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

Up until a few months ago, the most emblematic and successful cases in electronic money and financial inclusion in emerging countries came from Africa, with Safaricom’s M-PESA in particular demonstrating the potential of mobile financial services. However, Latin America has recently claimed a spot among the leaders of the mobile revolution, experiencing a 50 percent growth rate in new mobile money accounts – the fastest growth in the world. The region has 37 services operating in 19 countries, and some are taking very innovative approaches to developing the mobile ecosystem.

For instance, take the Dinero Electrónico (Electronic Money) service launched last December by the government of Ecuador through its Central Bank (BCE). The service – the world’s first state-run electronic payment system – is taking steps to avoid a core problem that has plagued the mobile ecosystem in other countries, and it may spark a small revolution that could have consequences for other countries in the region.

From its inception, Dinero Electrónico has aimed to resolve the technical problems of interoperability: the inability of mobile wallets to exchange electronic funds with wallets from different mobile money providers. To that end, BCE purchased and implemented a unified mobile platform, thus managing the gateway and allowing for interoperability throughout the mobile ecosystem. It also established itself as the sole e-money issuer in the country. This approach is in stark contrast with other countries in Latin America and the rest of the world, where users can choose from a patchwork of private mobile money providers in operation, but must generally cash out to transfer value between them.

A unified platform

So to take one example, while every individual or merchant that wants to receive payments through M-PESA must be registered with Safaricom’s mobile network, all networks in Ecuador will be associated from the start, joined together by the same technological platform, and administered by the Central Bank of Ecuador. To achieve this, the BCE closed deals with the country’s three mobile carriers (Movistar, Claro and CNT) to connect them to the single platform. This allows the Bank to manage the gateway and transactionality, while the operators provide the channel to reach the users.

In its first phase, Dinero Electrónico had the immediate goal of creating inclusion through the system. It aimed to achieve this by making it free to open an account and recharge a mobile wallet with electronic money. The costs of transfers are assumed by the issuing company or individual, and they are also affordable: 2 cents for transactions up to 10 dollars, and 4 cents for transactions up to 50 dollars, with the first four transactions provided at no cost.

The second phase of Dinero Electrónico, which is still in progress, is focused on allowing users to start paying for select products and services, and to send money between individuals. Using this single platform, banks, credit unions, cooperatives, mobile operators and app developers in the financial sector will create products and services so that new clients can be incorporated into the formal economy. Within this plan, a capillary network of agents and small third-party entities will be among the fundamental actors that will ensure the service’s outreach to all corners of the population, establishing access to electronic payments and advancing a more universal financial system. A third phase of the initiative will begin later this year, and will allow users to pay for public services like taxes through the mobile platform.

Reluctant partners – and potential beneficiaries

But although the single payments platform is readily available and the mobile carriers are interconnected, questions remain about whether the public will embrace the new system, with initial registration numbers looking lackluster. Furthermore, the banking sector has not been a particularly enthusiastic participant. Sources from the sector reveal to Frecuencia Latinoamérica (the mobile industry news site where I work as senior editor) that they still have doubts about the way in which the platform will be integrated in a secure manner with their own systems. In other words, there appear to be aspects related to the control of security norms and international regulations that need to be addressed. And some analysts have raised questions about the incentive structure for private financial institutions to invest in building a healthy agent network for the service. Nevertheless, this sector has shown significant interest in developing new services for its consumers based on this new payment method. And whether they’re ready or not, banks are likely to get on board with the new initiative soon: a recent mandate from the nation’s central bank requires Ecuador’s financial institutions to provide an electronic option for all their current and future services – giving them 120 to 360 days to comply.

Other sectors that may prove more enthusiastic include commerce and transportation, which could fundamentally benefit from this model. And for obvious reasons, businesses that encounter problems related to the management of large amounts of cash could also come out ahead, including peer-to-peer services between unbanked consumers and small businesses, like Caja de los Andes in Peru and Aldeamo in Colombia. For these economic actors, whose operations are more susceptible to theft and where the reduction of cash management is a necessity, Dinero Electrónico fits the bill quite nicely.

Government can be the key for mobile payments massification

It is evident that in order for this type of public initiative to emerge from a monetary and/or regulatory institution, it must be supported by a government policy that will sustain it. It’s possible that governments which favor public intervention will look more closely at initiatives, like Ecuador’s, that could boost alternative payment methods. In addition, other factors – such as the extent and growth of mobile phone penetration and the level of financial inclusion – count heavily into the equation.

In Latin America, barely half of adults have bank accounts, while mobile penetration passes 100 percent in several countries. So which countries could potentially be more receptive to this model?

Countries such as Bolivia, Venezuela and Argentina share similar banking penetration statistics to Ecuador, with the levels of financial inclusion in Argentina (50 percent), Bolivia (42 percent) and Venezuela (57 percent) close to Ecuador’s 46 percent. They also have governments with a similarly populist approach, readily intervening in the economy and offering social benefits plans. These governments may see the low cost of Ecuador’s electronic payment services for users, and the simplicity of access (any device works), and hope that these factors could lead to quick service adoption by their own unbanked populations, including those in rural areas. Further, national payment systems are not only able to provide solutions to remote areas and low-income populations, they also open the door to innovations in services like transportation and pay parking. These benefits might convince other countries in Latin America and beyond to consider Ecuador’s approach.

Though it will inevitably face challenges related to the complexities of coordinating commercial and government interests, Dinero Electrónico is a fascinating model that is gaining momentum in Ecuador – and that could impact the rest of the region. It’s one of the many mobile money trends and opportunities in Latin America that will be discussed at the M2Money & Payments Latam conference on July 28-29 in Quito.

Anabella Marciello is Frecuenciaonline and M2Cnews Latam’s senior editor.