Making mobile pay

By Sean Jackson

Last year, despite the advancing global economic malaise, mobile financial services gained traction-particularly in developing countries. From enabling m-payments via SMS, to full internet banking via a smartphone browser, it looks like we’ll be seeing a lot more mobile money in the future.

The worlds of mobile and finance have long-been converging. Even so, clear distinctions look set to remain. Once upon a time, much was made of a future that would see mobile network operators becoming financial service providers. It was promised that consumers would be buying all manner of products from all manner of sources using just their handsets, with the charges appearing on their monthly phone bill.

Cellular carriers were advised that they could play an integral role in our personal finances. Person-to-person and person-to-merchant mobile payments and transfers becoming commonplace sounded the death knell for credit and debit card providers alike. It was fanciful stuff of course. For a host of well-documented reasons, chief among them being regulatory barriers, the encroachment of cellular players into finance has not happened in the manner or to the extent that were once predicted.

Mobile financial services fall into two distinct camps; additive and transformational banking. Additive banking describes services targeted at markets that already have traditional financial services at their disposal. It is effectively an extra channel to market for the banks to reach their customers and, as such, provides carriers with opportunities to generate greater ARPU due to subscribers accessing and obtaining information from their existing accounts via SMS or other data channels.

Transformational banking refers to the practice of extending banking and payment services to those people who do not have ready access to banking facilities. This market or group of people is often referred to as ‘the unbanked’ and is primarily located in developing markets. Large migrant workforces in so-called ‘developed’ economies often fall into the unbanked demographic.

Transformational banking is currently grabbing a good deal more column inches than additive banking. In May last year the GSM Association’s inaugural Mobile Money Summit in Cairo highlighted the steady traction the industry is gaining in terms of developing and providing mobile banking, payment and transaction services, including mobile money transfer and the increasingly important remittances market.

In the last 18 months, pilot schemes and service trials, as well as commercial deployments, have taken place in many markets. The opportunity in mobile payments and banking services becomes obvious when analysing the existing gap between mobile penetration and banking penetration.

“Transformational banking has much more appeal in developing markets because it is satisfying a need. There is a latent demand for this type of service due to the number of unbanked mobile subscribers. This situation has arisen as the mobile penetration has increased dramatically over recent years whilst traditional bank account penetration has remained very low,” says Humera Malik, director of product marketing at mobile payment specialist Redknee.

Malik believes that people are often more willing to trust their mobile operator with their cash than a traditional bank. “The service provides a huge difference to these people’s lives due to the level of convenience and security provided. In developed markets the situation is very different. A transformational banking service is not necessary as there are sufficient traditional financial services products to suit everybody’s needs. It simply provides a novel alternative to the existing banking services,” she says.

“A few years ago when we moved our development centre from India back to Europe, we made a big push to the European market,” says Stephen Gibb, CIO of payment firm Upaid. “We had a project with Visa International and we had other advancements with other major players. But what we have learnt, I feel, is that there is not the same need in developed markets because there are so many more ways to pay for things. That’s not to say it will never happen, that it won’t become ubiquitous and people won’t find it convenient, but there is a greater need in geographies and economies where the financial networks aren’t provided by traditional methods.”

The theory runs that, in time, as consumer trust in services grows, people will feel comfortable keeping a reasonable sum of money stored virtually, accessible via their mobile phones, which means a substantial sum of money will be in the system. Operators will then also have the opportunity to earn interest on, as well as benefit from investing the money available in the system, much as traditional high street banks do with customer deposits.

Furthermore, mobile banking and payments services can also help operators in retaining customers (even the low-end prepaid subscribers) and in reducing subscriber churn. This means opex savings for operators in terms of what they need to spend on marketing and promotional activities.

“There are many different models of how banks and operators work together and that we licence,” points out Hannes van Rensburg, CEO of payments firm Fundamo. “There is the one to one relationship, where one bank and one operator work together to provide a service, there is the one bank many operator model, which is independent of the carriers used, then there is the one operator many bank mode with specific applications and then there is the many to many which could be a country facility or hub.”

For banks, the main driver is the need to increase their reach and penetration. In a bank-led mobile payments and banking services model the operator’s role is likely to be that of secure communications provider working in partnership with the bank to ensure that applications and mobile devices are interoperable and can provide the required functionality to operate the mobile services offered.

Regulators have to play a very important role to ensure fair and secure deployment and operation of mobile payments and banking services. This includes establishing public confidence and awareness for services, keeping criminals out of the system, bringing the unbanked and under-banked onboard and preserving system integrity.

However, the downside is that regulatory hurdles can delay and even prevent service deployments by impacting on the ability of players to provide services and form partnerships, as well as in selecting the markets and locations for service provisioning. Also, the regulatory environment often differs from one market to the other and so a “one size fits all” approach cannot be implemented for service deployment in different markets. Further, there can be delays due to instances where current regulations do not cater for a new technology solution.

