[From #access, May 2014 issue, published by IFC under its Parternship for Financial Inclusion program]
Q: What do you think are the most important trends in mobile financial services at the moment?
We clearly see pent up demand for remote payments and a lot of confidence in electronic payments. That’s not a problem. There is an immediate value proposition to customers in terms of convenience for remote payments, being able to send money to family far away for example, and there are no big trust issues. What’s missing is digital money as a way of storing value. Many accounts are empty, just used for payments. It’s a more efficient way of transferring cash, but it’s not changing behavior. The challenge now is to get people to leave money on their electronic wallet. The more money people store electronically, the more electronic payments they will make at the local shop. I see it as a virtuous cycle, and we need to get into that cycle.
Q: How do we get there?
My hypothesis is that we need the e-system to replicate the way people think about money, and the way people do that is by separating it into different pots. Different pots for different purposes. People don’t keep all their money in one place, mentally and likely also physically. As it is now, digital accounts don’t give people sufficient sense of control over how they separate their money out. We don’t have a way of doing digital pots, conveniently and intuitively. That’s where the challenge is.
Q: If this is what customers want, then why are market players not providing this yet?
A lot of providers care primarily about profitability, which is in credit and payments, not in savings. But if you can’t capture savings, you will get much fewer payments; and if you only capture a few remote payments and little savings, you gain little insight which you can use for credit scoring. Savings is the engine that drives payments and credit. Most institutions are going for direct profitability rather than the engine. We also need to design a system with multiple accounts on the phone, similar to internet banking. We need to develop apps that are user friendly. This is difficult to do with the simple mobile phones, but now we can start thinking in terms of smartphones. Smartphones are not sufficiently cheap yet, but they will be in a few years. If people know that they can use a smartphone to control their finances that might well be a reason to buy a smartphone. We don’t have to wait for smartphones to be everywhere before we start figuring out how to use them for financial services; we can actually help to make the shift happen.
Q: Do you see any developments in the current market towards these kinds of applications?
I don’t see a huge amount. I am working with an institution that is trying to use the notion of sending money to self, me-to-me payments, which is a way of helping people to separate money without having to open several accounts. I can send money, for example, to my own account at the end of the month when I need to pay school fees for my children. Or I can send money to Friday this week, when I want to pay off my microcredit.
Q: What will it take for an African microfinance institution to successfully implement mobile financial services?
In general, as a small institution you can’t afford to build your own mobile financial services platform. You need to be more reactive and engage with a system that already exists. As soon as there is a viable mobile money system, engage with that particular system in a constructive way. Not just as a client, but to add value, for example through agent management. Microfinance institutions should also look into going cash-less. If I were a microfinance institution I would be very keen to take cash out of the system as a way of adding customer convenience, gaining real time information on all operations, minimizing working capital requirements, and reducing fraud.
Q: What do you think are the big issues regarding regulation of mobile financial services?
There has been much progress in many countries, but causing change is difficult because regulators tend to converge to the mean and few want to stick their head out, and do something different. The regulatory barrier is too high for the smaller private sector players to respond to the opportunity. For example, cash-in/cash-out functions should not have to be handled by agents of banks. This is the biggest regulatory hurdle. If a bank or a mobile financial services provider has to own the cash-in/cash-out system, then it can only be for large players. I should be able to do a small start-up, but it’s difficult when you have to set up a cash-in/cash-out network. There is no reason for this as cash-in/cash-out is not touching bank money. There is no difference between this and walking into a store exchanging cash for rice or exchanging your 100 dollar bill for however many pennies you want, and you don’t need a specific license for that. Anyone should be able to do cash-in/cash-out as long as they have money in their bank accounts to trade against cash, and anyone should be able to do it for all mobile money operators. That’s not to say there couldn’t be a license to do it still, motivated by consumer protection concerns. Licensed cash in/out networks might be required, for instance, to post tariffs at all their outlets and have a call center to capture customer complaints. But the market should be open for everyone, and once I am licensed to be in the cash in/out business I should be able to do cash in/out for any financial provider with whom I have an account.
Q: What made M-Pesa such a success and what would it take to replicate such success in other markets?
The lack of a rigid regulatory framework helped a lot. Another big factor was its size. M-Pesa’s customers don’t individually do that many transactions, but it has a hell of a lot of customers. Most players are not that big and that’s why it’s been difficult to replicate. You can reach scale in two ways; either by getting many customers or by getting your customers to do many transactions. If you’re small, you need to offer more services. M-Pesa also thought it out very well and executed flawlessly. The proof is that in the first couple of years they didn’t need to change a thing. Everything was right. In many other players, I don’t see the same quality of business. The other way to achieve viable scale, if you are not a big player like M-Pesa, is to work together. If you have 25 percent of the market you are too small to do it, but if you get together with three other players that also have 25 percent of the market then you collectively have 100 percent of the market. You don’t need to be large independently; you just need to work together. Unfortunately, many players are precious about going it alone.
Q: Why is that the case?
It goes to the reason why they do this. MNOs are not doing it necessarily to get into a new payments line of business, they are doing it to increase their market share in their core communications business. They want to maximize their part of the pie. It’s about getting an edge on your competitors, about gaining advantage. For banks it is difficult to rethink their model of a direct relationship with the customer, which is so ingrained in banking. Banks are not at all comfortable with franchise models. Coke has a great relationship with its customers wherever someone buys a Coke. Banks don’t think in those terms. They should move from direct distribution to indirect distribution. But it’s like moving from a tricycle with support wheels to a bicycle, in the early days it feels very wobbly and uncomfortable. It’s a control thing for banks, it’s in their DNA.
Q: Where will mobile financial services be in 5-10 years?
In my mind, it’s not possible to overhype the potential of mobile money. It’s clearly the way things are moving. Money wants to get off the paper the same way that music got off the disc and news got off print. It will happen. What you can easily overhype is the progress we have made so far against that vision. We know what the future will look like, but it´s not clear how quickly we will get there, who will take us there, and how. In my view, and it might change, it will happen with a start-up, not an existing player. Someone Amazon-like. It will happen by disruption rather than reinvention. In a way that’s what happened with M-Pesa. It was not an existing player. I don’t think it’ll be an MNO though, but rather someone from the internet space. Once smartphones are more widely available, that’s when it’ll happen. Currently, internet providers are too dependent on MNOs, which is another huge barrier. Also, if players weren´t required to set up their own cash-in/cash-out systems by regulation. The way it’s set up, it dissuades the visionary Steve Jobs out there. The vision is really possible, but we need to reduce barriers to innovation and competition. We´re only at half time.