NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

This is part one of a three-part report. You can read the second part here and the third part here.

Outside of exceptional cases like Japan, using phones to pay for consumer goods or otherwise move money has barely emerged in developed markets – no doubt because access to financial services and other means for internet connectivity are so widespread. But the potentially transformative nature of mobile money for the poor and unbanked is not only pulling millions of customers towards such services, but pulling the industry towards the base of the pyramid (with some help from the Gates Foundation, among others).

The Mobile Money Summit in Rio de Janeiro May 25-26 was sponsored by the GSM Association, the global trade association for the mobile industry, and is the second that the association has held. Under the auspices of the GSMA Development Fund and with funding from the Gates Foundation, the GSMA’s Mobile Money for the Unbanked Program helps to drive both the conversation and the companies involved towards services for the poor. As these services reach scale in developing markets – which would by default include the poor – the intention is to create platforms that can then deepen what they offer to the poor.

My hope in attending the summit was to share with NextBillion readers the state of the industry and what can be expected in the future outside of places where mobile banking and payment systems have already taken significant hold – namely Kenya and the Phillipines (and significant branchless banking in Brazil) – as well as indicate how mobile money systems can be brought into base of the pyramid business models not only for microfinancial services but far outside of the financial services sector – in health, education, agriculture, energy, and more.

The conversation at the Mobile Money Summit was notable for how the base of the pyramid was implicitly brought into the picture as a key demographic for the growth of mobile money. But from speaking with industry players, investors like the IFC, and observers like CGAP and other base of the pyramid researchers, it’s clear an acceptance of the business case for working at the base of the pyramid has not necessarily translated into an understanding of how to do so, or sophistication in understanding consumer needs across income segments, either by global players like Visa and Nokia or by local players which operate in individual country markets.

The GSMA’s Mobile Money Deployments Tracker can give you a good overview of the growth of mobile money services – from just a handful only a few years ago, over 150 mobile money services have been launched in the past year or will be launched this year by mobile network operators. We will see how these fare as they attempt to learn from success stories like Safaricom’s M-PESA in Kenya – and whether interest holds in pushing these new services to the poor and unbanked in this fast-moving, highly competitive industry.

These will hopefully gain enough traction and consumer uptake, despite widely varying market and regulatory conditions that they will serve as platforms for further innovation by both mobile operators and the wide range of businesses and organizations that might use mobile money platforms to bring market access to the poor.

A significant portion of the audience at the MMS was representing banks – a signal that interest from potential partners, especially those that are necessary for offering sophisticated financial services, will help drive and maintain operator focus on expanding into mobile money.

Above and beyond the individual services that are being launched, here’s an overview of the factors at play that will determine whether the seeming success of M-PESA, from a development perspective, will be seen again.

Regulatory Frameworks – “Stability Before Inclusion”

Central bankers from Kenya to Afghanistan were present at the Mobile Money Summit – while mobile operators made veiled pleas for coordination with telecom regulators so that as banks and mobile operators build new systems, they do not fall through the wrong regulatory cracks.

Unlike many base of the pyramid business models that are defined at the community, municipal, regional, or international level because they are reaching customers who are almost by definition not integrated into formal markets, mobile money is being defined squarely at the national level, even where mobile operators are working across borders. Telecom regulators and central bankers define, country by country, exactly what role mobile operators can play in providing financial services, how banks can and must be involved, and more.

In Kenya, the Central Bank played a key enabling role in setting the stage for M-PESA and now M-Kesho, the integration of this mobile service with banking services by Equity Bank. Having seen examples like this, regulators seem inclined to support the growth of mobile services in other countries, but the devil is in the details.

As Alvaro Martin Enriquez of Analistas Financieros Internacionales said at the MMS, “Regulators care first about stability, then about inclusion.” While an understandable sentiment, critical decisions that can either facilitate or constrain mobile money services are now coming down to how requirements intended to reduce risk in the banking system and prevent money laundering are applied in situations where the expected ceiling for the size of transactions are so low that these concerns may not be applicable.