Banks at the moment are not totally comfortable with mobile operators entering into their domain to provide mobile banking services. This is despite the fact that the primary target audience for mobile banking services are not the customers of banks, but the unbanked low-income population in remote areas that banks have not managed to address.

A lot of this unease among banks stems from the realisation that mobile penetration is significantly higher than banking penetration in most markets. Therefore, banks fear that the greater reach and penetration of operators may enable them to emerge as strong competitors.

Also, in markets where operators are working in partnership with banks to introduce mobile banking services, they are finding it hard to achieve their time-to-market ambitions. This is because in contrast to operators, banks take longer to evaluate and introduce new services. Time-to-market happens to be a more sensitive and critical consideration for operators than for the banks. In addition, there are commercial issues to resolve, including service branding and agreement on who owns the customers.

Fundamo’s van Rensburg feels neither banks nor MNOs fully understand the mobile financial services: “It is a discipline that sits between banking and telecommunications and it has characteristics of both. It must be very rigorous because it must conform to regulatory dispensations, you’re working with people’s money so the integrity is essential. On the other side, you’ve got to move fast, the kind of volumes that you work with, time to market is critical.

“You’ve got to be flexible in terms of changing your fee structures, these are much more telecommunications type things. You have to teach banks a lot of things and you have to tech MNOs a lot of things, or they have to learn it themselves, these things do not come naturally for either party,” he says.

Another key barrier to service adoption, especially for mobile remittance services, is the high commissions and charges customers end up paying for using the service. Western Union, as part of the GSMA’s mobile money transfer initiative, has been working with mobile operators to accelerate the deployment and launch of services. However, the fees currently charged can be as high as 15 per cent of the total remittance value in certain countries. Customers feel reluctant to pay such high fees and this is a barrier to mass-market adoption of such services.

Though, analysis released in the summer by Juniper Research pointed to a rapidly evolving market for money transfer and remittances via mobile phones, forecasting that in excess of 100m users globally will use their mobile phones to make international money transfers by 2013.

Informa Telecoms & Media believes that to enable quick and mass market adoption of mobile banking, transaction and payment services, industry players will have to ensure that the necessary elements on both the supply and demand sides are in place. On the supply side, this will include providing the necessary technology, regulations, security and ecosystem alignment and identifying the right suppliers at the early stage. On the demand side, issues including service availability and market awareness, competitive pricing, ease of use and security for consumers.

“With mobile payments, a lot of it is creating a community,” points out Upaid’s Gibb. “There has been lots of talk about walled gardens and that sort of thing. A lot of is has to do with breaking the walls down between the telecoms, financial services and merchants.”

The user experience of services on handsets is an important factor that can impact on service uptake and usage. It is important to remember that many people in the targeted low-income and unbanked population segment in emerging markets happen to be less educated and literate. Therefore it is important to ensure a very intuitive and easy user interface to the services on handsets.

It is important to make sure that necessary regulations are in place to protect consumers and prevent money laundering, fraud and illegal practices. However, while doing so, regulators should be careful not to stifle innovation, competition and the ability for mobile operators and service providers to offer services.

To avoid regulatory hurdles and delays, companies planning to deploy mobile payment and banking services should engage with regulators as early as possible, show financial stability and demonstrate a sound business case and integrity. Also, getting development organizations like the Department for International Development involved can help in getting faster approval from regulators.

Transformational banking may be grabbing more of the headlines, but according to Juniper Research, the number of mobile phone subscribers that use their handsets for additive mobile banking transactions will exceed 150 million globally by 2011.

A recent Juniper Research report determined that the mobile banking market is currently most advanced in the Far East, but that growing numbers of mobile banking services are being offered in North America and Western Europe. The developed nations of the Far East, North America and Western Europe are forecast to account for over 70 per cent of the user base by 2011.

Report author Howard Wilcox gives more details: “Transactional or ‘push’ mobile banking is being offered increasingly by banks via downloadable applications or the mobile web, complementing existing SMS messaging services for balance and simple information enquiries. Mobile banking is a key element in banks’ distribution channel strategies as they compete to attract and retain customers.”

The Juniper report highlights the extra user convenience as a key benefit. The mobile phone is the device that people-especially Generation Y-will not leave home without. Mobile banking is an addition to the wide choice of applications and services that they can access through their handsets to make life easier, especially via smart phones such as the iPhone reckons Wilcox.

However the report identified several factors that will need addressing to really foster market development including financial regulations which vary from country to country, application slickness, and security. Whatever the reality of the strength of the security, it is the perception and image in the mind of the user that dictates whether they will trust the service.

