Mobile Technology Transforming the Money Transfer Market By Cynthia Merritt Mobile devices are transforming financial markets in many parts of the world, particularly in developing nations, which are experiencing a dramatic increase in the number of devices owned and used by citizens. For example, there are some 700 million mobile subscribers in Africa alone, most of whom make a subsistence living and for generations have relied upon rudimentary informal value transfer methods such as cash and barter. Technological advancements in wireless telephony have resulted in an environmental sea change, leapfrogging generations of financial modernization experienced in the rest of the world. These dynamic, emerging developments bear significant implications for future payment methods across geographic borders as telecom firms play a more significant role in new payment delivery models and traditional financial institutions become less dominant. The opportunity for innovative firms to introduce more nimble and potentially more secure payments in the mobile channel could transform the crossborder payments market. Accordingly, mobile phones have already transformed a societal institution in the developing world banking and financial services. It is not yet possible to predict how mobile devices may transform financial services in the United States. Technological Innovation and Globalization: Key Drivers of Mobile Money The wireless payments market is a new arena in which telecommunication networks augment existing voice-based wireless services with other types of data, including the transfer of a payment between friends and family or the purchase of goods and services. This market is evolving explosively. Worldwide mobile phone subscriptions are growing at staggering rates, particularly in emerging markets. Technology is advancing telecommunication services to rural areas that were previously unreachable with traditional brickand-mortar service providers. Even in emerging markets today, nearly everyone owns at least one cell phone, and wireless subscription numbers continue to rise, according to the World Bank. That growing ubiquity, along with expanding functionality, will continue to drive and shape commerce and financial services in new and unanticipated ways. New business models that are supported by a growing number of participants not traditionally found in financial services markets are evolving. Within the emerging mobile ecosystem are many new parties, including the mobile network operators that run the wireless networks through which communications and data flow; technology platform providers that facilitate the transaction flows through hardware and software system deployment; and money transfer operators and traditional financial institutions. In the United States, traditional financial institutions hold customer deposits as checking and savings accounts, which often serve as the funding source for person-to-person (P2P) transactions. In contrast, firms engaged in money transfer generally do not hold depository accounts. They merely accept funds as an agent either in the form of cash or a transfer from a depository account from a traditional financial institution for a money transfer. Today s mobile phone is not merely a phone. It is a multipurpose device with tremendous computing power and data storage capacity. Similar technology is deployed in tablets to provide parallel functionality. When a consumer uses a mobile device to purchase goods Published in The SciTech Lawyer, Volume 9, Number 3, Winter/Spring 2013. 2013 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. photo: istockphoto
and services, a silicon microcomputer chip stores and transmits information about the consumer s payment, such as account data and personal identification. Businesses in a variety of sectors are repurposing mobile devices to pay for services ranging from mass transit and parking to taxi rides. For example, many urban cabs feature self-serve terminals where a rider can swipe or tap a card or mobile phone to pay for fares. In the United States, merchants are broadening their already expansive online presence with proprietary mobile applications to drive additional revenue beyond brick-and-mortar retail outlets. Many retail stores allow consumers to download apps to their smartphones or tablets for convenient, on-the-go shopping. These apps can send coupons, discounts, and other incentives to consumers for online shopping. Merchants are incentivized to participate in mobile transactions as they acquire data for consumer marketing analytics. Mobile payments assume two primary forms today: proximity payments at the point of sale and remote payments, also known as P2P or account-to-account payments. The most prevalent type of proximity payment is payment card mobile. The same data encoded in the magnetic strip on the back of your credit, debit, or prepaid card is stored in the microchip embedded in the mobile phone, or in a remote server (the Cloud), and accessed using sophisticated chip-based technology. A number of such mobile wallets have emerged in 2012 in the United States in various stages of rollout. However, these early wallets are initially designed for credit and debit card payments. Essentially, the same consumer information coded in the magnetic strip on the back of credit and debit cards is embedded in a microcomputer chip, which may reside in a variety of devices, from the traditional plastic card, to a wrist watch, a mobile phone, and so forth. The benefit of placing the microcomputer chip in the mobile phone is that the hardware in the handset can provide additional security with added password protections and geolocation functionality. These wallets are envisioned to eventually hold all the items in the leather wallet today and provide for P2P payments in addition to