[From Next BillionFinancial Innovation blog, 19 September 2012]
You may be tired of hearing about mobile money, but the world is not. The Google Trends chart (also see below) on M-PESA, the poster child service which launched in April 2007 in Kenya, shows that it keeps increasing market share of global Google searches. And the GSMA keeps ramping up its count of mobile money deployments across the world: today’s number is 191.
Let me dig under the hype and give a personal assessment of where things are. In this post I’ll focus on the potential of mobile money as a retail payment platform, leaving to a subsequent post the discussion of how it links to the delivery of broader financial services. I’ll highlight 10 key points: some reaffirm my hope (the good), some I find disappointing but fixable (the bad), and some fill me with deeper-seated concern (the ugly). The former points represent the key reasons for mobile money’s success, and the latter hopefully lay some markers for its future agenda.
The value of real time: Mobile money is about bringing immediacy to electronic transactions. With real time access, users feel an unprecedented level of control: they are able to act upon their money here and now. And providers can eliminate credit risk across the service fulfillment chain, which greatly facilitates its propagation: deposits and withdrawals can be accepted through loosely affiliated third party stores because cash movement between customer and store can be offset electronically on the spot.
Give them the tools: The story of M-PESA is an antidote against the natural customer-centric urge to develop specific solutions to specific needs presented by specific people. The remarkable thing about mobile money is how basic it is: you can hold electronic value, you can pass it along to others, and you can exchange it against cash. M-PESA is like a tool, a minimum viable solution. It may seem paradoxical, but the more basic the capability that is being offered, the more versatile and universal it may become.
Inventiveness at the base of the pyramid: Given the power of immediacy and a flexible payment tool, the people of Kenya took to using it with remarkable inventiveness. Marketed as send money home, it didn’t take long before people discovered that it also let you travel without having to carry cash on your person, conduct informal business with more remote counterparties, and squirrel money away for some other purpose. People figured out how to incorporate M-PESA into their routines, supporting what they’d always done.
The power of network effects: If you look at development with a broad historical sweep, much of it has to do with externalities and network effects: cities flourishing, trade routes opening up, ideas propagating – defeating distance in all senses of the word. M-PESA has demonstrated again the power of connecting people by reducing transaction costs, in this case through a national retail payments network. Once enough people move onto a new thing, the snowball effect can become unstoppable.
Operational troubles: Most mobile money systems I know are blighted by operational challenges which limit their ability to build on early successes. Their IT systems may go down with indecent frequency; their agent channel management structure may not be sufficiently scalable or adequately policed; they may be battling (internal) fraud cases; their call center may be deluged by confused customers. All this is usually the result of providers’ chronic underinvestment in systems, people, processes and marketing.
Lack of business interfaces: You’d be surprised to see how much of the formal economy in Kenya turns on checks. Yes, those non-real time, paper-based things. Mobile money systems are simply too skimpy and inflexible to suit the authorization, traceability and business analysis requirements of modern firms. They lack the kind of interfaces that would let developers, business consultants and system integrators work with corporate clients to adapt mobile money to their needs, which would entrench mobile money more firmly at the heart of the (formal) economy.
Unrealistic expectations: It is a gargantuan effort to rally sufficient numbers of people into simultaneously adopting new ways of doing things and moving onto new digital platforms. But the shining case of Kenya, the hype surrounding mobile money which feeds on the tiniest flashes of success uncovered anywhere, and the sudden interest of the payment majors all conspire to create a false impression of the mobile money business as a natural extension of mobile operators’ core business.
Unsupportive regulation: Many regulators are inflexible and refuse to see how new technologies and business models transform the nature of risks involved. Policy agendas may be conflicting: for example, the need to appear tough in the global fight against crime and terrorism causes many regulators to insist on unreasonable account opening procedures which dissuade millions from leaving the cash economy. And policymakers may be pressured to protect banks from competition from others with disruptive models.
Closed-loop systems: Reaping network effects requires building a platform for growth. Most operators simply do not have the size to pull it off. Consider a mobile operator with 40 percent market share in an African country with 50 percent mobile penetration. If half its customers used mobile money, that would constitute a payment network spanning only 10 percent of the population (40%x50%x50%) – not terribly useful. Systems need to interconnect so that they can reach everyone.Most accounts are empty. While mobile money has demonstrable utility as a money transfer and collection mechanism in developing countries, the stark reality is that most digital accounts hold little or no value. This will severely limit the scope for electronic payments to spill over into daily life, because people have a natural tendency to want to pay at local shops in whatever form they keep their money. As long as people eschew electronic storage of value, cash will continue to rule.