Nathan Wyeth

Making Sense of Mobile Money: An Interview with Ben Lyon of Frontline SMS:Credit

Even before I fully knew what mobile money was, I could tell it was going to be huge. One look at the size of immigrant remittance flows that have become the largest source of funds flowing into many developing economies (and are more stable than FDI), and you can tell that innovative ways to move money with lower transaction costs would quickly find scale.

Add to this the cumulative economic turnover at the base of the pyramid – 4 billion people without bank accounts and often any non-cash monetary instruments – and innovative ways to store money and make payments loom even larger.

Estimates for the size of the mobile money market range from $27 to $202 billion within 4 years. So I’m not the only one who thinks this will be big but doesn’t know how big.

To get a handle on all this buzz and walk through what mobile payments really look like, I sat down for a tutorial with Ben Lyon of FrontlineSMS Credit while he was in the Bay Area to speak at Google. As someone accustomed to debit cards and PayPal and the like, I had to take a step back to get a feel for what the ability to send and receive money through a mobile phone – or really, a SIM card – means for someone with no other easy way to move money or convert cash into electronic form.

Ben is one year out of college and I wish I had been smart enough to do what he’s doing, when I saw how big remittance flows were in my own senior year. FrontlineSMS Credit is building a back-end interconnection tool to allow microfinance institutions to interface their own databases with the mobile payment systems run by mobile networks. When mobile payments are received from MFI customers, the SMS message that conveys the payment will update the MFIs records, while the payment will stay on SIM cards the MFI holds, to be stored and loaned out again via mobile payment, or paid out into the MFIs bank accounts.

If this all makes perfect sense to you, you can skip the next paragraphs. But I wanted to get an intuitive feeling for what this looks like for a customer, so Ben drew me some flow charts and walked me through the situation in Kenya (he’s now in Sierra Leone scoping out operations there), where mobile payments have taken off the most with M-PESA, a partnership between the mobile network Safaricom and Vodafone.

Imagine you have no ability to convert cash into anything else, and no bank to put it in. If you want to save it, you’ve got to keep it hidden somewhere. If you’re a seasonal migrant laborer in a city, you might live in a communal space with many others – if you have private space at all. If you are employed, the closest you have to a bank is your employer witholding a portion of your wages until you ask for them (good luck collecting on that if business goes bad).

Starting recently, prepaid cell phone minutes have become a new liquid and electronic form of value. It’s always in demand by the vendors that sell mobile phone use, and there’s probably a vendor like this near your home. So you can purchase Safaricom airtime at the corner store in Mombasa, call the mobile phone vendor near your home, and have the airtime deposited with their SIM. The vendor can then pay out cash (minus a commission) to your mother.

It only takes a few leaps on the part of Safaricom to realize that it’s got a new form of currency on its hands – limited only by the amount of cash that it can be converted into in rural areas for payout. So instead of denominating this currency only in minutes, they’ve made a jump to being a nonbank financial institution by now doing so in Kenyan shillings as well. Mobile payments are done using the same SMS system as text messages, conveying information to Safaricom agents about money that has been transferred from another agents account to theirs, and can therefore be paid out to its intended recipient. But a recipient could just as easily be a store or a company or an MFI. (The actual story of M-PESA’s creation is told here).

Ben suggests that a the emergence of virtual SIM cards that authenticate users and query accounts based on activation codes or passwords would bring mobile financial services to those who cannot afford a handset or SIM card. This means that virtually everyone, except those so remote that cell phones are not within reasonable traveling distance, will have access to electronic money.

So think of every time you would rather have money in a secure place and in electronic form rather than cash – and what percentage of your payments and savings you keep in electronic form. An indication emerges of how momentous the arrival of mobile payments and then branchless banking, following on the heels of the mobile communications revolution, will be for the unbanked world.

What will it look like? The World Bank’s Consultative Group to Assist the Poor (CGAP) has done an initial research brief on M-PESA. The findings are that more frequent remittances – rather than visits home to deliver money by migrants – have increased income by 5-30%. More than $1.7 billion had been transferred by 7 million members in average transfers of $20 as of August 2009.

In Kenya, mobile payment systems are currently segmented by mobile carrier – as Ben explained to me, they are being used to build up commerce within networks. Meanwhile, banks are focused on mobile services only for their existing customers.

Coming back to the ground level, this is where FrontlineSMS Credit comes in. An MFI would want to easily accept loan repayments via mobile phone but would not want to only accept loan repayments through a single network – so their system interfaces with all four major networks and allows an MFI to accept and pay out money through all of them. These transactions to flow right into the MFIs records, eliminating costly and error-prone data transcription by hand.

But the same payment system could be used by any product company that wants to provide consumer credit on a product but doesn’t want to set up an entire MFI community infrastructure to collect payments.

Or for a power utility to allow customers to pay via phone rather than handing cash to bill collectors that customers distrust as being corrupt.

The possibilities created by electronic money are fairly endless.

And the application will be global. In this slide deck by Menekse Gencer of MPay Connect, the new payment systems popping up around the world are mapped. In its company presentations the start-up payment company Amaana in Pakistan notes that in that country, 50+% of the population has a mobile phone, but fewer than 5% have bank accounts.

And as Ben points out, a new wave of services will “disintermediate mobile networks by allowing third parties to create value-added mobile payment services without the permission of networks” – citing services like PesaPal in Kenya, Splash Cash in Sierra Leone, and txtnpay in Ghana. And as they do so, the data locked up in mobile networks will begin to filter out, becoming possible to integrate into information management systems widely the way that FrontlineSMS is doing diligently for MFIs.

Mobile payments are already an incredible story of innovation – which is being carried out and deployed led by Africa, long before those of us in the U.S. and Europe are using our phones to move money in quite this way. Get ready for this to blow up as quickly as mobile phones and as expansively. Nokia is rolling out its own Nokia Money service expects to reach 300 million customers in 2011.

All of the tools for innovation on this front are distributed in the hands of millions of people (literally) – people just like the innovators who started by using airtime as currency for money transfers. The future of banking will not be created on Wall Street – it will be written by coders in places like Nairobi’s new tech incubator, iHub, and by the companies noted above that are springing up across Africa.