payments at the point of sale. The Google wallet was the first on the US market, but has seen lackluster adoption. With few phone manufacturers producing phones with chips needed for the mobile wallet service, and with slow uptake of banks willing to issue the cards, Google has faced hurdles to gaining market adoption. Another mobile wallet expected to roll out soon is the ISIS service, also card-based. US mobile initiatives have focused on these wallets because of the perceived value to merchants and consumers. Many consumers will not see appreciable convenience in paying with their phones instead of with plastic. However, using a phone for a marketing benefit such as a coupon or discount can give consumers a real reason to use the phone to make the payment. Similarly, merchants are incentivized by new payment methods that provide them with consumer data. For example, LevelUp registers consumers payment cards, storing individual consumer data on remote servers for payment at subscribed restaurants. When consumers pay using LevelUp, the merchant receives data about the sale that it can use to understand consumer behavior and design future marketing strategies. Remote mobile payments are another story, as US consumers are still inclined to use cash and checks, although the use
of both is predicted to decline. Recently banks have rolled out services for P2P payments online, using a PC or mobile phone to provide an electronic alternative to paper-based payments. Many US community banks provide a P2P service called PopMoney, which facilitates transfers to a broad network of banks, allowing customers to send money from checking and savings accounts. Another recent development is the rollout of clearxchange, which permits transfers among account holders within its threebank network (Bank of America, Chase, and Wells Fargo). In emerging markets, telecom firms have moved to provide P2P services to a more expansive geographic reach of consumers, filling a void left by traditional financial service providers. As these services expand and realize success, the lessons learned by technology providers can be leveraged to new markets and consumer demographics. According to a report published in February 2012 by CGAP (Consultative Group to Assist the Poor) on the current landscape of international remittances through mobile money, international remittance services are expanding, but many planned deployments have faced obstacles to full implementation. These barriers include difficulties in coordinating partnerships across multiple parties and the complexities involved in establishing commercial agreements in different legal jurisdictions. The CGAP study found that 8 of 17 planned mobile remittance pilots identified in 2010 had gone live by February 2012, evidence it said of the long delay indicating significant and unexpected challenges encountered by MNOs (mobile network operators) and their partners in going to market. So, while technology providers and telecom firms seem eager to enter the mobile money transfer business as evidenced by a growing number of start-ups traditional remittance methods and providers are still preferred Cynthia Merritt is the assistant director of the Retail Payments Risk Forum at the Federal Reserve Bank of Atlanta. from a global perspective. Business model changes are slowly occurring to facilitate fund transfers with the use of mobile devices, even in traditional payment transactions. Industry participants are optimistic that rising costs in regulatory overhead may promote the advancement of Internet and mobile as more nimble and less expensive delivery channels than traditional money transfer schemes. For example, banks and money transfer operators like Western Union and MoneyGram will be challenged to comply with the new 1073 rule of the Dodd-Frank Act, which requires more robust consumer disclosure. Mobile network operators facilitating the transfer of airtime that may or may not be converted into currency in a foreign country may represent a potential future remittance model to keep on the industry s collective radar. As the Landscape Slowly Shifts, Emerging Markets Take the Lead Mobile money transfer payments generally represent P2P or person-to-business transactions either domestically or internationally. Indeed, people are using this technology to send money across national borders. A few years ago it was unthinkable that one could make international funds transfers with a mobile device. For example, Western Union and MoneyGram are partnering with both banks and mobile network operators to make their remittance businesses more efficient. In the United States these partnerships largely involve banks that share agent networks and bank branches with remittance operators. In emerging countries, where consumers are often underbanked, remittance providers are partnering with mobile network operators to provide mobile money transfer services. Emerging markets have been a hotbed for mobile payments as more consumers have become linked into the wireless community and because there is growing mobile phone ownership throughout the globe. Mobile technology has enabled dramatic growth in mobile networks, which have doubled in size almost every two years since 2002, according to the World Bank. Furthermore, by the end of 2011, mobile phone subscriptions reached 5.9 billion worldwide, with 8 out of 10 people having a mobile phone subscription. In a relatively short time, the mobile phone has emerged as a fundamental financial tool for the poorest consumer instead of a luxury good for high-income consumers in mainly developed countries. 