An example is “Know Your Customer” (KYC) regulations that determine whether ID cards for new subscribers to such services must be Xeroxed and kept on file by remote agents (a high hurdle in the places where mobile services may be most valuable), and whether such agents must each obtain a license for their involvement in financial services, or whether a single license can cover them all. For example, Rizza Maniego-Eala of G-CASH in the Phillippines expressed relief that all of the 18,000 agents who work with their service can be covered by a single license, rather than having to obtain them individually.

Even where there is enthusiasm for providing services to the unbanked, there is danger in unintended consequences. For example, a requirement for providing low-cost bank accounts for the poor in South Africa meant that banks lost existing customers to less-profitable products, dampening their enthusiasm for banking products for the poor.

Organizations like EFInA, a Gates-funded effort to enhance access to financial services in Nigeria, have been working to ensure that mobile money isn’t nipped in the bud by uninformed regulatory approaches. Adentuji Eleso, a policy specialist with EFInA in Lagos, spoke optimistically about the progress they are making in this enormous market and the buy-in they are getting from the necessary policy authorities. Look to cases like Nigeria, with three times the population of Kenya, to see if regulators get on board to enthusiastically support mobile money, or if regulation remains a checkerboard across Africa.

Markets Structure

Xavier Fas, a senior technical advisor at CGAP, was quick to note that while mobile money services are a hot topic, mobile operators may only prioritize them in certain market conditions, while going downmarket to unbanked consumers may or may not be an outcome that can be expected by banks in every markets.

On the mobile network operator side, in places where operators are in hardscrabble competition for market share, like India, he doesn’t expect them to focus nearly as quickly on mobile money services – which enhance revenue but may not attract new customers. Rather, the market structure in a place like Mexico or Kenya – with a dominant operator – is where operators would be expected to look for services to add revenue per customer. (After some questions about whether M-PESA was truly a commercial success, it’s now becoming clear that it is.)

On the flip side, Fas noted that strong competition in a banking sector is exactly what may drive certain banks to prioritize reaching out to new customers through mobile money and branchless banking.

However, the role of mobile money in the product offerings and market strategies of mobile operators is still being defined. Digicel is one operator that may be an exception to the rule, adopting not only per-second airtime sales but also a range of e-wallet services to grab market share in small markets in the Caribbean, Central America, and the South Pacific. David Sharpe, who is Head of Product for Digicel Haiti, described to me how Digicel eliminated fees on a number of e-wallet services in the aftermath of the earthquake that leveled the Port-au-Prince but is now resuming charging for these and is maintaining customer interest.

Business Model Structure

M-PESA has grown to scale on the back of peer-to-peer (P2P) mobile payments that expedited remittances from cities to villages and the like. Analogous services in different countries have taken very different forms. In Brazil, an expansive “branchless banking” infrastructure has grown up in the form of a network of agents that are used by small businesses for banking but through which people can also access social welfare payments from the government – government to citizen (G2C). In my previous post on mobile payments I speculated that utility payments could be simplified via mobile platforms, and this is in fact already starting to happen, with the water utility in Nairobi exploring how to use M-PESA for payments.

The permutations of what can form the backbone of a mobile payments system can go in any number of directions and mobile operators are actively evaluating where to start so that a new service offering will be useful for their subscribers and reach a critical level of network density. Any combination of government, businesses, financial institutions, community organizations, and consumers could be involved.

This is perhaps the key question where new mobile money services will either replicate or depart from M-PESA, and indicate how creative operators and their partners are ready to be in creating payment platforms that a full range of entities will jump onto.

Andi Dervishi, who manages ICT investments for the IFC, is looking to businesses that get onto mobile payment platforms to be the “queen bees” around which this critical mass can formed – for B2B payments as well consumer payments to businesses. But this has yet to happen at a scale like remittances.

Going from transactions that simply involve moving money to ones that facilitate the exchange of money for offline goods and services are a significant step up in complexity – but they are also where some of the biggest potential lies. Andi pointed out to me that for every heart-warming story of web-enabled medical diagnosis from a health clinic in a village to a big-city doctor, at some stage cash will have to go back the other direction. Mobile payments simplify that entire half of the equation dramatically.