The enigma of mobile banking

The enigma of mobile banking Judith Mariscal Ernesto Flores-Roux IV Congress “ICTs and its Social and Economic Impact in the Americas” Brasilia, May 15, 2010

Mobile money systems: “holy grail” to bank the unbanked... “The potential of mobile phones to revolutionize access to financial services in developing countries is exemplified powerfully by the success of M-Pesa moile money service in Kenya” GSMA, Bill & Melinda Gates Foundation, “Seeking Fertile Grounds for Mobile Money”, 2009 “New uses for mobile phones could launch another wave of development.” “The mobile service that is delivering the most obvious economic benefits is money transfer, otherwise know as mobile banking.” The Economist, September 26th-October 2nd , 2009 2

... but so far the global experience is patchy Source: Datamonitor, taken from Melin, Niclas (Marketing Director Revenue Management, Ericsson), no date specified, at http://telecomcity.se/Upload/DocumentManager/MobileMonday/MobileMoney.pdf 3

The two most cited examples are M-Pesa in Kenya...  Launched in 2007 by Safaricom (35% owned by the State, 40% Vodafone, 25% public)  Services offered: ― Top up ― Cash in/cash out ― Domestic transfers/remittances ― International transfers (only from UK; recently launched) ― Bill payment* (moving into actual purchases)  In 14 months, it had 2.7 MM users and 3,000 agents  In less than 3 years, it had 7 MM users and 10,000 agents  Based on a simple application on the phone and SMS with PIN  Maximum amount s allowed: KShs. 35,000 (USD 450) per transaction, KShs. 70,000 per day  Tariffs**: ― Transfers (intra M-Pesa): USD 0.50 ― Transfers (non M-Pesa): 1%-4$ (minimum charge USD 1.00) ― Cash withdrawal: 0.5%-2.0% * Schools, financial institutions, some government agencies, heald management, insurance agencies, NGOs and religious organizations, transportation, utilities 4 ** Tariffs ranges are for typical amounts; very small transfers (e.g. KShsh. 100 [USD 1.3] are allowed with a hefty charge of KShs. 30

... and Gcash and SmartMoney in the Philippines  Launched in 2003 (SmartMoney) and 2004 (Gcash)  Smart partnered with Banco de Ouro, Gcash has no banking partner  Mostly based on SMS  Services offered ― Top up ― Cash in/cash out ― Domestic transfers/remittances ― International transfers (original killer application; now Smart partnered with MoneyGram) ― Bill payments ― Purchases (physical and online) ― Loan disbursements  Tariffs: ― Transfers (intra M-Pesa): USD 0.50 ― Transfers (non M-Pesa): 1%-4$ (minimum charge USD 1.00) ― Cash withdrawal: 0.5%-2.0% 5

OiPaggo in Brazil has made some inroads, but it has not achieved enough scale  Launched in 2007  Only offered in 12 cities in the Northeast of Brazil  Credit based (ie, need preapproval): work under a credit card administration regulatory regime  Oi Paggo assumes all the risk of non-payment  Products ― Top up ― Purchases (physical) ― Transfers (in pilot phase) ― Payments (utilities, in pilot phase)  Built a merchant network of over 75,000 establishments  User base of approximately 250,000  Charge retailers typical credit card feed (2.99%) for purchases, no monthly fees nor POS device rental 6

Conceptually, mobile money systems are very simple Money in Money out Network (inlet) (outlet)  Mobile money systems require a way for money (usually cash) to enter the system and a way for money to exit the system  The system is usually though of as the “mobile network” In reality, the ecosystem is significantly more complex 7

Building the “inlet network” is a significant channel in itself, as it requires recruiting and managing thousands of “points” Inlet network Mobile company’s own network Merchant network Money out Network (outlet) Banks Other correspondants  “Ubiquity” (decent footprint)  Cash-management skills (for inlet, mainly Building the inlet channel safety) implies building a (physical)  Right incentives (fees) network of thousands of  Simplicity of transaction points where money can  Reasonable homogeneity of network come into the system (standardized process, branding, fees, etc.) [predictability] 8

More challenging than building the inlet network is building a good value proposition for the outlet network Key variables that influence Driver the driver  Widespread  (Mobile company’s typical - Airtime value proposition)  User-friendly  System Payments Degree of difficulty  Receiving network in place  Regulation (“chicken and egg problem”)  Scale of accepting network  System considered safe (trust)  Security/safety Cash  Use of cash is “dangerous”  Migration  Distance (outlet at different place  Brand equity of provider from inlet): Transfers and remittances  Except for temporary repository  Regulation (banking) Savings of cash, not explored  Banking penetration +  Regulation (enters heavily into banking arena) Certain combinations of these key variables are esential for determining success or failure 9

More holistically, the complete ecosystem is quite complex Credit Mobile company’s own network Airtime Merchant network Closed “e-wallet” system (repository) Banks (top-up) Savings Other correspondants Payments Cash Mobile company’s Merchant network own network Utilities/ Merchant network Government Banks Loan payments Other correspondants 10

M-Pesa has concentrated on “cash in – cash out” (transfers) Credit Mobile company’s own network Airtime Merchant network Closed “e-wallet” system (repository) Banks (top-up) Savings Other correspondants Payments Cash Mobile company’s Merchant network own network Utilities/ Merchant network Government Banks Loan payments Other correspondants 11

In the Philippines, all players have extended into most parts of the ecosystem, except credit and savings Credit Mobile company’s own network Airtime Merchant network Closed “e-wallet” system (repository) Banks (top-up) Savings Other correspondants Payments Cash Mobile company’s Merchant network own network Utilities/ Merchant network Government Banks Loan payments Other correspondants 12