1 Many consumers in emerging markets lack access to basic financial infrastructure. As a result, they have historically relied upon simple mechanisms of exchange, such as cash, and even informal value methods such as barter and hawala (an alternative remittance system widely used in the Middle East and parts of Africa and Asia). These payment methods make their users vulnerable to transfer theft, loss, and possibly more severe crimes. For example, consumers in remote villages needing to send money home were often reliant on a bus driver or other intermediary, exposing the funds to potential theft. The mere holding of cash represents a risk of theft that ultimately discourages savings. Wireless communication has facilitated exchanges to rural areas beyond the physical reach of traditional payment providers such as banks and subsequently changed the environment for financial inclusion. One frequently noted example of a successful mobile transfer payment system is the M-Pesa service in Kenya. Initially introduced on a domestic basis, the M-Pesa Sending-Money-Home remittance service now permits senders in 45 countries to transfer money to Safaricom mobile wallet customers in Kenya. M-Pesa s remittance service links to Safaricom s mobile money platform to allow consumers in other countries to send money to the mobile wallets of customers in Kenya. Initially a domestic transfer service, international transfers are now enabled through partnership with Western Union to leverage its expansive agent network. In contrast, the market for money transfers in the United States and other developed countries is moving more slowly, as consumers have many safe,
secure, and, perhaps most importantly, trusted payment methods available. The use case for accessing these payments via the mobile channel has not materialized in a meaningful way, as the more secure risk environment of safer electronic payment alternatives to cash in contrast to that of emerging markets does not provide a compelling incentive for change. Still, there are signs that the landscape may be changing as telecom carriers, financial institutions, and technology service providers are partnering to form new business models for the delivery of mobile financial services. In the United States these money transfer start-ups are largely focused on the domestic market, but they also recognize opportunities for expanding business models to other markets in response to the need for low-cost, lowvalue cross-border payments. Many businesses are making their entrée into the money transfer business, including firms like Amazon, social networks such as Facebook, and alternative payment services like PayPal and Dwolla. Cross-Border Remittances: Market Innovations Are Under Way, but Adoption Is Flat As the global financial crisis has moderated, worldwide remittance flows funds sent from immigrant communities to family and friends in mostly emerging markets have grown beyond World Bank expectations. Those remittance flows reached $351 billion in 2011, evidence that migratory workforces remain a compelling driver for cross-border money transfer growth. Developing countries with the highest level of remittance inflows in 2011 included India, China, Mexico, and the Philippines. The World Bank believes the 2011 rebound signals positive expectations moving forward, predicting that all worldwide remittance flows including both developing and developed countries will exceed $590 billion in 2014. Most of these flows are through traditional channels, but the environment is ripe for mobile with its more convenient and ubiquitous reach to a Mobile Devices & the Brain broader population of consumers across the world. According to the February CGAP 2012 report cited above, international mobile remittance deployments are growing, but most have not gone beyond the trial stage, with usage levels very low for those that have gone live. The study identified only 8 live mobile cash-out deployments among the 17 live deployments. This experience indicates that these new business models face challenges in migrating remittance flows to the mobile channel. As a result, traditional remittance operators continue to maintain market advantage on a global basis compared to new business entrants. This trend is observable in the M-Pesa remittance service in Kenya, which has not yet recognized significant growth in its cross-border remittance business. The CGAP report says M-Pesa seeks to augment revenues by tying international remittances to its existing mobile money platform, a complementary service to its existing business model. Although its mobile money platform is recognized for its initial successes, the international remittance business faces challenges as business model participants struggle with technological interoperability, and disparity By Neil Jacobstein The most transformative change in artificial intelligence enabled by mobile devices is ubiquitous human augmentation by crowd-sourced and machine intelligence. Collaborative mobile services give people the ability to share their expertise and information sources, and collaborate globally on complex projects, augmented by machine intelligence. The machine intelligence includes knowledge services, such as Google, SIRI, Watson, and Deep Learning Networks, that can utilize vast computational and inferential resources to marshal the information in billions of web pages. This effectively delivers selective snapshots of the accelerating wave front of human knowledge into the minds of mobile device users. The significance of this is that access to facts is no longer the limiting step in human decision making. Rather, evaluating the facts; assessing their significance, interrelationships, and quality; and exercising ethical judgments about them are the critical new skills. In the future, these mobile collaboration and knowledge services will increase rapidly in scope, power, and ease of use, empowering individual and group decision making, and increasing productivity. Neil Jacobstein is co-chair of AI & robotics at Singularity University. in