Martin Herrndorf

Beyond Payments – Experiences From Mobile Money Pilots

As financial inclusion goes beyond credit, mobile banking should go beyond payments, suggested a report by PlaNet Finance and Oliver Wyman. A look at some key findings – and potential next steps.

At least since M-PESA cracked the market for payments in Kenya, mobile money is a global development dream: New technology enables even the poorest and most remote communities in society to participate in modern commerce. The entry ticket is a mobile phone – ideally any mobile phone – and the presence of local agents that provide cash-in/cash-out. Still, M-PESA has never been as successful outside Kenya as it has in the country – and few others have been able to copy the experience, struggling with low usage rates, density of agent networks and other issues.

Launched February this year, a joint report from PlaNet Finance and Oliver Wyman takes a look at two of their pilots.

Why “beyond payments”?

What looks easy and clear-cut – make payments with your mobile phone – is actually a multi-facetted and complex issue. This has various reasons.

First, payments are important as an enabler for a range of financial services, including different forms of credit, savings and insurance. While payments have relatively low regulatory oversight, banking and insurance are highly regulated industries. Once regulatory oversight (to guarantee that clients get the money they deposit on their phones back for instance) comes into play, things can get difficult.

Second, and related to this, different players have tried their luck at mobile payments – in particular, banks and phone companies. Both follow very different logics. Especially in developing countries, banks are used to clients with few but big transactions, while mobile carriers are much more agile – dealing with billions and billions of almost negligible transactions. Banks are built to be stable – mobile carriers to be agile.

Third, market conditions can exhibit striking differences. A mobile carrier with a high market share, like Safaricom in Kenya, can build up a system at scale relatively easy, as happened in Kenya. In other countries, where different operators focus on rural and urban areas – systems operated by a single operator will most likely not be available, making some transactions difficult, such as urban-rural remittances (sending money home from the city is a key function of many mobile payment systems).

Learning from experiments

Getting mobile payments right is thus challenging enough. Offering more complex credit, savings or insurance products will be even more. The PlaNet Finance / Oliver Wyman summarises the experiences and lessons learned from two recent pilot projects making at attempt at that.

Both projects play at the interface of credit and payments, and one attempts to offer a 100% mobile microfinance operation. Interestingly, a mobile-based microfinance operation was a major theme when Safaricom started the M-PESA project. The theme was abandoned later on as other functions (like mobile payments) got prominence (and, reading between the lines, it never really worked out). Interestingly, new industry players are building value propositions based on this promise.

The report offers a wealth of detailed findings – but is rather a reading for the expert than for the novices (who are probably better served by CGAP’s 2010-stocktaking or their scenarios for 2020). The conclusions touch on issues like partnerships, customer income patterns, the effect of incentive systems on agents and customers, and many other business model elements. The pilots focused on credit & savings, and don’t explore the potential of mobile insurance, (as envisioned by a recent Zurich study (pdf))

Some key findings

Though not everything in the report is new, it does offer some “jewels” well worth noting.

First, on a product basis, commitment (or automatic) savings work much better then voluntary savings. This has already been experienced by other providers – the super-flexible Max Vijay savings policy has not achieved the scale of the relatively un-flexible, five-year-commitment-savings-plan of competitor Bajaj Allianz, especially not in terms of saving mobilisation. Apparently, mechanisms to enforce saving discipline trump the flexibility that allow poor clients to adapt their savings pattern to their (often volatile) income patters.

Second, the report highlights challenges in forming healthy partnerships. One key issue is uncertainty – how will customers react to the service? How big will the customer base be? How often will people transact? When breaking innovation frontiers, profit sharing and finance agreements will often undergo later changes, as new facts are revealed. This is especially relevant as banks, mobile carriers and microfinance institutions might have different resources for investments, and different return expectations. The pricing difficulties are aggravated as sometimes different parts of the model need to cross-subsidize each other (for example, a transaction charge a free loading of money), making it difficult to match costs and revenues in the different parts of the model.

Last, the report has something to say on commission payments and managerial oversight. Mobile money inherently requires scale – and aligning thousands of cash-in-cash-out-agents, support staff, shop clerks, etc. who are needed to make the systems work. To achieve such a feat, one needs to go back to some business basics: Optimising processes for selecting and incentivising staff and agents, for example, including transparent commissions rules and effective oversight and coaching. Or strategies to optimise marketing expenditure and tweaking sales campaigns.

What’s next in mobile banking?

The report’s findings are a bit limited in that they are looking at pilot projects, not full-scale success stories. Also lacking is a market-perspective that takes a look across different operators at their interaction. Three issues that are conspicuously absent, but will be crucial for the future of mobile money are:

1. Regulation: While M-PESA developed at the border of the official banking system, it attracted more attention once it became wildly successful. In other countries, banking regulators will be invasive earlier on, making it necessary to include partners with a formal banking license, and build proper compliance mechanisms, for example as linked to agent selection.

2. Competition: In some markets, for example South Africa, different companies compete for accounts and clients, increasingly also in the low-income segment. For example, the report analysis branding issues from the perspective of building trust in a service – still, once competition kicks in, brands can be important beyond trust, for example in offering a service which allows customers to express their aspirations. Even in M-PESA-ate-em-all-Kenya, competition is up and running.

3. Interoperability: Closely linked to competition, interoperability is the ability to make payments and transfer between different mobile payment systems available in one market. It is crucial to grow healthy mobile payment markets – lack of interoperability harms clients as some may be forced to hold multiple accounts (with multiple account fees and minimum balances) or revert to cash payments. In the worst case, too many incompatible mobile payment offers in a country could even prevent the market from ever taking off.

While the report thus offers enough fodder to get a single model “right” (or, avoid the worst mistakes), there’s a bit more to helping clients go beyond payments on a market basis.

Disclosure: The author has worked for both Allianz and Zurich (mentioned in this article) as part of his doctoral studies during the year 2010.

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