Big Idea: Why Hands-On Regulation of Mobile Money Could Be Dangerous
Success has many fathers, but it also attracts critics. Jamie Zimmerman and Sascha Meinrath, of the New America Foundation, recently authored a column in Slate suggesting that the cost of Kenya’s mobile money system, M-PESA, is hurting rather than helping the poorest of the poor. They chose an inauspicious time to advance this claim. Just a few days before M-PESA’s transaction fees were slashed as the growth in the system’s volume has allowed its owner, Safricom, to operate on progressively lower margins per transaction.
But Zimmerman and Meinrath’s suggestion is to take a ‘harder look at the systems that create and control access to these tools.’ Zimmerman and Meinrath’s suggestion that greater regulation of the sector is the key to serving the poor is not only incorrect – I think it’s potentially dangerous. From my own experience building tools to advance use of mobile payments in rural areas and by NGOs, I’d like to take the opportunity to illuminate what some of the barriers really are and highlight some innovations that are bringing the benefits of mobile money closer to the poorest of the poor.
There’s a very simple imperative driving the tariff structure and every other decision that determines access to mobile money: cost recovery. This is more than a cold-hearted calculation by mobile network operators’ accountants. If rural mobile money agents, who generally operate as independent contractors, cannot profit from this role, there will be no rural agents and no mobile money service. This accounts for the relatively high costs of withdrawing small amounts of money from M-PESA. Almost all mobile money systems, even growing ones, are still loss-making propositions for their corporate owners, and it will take continued growth to enable costs to come down further. If reaching critical mass requires starting with wealthier customers who can pay higher prices, so be it.
To the extent that absolute costs are a barrier to the poor, phone access is perhaps the most important inequity to consider. Innovative companies like Movirtu and Comviva help the poor sidestep the cost of buying a phone and SIM card by enabling mobile network operators to create ‘virtual SIM cards’ that enable even the absolutely destitute to create a mobile identity and access it via a PIN code on any phone on the network. They can then use this to talk, text, receive funds or conduct any other mobile business. Operators are starting to perk up to the opportunity.
Where mobile money transaction fees cannot be reduced without undermining the system overall, the focus must shift to how mobile money can create greater value for the poor at the existing cost structures. Greater value can lead to greater use, and in turn can bring down costs in the long run. This is where my former organization, FrontlineSMS:Credit, comes into the picture, among many others.
By getting local savings and credit organizations set up to receive microloan repayments via M-PESA, FrontlineSMS:Credit helps the poor avoid long and costly bus rides to repay loans in cash and potentially avoid cash-out fees entirely (forwarding remittances on to repay a loan). With tools to manage M-PESA payments, businesses with rural distribution chains can increase reach and offer life-saving and productive products to more people. These approaches are cost-effective even with existing mobile money tariffs.
There are certainly ways that mobile networks can innovate to better serve the poor. An example is affordable micro-payments to enable the very poor to access things like microinsurance or pre-paid water or energy services in line with their cash flow.
M-PESA has taken a big step forward with its newly-announced $0.04 fee for transfers of $.012-0.62, but this is just a start. Micro-payments could be made cheaper where there’s an ongoing relationship with the receiving entity. For example, the fees for 10 micro-payments to a microfinance institution could be rolled into a single fee debited from the receiver’s account. There is a need for effortless micro-deposits (deposits are already free but take time) to make it possible for a mobile money account to store the few cents in extra income that a poor person might have at the end of the day.
Where M-PESA falls short, I expect that other mobile money systems in Kenya or elsewhere in Africa will eventually succeed and demonstrate how to serve progressively poorer income segments. How this will be done, who will do it, and how it will be sustained, remains to be seen and represents the next chapter in mobile money.
This is why Zimmerman and Meinrath’s suggestion that mobile money needs hands-on guidance from regulators in order to benefit the poor is potentially dangerous. India provides just one cautionary example of how attempts at ‘pro-poor regulation’ oriented around universal service mandates have created grinding failure, in areas like banking penetration and rural electrification. And the requirement to link mobile payments to non-existent bank accounts, ostensibly to promote financial inclusion, may forestall mobile money from reaching millions of people there.
Nobody yet knows how to make mobile money work for the poorest of the poor. Mobile money is not inevitable and platforms will grow based on innovation centered on their respective and unique markets. Financial support for mobile money, like that provided by the Gates Foundation to operators in Africa and Asia, provides room for experimentation and reaching critical mass. But regulatory demands would simply bleed the momentum out of M-PESA’s emulators. The result will be the poor would not benefit from the vast landscape of mobile money deployments on which these crucial innovations will be configured.