regulatory governance in different countries. As wireless carriers look for revenue opportunities in addition to existing voice services, data services such as payments transfers offer promise as a basis for viable future business models. Continued growth in immigration coupled with the global ubiquity of mobile phone ownership will provide the essential elements for mobileenabled remittances in the future. Growth in Prepaid Payment Adoption Prepaid or stored value cards in the United States, while still a small portion of the overall retail payments pie, represent the fastest-growing retail payment method, according to the 2010 triennial payment study conducted by the Federal Reserve Bank. Part of this growth is attributed to the appeal of prepaid payment solutions to financially underserved consumers. According to the recently released 2011 FDIC National Survey of Unbanked and Underbanked Households, prepaid cards continue to be more widely used among this US demographic market segment than among fully banked households. The FDIC survey found that despite some improvement in the US economy, the
Wireless communication has facilitated exchanges to rural areas beyond the physical reach of traditional payment providers such as banks. country has experienced a modest increase in the proportion of unbanked and underbanked households. Because this group shares some of the characteristics of consumers in emerging markets, it is useful to analyze their payment behaviors to help develop appropriate mobile payment strategies and proactive risk management systems. Other innovative payments business models are based upon a prepaid system, as participation relies upon a traditional legacy payment method for funding. For example, many prepaid cards can be funded with credit and debit cards over the Internet. Nearly all the mobile wallet trials under way provide a digital prepaid card option, funded again by a traditional payment method. Replicating Prepaid Mobile Airtime for Other Prepaid Financial Services Prepaid value as a medium of exchange in the mobile channel first emerged in the form of scratch cards. These are prepaid vouchers that hide a number a user scratches off to unlock the value on the phone. The user could then recharge the mobile account with airtime by calling the telecom. Physical reload media were rendered obsolete by Internet delivery methods to reload transactions. Similarly, the business model for mobile top-up (recharging prepaid airtime on the mobile phone) also influenced the development of other prepaid products such as gift cards and prepaid online services for digital media. As airtime reload became delivered electronically, telecom firms responded to consumer demand for phone-to-phone airtime transfers as a remittance product. This transferred airtime could then be used by the recipient in another country to make calls or likewise transfer to another consumer. Telecoms use of airtime transfers is helping position the industry eventually to provide international money transfers as systems are established to manage financial flows, currency exchange, and associated float. According to the CGAP study cited earlier, mobile money transfers represent a source of new revenue growth for wireless carriers whose core business revenues from voice-related services have declined in recent years due to competition and market saturation. However, the challenge for telecom firms navigating cross-border transfer issues is in establishing partnerships with multiple parties representative of distinct and unique industries. So while airtime transfer holds great appeal as a means of exchange, international P2P transfers using the mobile phone as a delivery method are likely to evolve slowly. Consumer trust and familiarity with these services must be developed. As with other payments in the mobile channel, consumers are not likely to shift to mobile-enabled remittances merely because the service becomes available. Many consumers are content with traditional money transfer options, which are safe and reliable. Risk and Policy Implications The same risks that exist in the payments consumers use every day are important considerations as they shift to the mobile channel. In cross-border payments, differences in regulatory regimes pose compliance challenges for service providers, both in terms of understanding the differences and the complexity of developing enterprisewide risk management systems that address these differences and adequately assure regulatory compliance. However, in a mobile environment, the potential for rapid settlement for financial services across shared networks in different geographical jurisdictions may also create opportunities for money laundering or other illicit transactions. The growing complexity and inconsistency in regulatory requirements in different countries are likely to serve as a barrier to innovation in the shortterm. Some jurisdictions do not permit nonbanks from managing foreign transfers, so service providers are forced to navigate an uncertain environment in which many of the new industry participants lack experience or legal expertise. Technological interoperability issues in working with numerous cross-border parties are another challenge to the development of more robust international mobile remittances. Another issue of concern for regulators is the need for third-party management. Legal and reputational risk is created for payment service providers that fail to perform comprehensive due diligence and ongoing monitoring of third-party relationships in new mobile payment businesses. There is also the risk that third-party business partners are lightly regulated or subject to a general lack of regulatory controls, which can create operational risks in new business models. Because the regulatory landscape is likely to evolve and differ by country and business model, it is important for telecom and financial regulators to coordinate a risk-based approach to understanding risks in mobile money transfer services and to coordinate oversight across geographic borders. Policy and regulation on an international basis will need to consider shared infrastructures that work harmoniously to address emerging risks in mobile transfer services while recognizing the benefits