Oi Paggo is currently building its offer based on credit Credit Mobile company’s own network Airtime Merchant network Closed “e-wallet” system (repository) Banks (top-up) Savings Other correspondants Payments Cash Mobile company’s Merchant network own network Utilities/ Merchant network Government Banks Loan payments Other correspondants 13

Literature has identified certain enablers of mobile payment systems Decent mobile  Footprint/coverage infrastructure  Penetration  High penetration of formal financial Scalability Low penetration of services (savings, credit, transfers formal financial and payment options) substantially  Success depends on services diminished the value of mobile volume banking  “Chicken and egg” problem  Determines what can be done and who can do it  Virtuous vs. vicious cycle  Flexible regulations allow for more Regulation entrepreneurship, risk taking and  “Scalability” is innovative ideas determined by these four “enablers”  Determines the extent to which a partnership with a bank is required  Intrinsically linked to the Inlet/outlet convenience of mobile money partnerships systems  Basis for “scalability” 14

The first enabler – reasonable wireless infrastructure and use – does not appear to be a determining factor. M-Pesa began offering mobile money services when penetration was around 20% Wireless penetration Year 1 = Year of launch of mobile money services 100 Brazil South Africa 90 80 Philippines 70 60 50 Kenya 40 30 Tanzania Afghanistan 20 Colombia: 93.2% 10 Mexico: 78.2% Rwanda: 24.7% 0 1 2 3 4 5 6 7 * The “Strength of legal rights index” measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are 15 better designed to expand access to credit; Source: WorldBank, 2010, “Doing business: Measuring business regulations”

In countries where m-money initiatives have been launched, penetration of financial services has varied widely Banked population Percentage of population (16 and over) with a bank account 100 90 80 70 60 50 South Africa Brazil Colombia 40 30 Mexico Philippines 20 Kenya 10 Tanzania 0 Source: WorldBank, 2009 16

Even the strength of the financial system and the availability of credit shows no consistent pattern Strength of legal rights index* Index (0-10) 10 Kenya South Africa 8 6 Colombia Mexico 4 Philippines Brazil 2 0 * The “Strength of legal rights index” measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are 17 better designed to expand access to credit; Source: WorldBank, 2010, “Doing business: Measuring business regulations”

The cost of transfers (outgoing) also varies significantly from country to country Cost of transfers Percentage on a 250 USD international transfer (outgoing) 9% 8% 7% 6% Brazil 5% Colombia 4% South Africa Mexico Kenya 3% 2% 1% Philippines 0% Source: WorldBank, 2009 18

Also, the cost to the sender of an (incoming) international transfer varies significantly Cost of transfers by country of origin (2 largest per country considered) Percentage on a 200 USD remiitance US to Brazil 15.7 Japan to Brazil 15.2 UK to South Africa 10.2 Canada to Mexico 9.5 UK to Kenya 8.5 US to Colombia 7.6 US to Mexico 7.4 US to Kenya 7.4 US to Philippines 6.6 US to South Africa 6.4 Spain to Colombia 5.4 Saudi Arabia to Philippinnes 4.9 Source: WorldBank, 2009; Western Union; MoneyGram 19

Also, international incoming transfers (remittances) show a significant variance. They are relevant in the case of the Philippines and less so in the case of Kenya International incoming remittances As a percentage of GDP 25%  18 countries* have remittances over $1 bn, representing more 20% than 10% of GDP  Except for the Philippines, none has built an m-money transfer mechanism 15% Philippines: $18,600, 11% 10% Kenya 5% Colombia Mexico: $26,300, 2% Tanzania South Africa Brazil 0% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 US million (2008) * Bolivia, Kyrgyz, Senegal, Haiti, Albania, Moldova, Jamaica, Tajikistan, Nepal, Bosnia and Herzgovina, Honduras, Jordan, El Salvador, Guatemala, Servia, Lebanon, Bangladesh 20 Source: WorldBank, 2009

Domestic remittances (measured by internal migration and the size of rural population), also varies significantly within our case studies Rural population and migration Growth of rural population (2000-2008) 10% 0% - 10 20 30 40 50 60 70 Kenya80 90 100 Colombia -10% Mexico South Africa Philippines -20% -30% Brazil -40% -50% -60% Percentage of rural population (2008) Source: WorldBank, 2009 21

Security (as measured by the homicides ratio) also does not show a pattern Homicides ratio 2008, per 100,000 inhabitants 50 45 Colombia 40 South Africa 35 30 Brazil 25 20 15 Mexico 10 Philippines 5 Kenya 0 * The “Strength of legal rights index” measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are 22 better designed to expand access to credit; Source: WorldBank, 2010, “Doing business: Measuring business regulations”

Our hypothesis: None of the factors identified by the prevailing literature on the subject explains the existence and success of a mobile money system Except for very basic wireless penetration, none of these factors appears to be essential nor enabling As same companies have mixed experiencies (M-Pesa in Kenya , Tanzania and Afghanistan), it is not solely dependent on the mobile company’s abilities nor on its entrepreneurial skills A set of unique charactistics of each country, together with non- hindering regulation, will probably determine success on a case by case basis As more companies launch these services, some of them will manage to turn them into successes. There appears to be no set of clear identifiable and replicable variables that serve as a basis for success 23

The enigma of mobile banking

by Dialogo regional sobre Sociedad de la Información

Accessibility

Categories

Upload Details

Usage Rights

Statistics