Mobile Money- What s next?

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1 Mobile Money- What s next? Christoph Stork researchictsolutions

2 M-Apps One of the most exciting functions of mobile phones in recent years has been Mobile Money Linked to MM is m-trial balance m-inventory control m-insurance

3 Economic Growth / Jobs Savings Banks Investment Financial Intermediation (core economic function) Private sector needs capital to expand Saving is good for the economy: lower inflation cheap capital for banks

4 Africa s Plight Salary Banking Sector Same day out Bank fees for deposit and withdrawals Fee structure is a disincentive to leave money in bank Deposit fees prevent banks from getting cheap capital - (making money with the interest rate spread) Why would informal businesses or poor people put money into an account if charged for depositing and withdrawing?

5 Access to capital remains biggest obstacle for informal businesses... mostly through family and friends Micro finance only works on peer pressure (eg village banks, not suitable in urban areas) Informal money lenders are very expensive Even formal banking for the informal sector is very expensive: Bank in Kenya provides daily loans to market women at 20% a day eg

6 Obstacles to serve informal sector and the poor profitably Cost asymmetries: Cash expensive for banks but cheap for informal businesses Manpower is expensive for banks but micro-credit is very manpower intensive Information asymmetries: Lack of transaction history Inability to demonstrate profitability of cash

7 Informal businesses It is risky for banks to serve informal businesses The ability to repay loans is unknown to banks due to lack transaction history Lack of collateral Lack of bookkeeping skills No inventory systems Lack of business plans

8 Conventional Banking Sende go to bank pay deposit fees Bank Account 24 hours Bank Account Mobile Banking go to bank or ATM withdrawal fees Receive deposit fees Bank Account 24 hours Mobile Money a few minutes Bank Account go to bank or ATM withdrawal fees Receive deposit fees Cash from agents or spend directly withdrawal fees

9 Example Individuals 15+ Uganda

10 Nationally representative household survey 2011/ household heads 1200 randomly selected individuals Census methodology

11 Ugandans 15+ that % 15.2% 13.9% Own a Mobile Have a Bank Account Used Mobile Money

12 Reasons why not using MM DISAGREE ARE NOT SURE AGREE Agents are to far away from where i live I use other means I do not have a mobile phone I do not know what mobile money is No need It is too complicated to use I do not trust mobile money 23% 37% 40% 49% 51% 26% 36% 60% 56% 56% 36% 31% 30% 30% Mobile money is too expensive 29% 28%

13 Ugandans 15+ that use MM Comparing Mobile Money to other forms of sending or receiving money Ease of Use Safety Trust Convenience Speed Cost easier same more difficult 86% 11% 2% safer same less safe 73% 16% 11% more trustworthy same less trustworthy 60% 29% 11% more convenient same less convenient 69% 21% 10% faster same slower 83% 11% 6% cheaper same more expensive 65% 22% 13%

14 Example informal businesses in Uganda

15 Nationally representative informal business survey 2011/ business owners 86.4% informal 12.9% semi-informal 0.7% formal Census methodology 0.7% 12.9% Informal formal Semi formal 86.4%

16 Businesses that... Use mobile phones for business 68% Send or receive money via mobile phones 17% Business with dedicated business bank account 6% Using private bank account 16% Having a loan among businesses with bank account 19%

17 How was the start up capital financed Own Savings 80.7 Lending from Friends or Relatives 8.2 Micro finance loan 5.6 Bank 5.6

18 What means of sending and receiving does the business use Send cash with someone 81% Bank 17% Mobile money 16% Western union/moneygram etc 2% Post office 1%

19 The business uses mobile money for... Payments from customers 65% Paying suppliers 63% Paying bills 26% Paying employees 22% Paying taxes 8% Paying insurance 1%

20 MM transaction fees in Uganda Cash in Transfer Cash out

21 Comparing transfer costs of MM transfers including cash in and cash out in Uganda US$ USD 50 USD Registered to registered users Registered to nonregistered users Registered to registered users Registered to nonregistered users MTN MobileMoney Airtel Money UTL M-Sente Not allowed % % Not allowed % % % % % % % %

22 omparing transfer costs of MM transfers including cash in and cash out in Kenya US$ 1 USD 50 USD Registered to registered users Registered to nonregistered users Registered to registered users Registered to nonregistered users M-PESA Airtel Money Yu Cash Iko Pesa % % N/A - N/A - N/A % N/A - N/A % % % % % % % %

23 Mobile money is great but please make it free

24 Key is getting the incentive framework right Mobile Operators poor / informal Retailer s & Banks

25 Back to Basics African banks make their money to a large extent from fees Deposit fees limit the money banks can raise cheaply (savings are cheaper than central bank) Instead banks should be making money through their core value proposition i.e. financial intermediation, channeling savings into productive investments Removing bank or MM fees for deposits, withdrawals and transfers would provide banks/operators with: cheaper access to capital higher transaction volumes better tools to assess the creditworthiness of their customers

26 No transaction cost Proposing an alternative to the current formal banking system and MM agent model Transacting electronically as convenient as cash... and for free Instead of agents charging fees, banks can offer agents interest bearing bank accounts

27 Banks Replacing cash transaction with electronic ones would build up transaction histories Overcoming information asymmetry (lack of knowledge of customers) Overcoming cost asymmetries More transactions = transaction histories More customers More money in the system capital for banks to lend cheaper than money from central bank

28 Retailers / Agents Getting cash from sales into bank instantaneously and safely Earn interest on money in the bank eg Pick and Pay South Africa = free ATM: free Nedbank withdrawals money deposited directly into its bank account

29 Who benefits: Informal businesses Operators/Banks can provide accounting to informal businesses (eg. Mobipay for farmers in Kenya) Benefit from gaining access to formal financial services Transfer money nationwide and beyond borders to family and business associates

30 Mobile operators love MM Customer retention Prepaid customers can load airtime anytime, anywhere No loss in the distribution channel (currently between 10-25%) No need for scratch cards

31 MM Relationship Cash Out ATMs Cash businesses such as petrol stations and super markets love to give out cash and have the amount directly put into their bank account...earning interest directly...and reducing cash in store Cash In Cash expensive for banks to handle African banks struggle to raise savings (development banks been springing up for that purpose for the last 20 years in Africa) Salary payment to M-wallet

32 Regulatory Aspects: Telecom and financial sectors are similar Crucial for economic and social development Few players (oligopolies) and need to be regulated in public interest In future the different sector regulators will have to work together

33 Who dominates this relationship banks or mobile operators? Mobile operators dominate: open to more banks but may exclude other mobile operators Banks dominate: open to other mobile operators but may exclude other banks Economic perspective: Mobile payment system that allows transfers and interactions between any bank and any operator Develop industry standards for mobile money based on open access principles Regulate (similar to mobile call termination)

34 Conclusion The unbanked are unbanked for a reason. They will only consistently transact electronically if there are no transaction costs and if doing so is convenient and secure Serving the unbanked profitably and sustainably requires a radically different approach. Tweaking the existing banking system will not achieve a breakthrough MM has the potential to provide an urgently needed breakthrough

35 Conclusion Banks need to get back to basics and focus on making money through financial intermediation rather than through transaction fees Convergence of two such heavily regulated industries means that challenges are unlikely to be met unless policy-makers lay the ground rules for innovation Policy-makers and regulators need to safeguard that evolving systems serve the broader objectives of economic growth and development as well as protect consumer interests, while creating an environment that encourages and rewards innovation