of innovation and increased financial inclusion. Fostering Mobile in the Interest of Public Good and Financial Inclusion Private and public initiatives aimed at furthering the development of mobile payments in the interest of more widespread financial inclusion have been recently announced. For example, on June 12, 2012, the US Agency for International Development and Citigroup announced their global partnership to expand financial inclusion by working together to foster the adoption of mobile technology for money transfers in developing countries. The announcement states that the partnership intends to work with governments, donors, industry and other participants in the payments system to expand mobile money platforms for payments services across borders to drive growth and financial access for the developing world s poor. Because informal value transfer systems, including cash, have the potential to be costly and prone to illicit activity, this partnership hopes to accelerate the adoption of mobile services as a safer, more efficient means of exchange. The Bill and Melinda Gates Foundation leads another noteworthy initiative for promoting mobile money and financial inclusion. The foundation s strategy for improving financial services for the global poor is to support programs to help shift the majority of cash-based financial transactions into digital form through mobile technology or another digital interface. Reliance upon cash perpetuates exclusion from more formal economies where businesses such as financial institutions and utility companies assume higher costs to process cash. Shifting to electronic methods of transaction and clearance reduces these costs and thereby lowers barriers to financial inclusion more generally. Mobile money transfer systems should continue to experience adoption success going forward. In developed markets like the United States, consumers will become more familiar with new person-to-person payment services. The prevalence of online payments should serve as a catalyst in the United States as smartphones and tablets are increasingly used to access the Internet for online transactions. In the near term, however, barriers will challenge the development of cross-border business models on a far-reaching basis. In addition to dealing with different regulatory regimes in different geographic locales, the limited infrastructure for allowing recipients on the receiving end of a remittance to withdraw cash will likely continue to be a significant barrier. Informal methods of exchanging airtime top-up may emerge as barter alternatives to cash, in light of the lack of liquidity and infrastructure for cash-out. Judging by the number of deployments under way in the mobile transfer arena, the future success and ubiquity of mobile-enabled transfers both domestically and internationally is inevitable. In the near term, the industry will need to find solutions to business model infrastructure, technological interoperability, and regulatory inconsistencies across business enterprise geographies. Business models that leverage traditional transfer operator expertise and agent networks are likely to dominate the mobile transfer landscape. u Endnotes 1. http://siteresources.worldbank.org/ EXTINFORMATIONANDCOMMUNIC ATIONANDTECHNOLOGIES/Resources/ IC4D-2012-Appendix-1.pdf. Mobile Devices & Abundance By Dr. Peter Diamandis Over the past 20 years, wireless technologies and the Internet have become ubiquitous, affordable, and available to almost everyone. Africa has skipped a technological generation, bypassing the landlines that stripe our Western skies for the wireless way. Today, a Maasai warrior with a cellphone has better telecom capabilities than the president of the United States did 25 years ago. And, if he s a Maasai warrior on a smartphone with access to Google, then he has access to more information than the president did just 15 years ago. By the end of 2013, more than 70 percent of humanity will have access to instantaneous, low-cost communications and information. In other words, we are now living in a world of information and communication abundance. For the first time ever, the world s Rising Billion will have their voices heard, becoming both a producing and consuming segment of humanity. Just think of all the consumer goods and services that are now available for free with the average smartphone: cameras, radios, televisions, web browsers, recording studios, editing suites, movie theaters, GPS navigators, word processors, spreadsheets, stereos, flashlights, board games, card games, video games, a whole range of medical devices, maps, atlases, encyclopedias, dictionaries, translators, textbooks, world-class educations... and the ever-growing smorgasbord known as the app store. Ten years ago, most of these goods and services were only available in the developed world. Now, just about anyone anywhere can have them. Another new technology now under development, known as Lab-On-A-Chip (LOC), has the potential to bring personalized reliable health care to billions. Packaged into a portable cellphone-sized device, the LOC will allow doctors, nurses, and even patients to take samples of bodily fluid (e.g., urine, sputum, or a single drop of blood) and run dozens, if not hundreds, of diagnostics on the spot and in a matter of minutes. This will be a game changer. Dr. Peter Diamandis is chairman and founder of Singularity University.