand being on the lookout for evidence of structuring or is used for transactions. Providers will record the devicelayering. Providers and their agents must also monitor ID of the PC. If subsequent attempts to access theand report on large cash transactions and patterns as account are made by a PC that the provider’s systemrequired by the PATRIOT Act and other regulations. has not previously recorded (an untrusted device), again, an automated call can be made to the user’s mobileAccount funding can be as simple as taking and phone requesting input of the mobile PIN. This preventsdispensing cash at physical locations such as retail the takeover of an account by someone who may havestores. It can also include enabling electronic funding gained access to the user’s credentials.and withdrawal from the network. This is usuallydone by a debit to the user’s checking account, Transaction Monitoringaccomplished in the U.S. via the Automated Clearing After the provider has authenticated a user’s identity,House (ACH) system, or by charges to user’s credit account access, and devices, the user is ready toor debit card. When enabling electronic funds, the transact. Transactions can be governed by a setfirst challenge is to determine if the account is valid of hard limits and by a flexible set of parametersand if the user has authorization to transact on those established by modeling the behavior of the user andaccounts. Account ownership verification can be the account over time. These limits are generallyaccomplished by having the user verify two small the number of transactions and the value of thoserandom credits to the account. In the case of credit or transactions in any given time period. Thesedebit cards, the provider will initiate an authorization parameters may also govern how much and how oftenagainst the card, usually requiring the full billing a user can send or receive money.address and the card security code to authenticateownership of the account. Limits and parameters are used to limit both financial and money laundering exposure, but theyMultifactor Authentication also establish benchmarks against which suspiciousOnce a user has authenticated his or her identity and activity is monitored, allowing the provider to look forownership of funding sources, access to the mobile red flags.financial account is controlled by a set of credentials Access Monitoring(i.e. user name and password), as well as a series ofsystem authentications of the user’s phone and PC. In addition to transaction monitoring, providers also look to see who accesses their system, how often theyIn the case of a mobile phone, the account registration do it, and who their customers might be associatedprocess can include an automated call to the phone with. For example, a fraud or money laundering ringrequesting the user input a mobile PIN. This establishes may use a single PC to set up and transact on multiplethat the phone is in the possession of the user at time accounts. A provider may notice suspicious access orof registration. From that point, that one phone is the IQT QUARTERLY WINTER 2011 Vol. 2 No. 3 17
  • 4. IQT QUARTERLYtransaction patterns on one of those accounts that can gain experience and comfort, m-governmentbe used to identify other problem accounts. applications can drive mass market adoption by getting a large number of people to start using mobiledata security money. Government involvement can also ensureSetting up and maintaining a financial transaction that safety and security standards are met and thesystem requires the collection of and access to sensitive regulatory environment is fostered for mass adoption.data. Providers should adhere to industry best practices Governments should implement m-governmentregarding data collection, encryption, storage, and mobile money applications for governmentaccess. At the very least, providers who store this type disbursements and collections. This will kick startof data should be PCI DSS Level 1 certified. the greater market and have the added benefitFurther, in extending access to mobile channels, of driving down the cost of mobile money for theproviders should be very attentive to data that is individual consumer. One of the biggest cost factorssent to or stored on the mobile device. Sensitive data for mobile money is moving funds or converting cashshould not be stored on the device. Similarly, data sent into mobile money. Government disbursements wouldto the device via SMS or within a mobile application mean that funds would be mobile funds from theshould not expose sensitive data. beginning. Additionally, foundations or government aid organizations considering subsidizing mobile financialThe Role and opportunity inclusion should rethink their tactics. Don’t subsidizefor governments these solutions in the private sector — instead, workRecently, I attended the Gates Foundation Global to implement m-government solutions and the privateSavings conference in Seattle which focused on sector solutions will blossom.financial inclusion — thought leaders and innovators In the U.S., the private sector has already startedfrom around the world met with Bill and Melinda Gates delivering mobile banking and mobile payments.to discuss leveraging mobile ubiquity to bring banking Banks are offering consumers and small businessesand savings offerings to those who need it most. On a more and better choices in how they access bankpanel with Bill Gates and other luminaries I suggested information, deposit checks, and make and accepta link between m-government initiatives and financial payments through mobile phones. Two factors areinclusion. Governments can benefit greatly from influencing the increase in mobile banking. The first,mobile financial applications; mobile disbursements as previously outlined, is the growth of smart phones.of emergency funds, social security, and tax refunds According to IDC, smart phone shipments jumped by 55are a few examples. These solutions are greener percent in 2010 — 10 percent more than the research(eliminating use of paper checks and cash), safer for firm projected earlier that year. They have enhancedconsumers (no stolen checks), and more efficient the user experience and increased expectations about(reduce time and cost compared with cash or check what can be done from a mobile phone.disbursements — for government and the receiver). The second, equally significant, has been theSince more people have phones than bank accounts, development of use cases that are compelling andthese government applications can serve an address consumer pain points. Yet, I worry that withoutunprecedented number of people. At the same time, government applications the benefits will fall short ofgovernments can help create a critical mass of users, their potential here. That it will be primarily used towhich then creates the momentum for mobile money improve access for those who already have solutions.solutions. Once momentum is built, other applications U.S. Government m-government applications can takeand benefits will follow. Since adoption of mobile mobile money to its full potential — improving accesspayments typically starts with one application then and driving down costs for all. In addition, it can createquickly moves to more complex uses as consumers greener, more efficient, and safer government solutions.Carol Realini is the Executive Chairman and Founder of Obopay, Inc., a leading global mobile banking and paymentprovider. Carol, a recognized international expert in mobile money, has presented to world business and politicalleaders at events including those hosted by the U.S. State Department, the World Economic Forum, and the GatesFoundation. She has three decades of technology experience, successfully leading companies through initial publicofferings as well as into acquisitions. In 2008, Carol was named one of the 50 Top Women in Technology by CorporateBoard Member magazine, and in 2010, was recognized as one of the most influential women in Silicon Valley by theSilicon Valley Business Journal. 18 Vol. 2 No.3 Identify. Adapt. Deliver. ™