Airtime as Remittance: Good Deal for the Poor?
Thursday, April 17, 2008
By Mark Pickens
The New York Times recently highlighted the work of Jan Chipchase, a Nokia researcher trying to understand how the poor use mobile phones. The article includes a report that Ugandans are using prepaid airtime as an informal money transfer mechanism, particularly to get value back to family in rural areas.
“Ugandans are using prepaid airtime as a way of transferring money from place to place, something that’s especially important to those who do not use banks. Someone working in Kampala, for instance, who wishes to send the equivalent of $5 back to his mother in a village will buy a $5 prepaid airtime card, but rather than entering the code into his own phone, he will call the village phone operator (“phone ladies” often run their businesses from small kiosks) and read the code to her. She then uses the airtime for her phone and completes the transaction by giving the man’s mother the money, minus a small commission.”
We’ve seen this in many countries, such as DRC (several reports on this as far back as 2005) and more recently stories of overseas Kenyans using airtime to send value home to family members in need during the post-election turmoil.
While undeniably innovative, it also shows how sub-par other money transfer options are which the poor have available to them. Prepaid airtime as a currency substitute is incredibly costly in percentage terms, due to:
- VAT deducted from the purchased value. e.g. If the VAT tax is 10%, one pays US$ 5 but receives $4.54, or alternately in some countries you receive the face value, but pay 10% more. Some countries also levy excise taxes on mobile operators – in Pakistan, its 10% on top of 16% VAT.
- The mobile phone company’s commission, which is hidden, but definitely built-in to the asking price
- A commission for whoever turns it back into cash (in the Uganda example).
We estimate the all-in cost from the Uganda example at at least 25% of the value sent. That’s quite high, and not all that far off from the high fees Western Union has been lambasted for charging with small value transfers. To us, its a good marker for how much people are willing to pay to avoid their other options. These could be even more costly, especially if risk-adjusted, e.g. to account for the possibility of money lost when sending money with people. And other means also come with the hard-to-quantify but very real “worry factor” of waiting days or even weeks to know if the money arrived.