[From IMTFI blog, 21 October 2013] 

Myths as retrospective reinterpretations

Every movement has its founding myths. These stories are rarely manufactured during the early struggle to catch attention. Rather, they develop at the onset of success, and tend to be retrospective reinterpretations designed to give a greater sense of purpose and method to what happened along the path to success. Myths generally have a strong basis of fact, at least initially, but they always play very selectively with those facts, and usually get disconnected from the facts through noisy repetition. Never let the facts get in the way of a good story. Founding myths serve to give a sense of inevitability of outcome; to create a sense of order in the inherently chaotic process of challenging and innovating; to create inspiring figures (individuals, organizations) that others can seek to emulate. In modern parlance, we call them case studies.

Mobile money is now cool, and it has attracted many of the trappings of a movement. Never mind that it’s just applying the logic of prepaid cards and internet banking on mobile phones, which are the only digital devices that most people in developing countries happen to have. In a cold business analysis, mobile money is simply the application of a secure, real-time, digital infrastructure permitting banking o shift from costly direct channels (branches, ATMs) to much more distributed indirect channels (stores as agents) and even to self-service (mobile) channels.

So what are the founding myths of mobile money, those origin stories which have inspired the industry? I would say there are two: agent banking in Brazil (even though agents tend to be connected through bulkier point-of-sale [POS] terminals rather than mobile phones, but that’s just a technicality because POS terminals carry a SIM card within them), and Smart Communications’ mobile money service in the Philippines. These two aspects, plus excellent messaging of customer benefits, are the three legs that Safaricom stood on to build its wildly successful M-PESA service in Kenya.

The early Brazilian experience

A critical enabler or component of mobile money is the conversion of cash to electronic value through non-bank retail outlets, and here Brazil is touted to this day as the poster child. Agent banking regulations date back to 1999, and by end-2008 (the dawn of the M-PESA era), Brazil had over 140,000 agents (correspondents, to use their term). Sure, Brazil is a large country, but not even Kenya today comes close to that. Here we see the key ingredients of a founding myth.

One element of myth-making is the injection of purpose. What the Central Bank of Brazil sought to do with its agent regulations was not so much to create new channels but rather to find a place within the law for a constellation of existing semi-formal and outright informal players who resold or brokered bank services to clients. The central bank was driven by consumer protection concerns (clarifying obligations and responsibilities across existing players) rather than by aspirations of financial inclusion.

Equally, banks did not see agents as a way to offer more convenient service to existing customers or to seek out new ones, but largely as a way of getting non-customers out of their banking halls. That’s because of an unusual provision in the Brazilian banking law, which stipulated that bill payment was a banking service and hence could only be conducted at banking outlets. Banks largely sought to shift this mass of bill payers onto non-bank retail outlets while respecting the letter of the law – agents, bingo! By end-2008, 75 percent of agent transactions were still bill payments, and only 5 percent were deposits.

Another element of myth-making is the misleading interpretation of data. Of those 140,000 agents in end-2008, only some 37,000 offered cash in/out services. The rest were a plethora of brokerage services for loans, mortgages, pensions, insurance and such. And two-thirds of these 37,000 I’d be hard pressed to count as a novel kind of retail agent. This figure includes the lottery houses, directly owned by Caixa – no arm’s length there. And it includes the post offices which Bradesco was running as a postal bank – as if postal banks didn’t have a long tradition elsewhere. If you exclude these agents, you are left with far fewer agents than there were bank branches (circa 19,500) at the time.

The early Philippine experience

Now onto the mobile phone. Smart Communications is rightly credited as being the daddy of all mobile money systems in developing countries, launched in 2001 and hence predating M-PESA by an impressive six years. Smart Money was the first operator to create a secure platform permitting customers to access a bank account securely from any mobile phone. Smart Money was much celebrated in its day, but its shine has now worn off, largely because of its paltry performance compared with M-PESA.

Was the touted success of Smart Money a mirage? No, it’s simply that Smart Money was not intended to be what later mobile money enthusiasts have wanted it to be. Smart Money was conceived not as a person-to-person money transfer system but rather as a mechanism to broaden the base of electronic airtime distributors across the operator’s customer base. Here was the thinking: if customers’ prepaid airtime account could be linked to their bank account, they would be in a position to buy as much airtime as they needed, on the spot. Combine that with the ability that users already had to transfer airtime to each other, and now any Smart Money user could become a Smart airtime reseller – in the process earning airtime commissions, which have historically been very high in the Philippines.

So Smart Money was designed as an enabler for airtime distribution, rather than as a consumer product in its own right. The design implication was that a cash in/out network was not so important: the money would come from linked bank accounts rather than from cash, there would be little cash-out since the money would go primarily into buying airtime, and in any case juicy airtime commissions to business-minded customers would compensate for any inconvenience from having to go to a distant or crowded bank branch to deposit cash. But precisely because Smart Money (and G-Cash, which came after it) underplayed the importance of the cash network, transitioning it to a consumer product à la M-PESA proved very difficult.

Their enduring legacy

All this is not to downplay the importance of Brazilian agent banking or Smart Money as precedents for what has come later in branchless banking. Their significance will be better understood if we look at them from the lens of the problems they were trying to solve at the time, rather than the problems we wish they had been trying to solve. If you don’t do this, you’ll be puzzled if you go to Brazil and notice the low level of banking (non-bill payment) transactions still happening through its agents. And if you go to the Philippines, you’ll be surprised to find so few people who send mobile money to each other. It’s only fair that we tell their story their way. My respect goes to them – and to M-PESA which was the first to combine these two stories –the agent and the mobile side of things—to great effect.