The mobile banking, transaction and payment services industry is still quite fragmented and at a nascent stage. Standardisation will start to happen as more commercial services are deployed. Longer term, it seems likely that hybrid forms of ecosystem will evolve, in which financial institutions (banks, microfinance institutions and credit card companies) in partnership with mobile operators or service providers will offer a range of services which may resemble either the bank-led model or the operator-led model.

The lesson, as is so often the case when it comes to much touted mobile services, is that carriers much exercise a certain amount of patience. “I think what we have learnt in the last year is to take a more gradual approach,” says Stephen Gibb of Upaid. “I think when we first started, I think we were extremely evangelical. We spent our time being evangelical to the operators and banks, we partnered with people like Visa and IBM to give us name credibility and that is all good stuff to do, but it was tough. So we’re being more gradual by trying to integrate into people’s exiting business and then add applications on top of it, rather than coming along saying ‘we’re the future, come with us’.”

Whether or not people go with the mobile banking community, only time will tell.

Transformational Banking

M-Pesa is arguably the most widely known transformational banking service. Safaricom launched M-Pesa in March 2007. The number of registered subscribers increasing to 4.14 million at 30th September 2008 which represented a doubling of the base in the six month period and a year-on-year growth rate of 650 per cent.

New subscribers continued to sign up for this service at a rate of 13,800 per day during September. Person-to-person transfers grew during September 2008 exceeding Kshs 9.6bn (£87m) in the month. This represents a tenfold increase over the same period last year. Total transaction value during September 2008 was Kshs 28.6bn compared to a value of Kshs 3.1 bn in the previous year. Cumulatively the service has now transferred over Kshs 50bn since its introduction.

M-Pesa users need to have a Safaricom SIM card and ID to register for the service, but they do not need to have a bank account. M-Pesa users have a PIN and a password to ensure that access to their account is secure.

Registration, money deposit and collection take place at M-Pesa agents, typically Safaricom dealers, other retailers-such as supermarkets and petrol stations-and banks and microfinance institutions.

Users are charged a transaction fee of Kshs 30 to send money- Kshs 100-35,000-to another registered M-Pesa user. Fees are higher for sending money to a recipient who is not a registered M-Pesa user, ranging from Kshs 75 to Kshs 400, depending on the size of the transfer. Registered users pay a fee of Kshs 25-170 to withdraw cash, and there is no fee for depositing money. Customers can also use M-Pesa to buy airtime.

Safaricom and Vodafone have not released figures for the revenues they earn from M-Pesa fees, but the service is clearly an important potential revenue generator. The five-year agreement between Safaricom and Vodafone specifies that Vodafone receives 32.5 per cent of Safaricom’s annual revenue from M-Pesa fees.

Safaricom has also set out plans to add applications to M-Pesa. One new application would enable users to pay utility bills via their mobile phones, though it would be available only to postpaid subscribers. Safaricom said that it also planned to enable users to move money electronically between M-Pesa and their traditional bank accounts.

In addition, Safaricom has trialed a bulk-payment service, Kwachua, which enables companies to deposit money into a corporate M-Pesa account and make payments to multiple recipients using the internet. The service has many potential uses, including paying wages to mobile phone accounts. Safaricom also signed a deal with Postbank, Kenya’s post-office-based savings organisation, to expand M-Pesa’s distribution network. Customers would be able to deposit and withdraw money from M-Pesa at Postbank branches.

Though some people are using M-Pesa as a means of storing money, both Safaricom and Vodafone say M-Pesa is not a banking service, since it offers no banking products, such as long-term loans or interest-bearing accounts. Safaricom would need a banking licence to offer banking services and would be subject to the associated regulation and scrutiny.

In February last year, Vodafone launched the offering in Afghanistan in partnership with Roshan, the country’s biggest operator, under the brand name M-Paisa. In April, M-Pesa became available in a third country when it was launched by Vodacom Tanzania.

No figures are available for the take-up of the Afghanistan and Tanzania versions of M-Pesa, but Vodafone said that at end-July there were about three million registered users of the service in the three countries in which it is available. Given that there were 2.72 million users in Kenya alone at end-May, take-up in Afghanistan and Tanzania appears to be low, though the service is new in both countries.

The apparent success of M-Pesa has encouraged other operators to introduce their own versions of the offering. Safaricom rival Celtel Kenya launched mobile-money-transfer service SokoTele shortly after the debut of M-Pesa, in partnership with a local bank, K-Rep. Tanzania’s number four operator, Zantel, launched a mobile-money-transfer offering in April to coincide with the launch of M-Pesa by Vodacom Tanzania. Etisalat has also said that it is developing an international mobile-money-transfer service in India, in partnership with Tata Communications and HSBC.