Implementation of mobile money transfer ICT Report Restitution workshop June 2009
Implementation of mobile money transfer Pays Bénéficiaire: /Country (region): St. Kitts West Indies (Caribbean region) Elaboré par/by Rambert NAMY François FLOURIOT Aiaze MITHA Présenté par/submitted by SOFRECOM Les opinions exprimées dans ce rapport n engagent que les auteurs et ne reflètent pas nécessairement celles de la Commission Européenne / The Views expressed in this report do not necessarily reflect the views of the European Commission
TABLE DES MATIERES / TABLE OF CONTENTS Résumé exécutif/ Executive Summary (max 5 pages)... 2 I. Remittance environment... 4 1. Remittance to the Caribbean... 4 2. Basic structure of remittance... 6 3. Market overview... 7 3.1. Senders and recipients... 7 3.2. Existing market players... 8 3.3. Remittance costs... 10 II. Mobile Opportunity... 11 4. Elements of a value proposition... 12 5. Possible service models... 13 5.1. Description... 13 5.2. Comparative relevance of the models... 14 5.3. Discussion on the recommended models... 15.5.3.1. Phone (m-banking) to cash... 15.5.3.2. Phone (m-banking) to Phone... 17 6. Recommended approach... 19
Sigles utilisés /Abbreviations MTO MFS MNO Money Transfer Operator Mobile Financial Services Mobile Network Operator Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 1
RÉSUMÉ EXÉCUTIF/ EXECUTIVE SUMMARY (MAX 5 PAGES) This document presents a recommendation for the development and implementation of m-banking technologies to enable international remittances from UK to the Caribbean. It builds on the particularities of the targeted corridors and the specific assets of ECIC. By closely aligning with current market context and regulatory framework, this document contributes to a realistic exploration of the optimal options. This document represents an important cornerstone in the evolution of m- banking in Eastern Caribbean. Using lessons learned from ECIC s mobile banking initiatives, and leveraging global best practices, this opportunity study will guide ECIC banks in their continued efforts towards better serving their customers. Remittances to the Caribbean Remittances to the Caribbean have been a significant contributor to local economies and GDPs. As the global financial crisis lasts, attracting and mobilizing international funds becomes a strategic endeavor for the local Banks, and new ICT technologies can best support that objective. This report discusses some of the trends and the current state of play with respect to remittances to the Caribbean so as to establish a baseline for a new service. Mobile remittance opportunities M-banking is increasingly used in a broad sense to refer to a range of applications, technologies, business models involving some form of financial transaction using a mobile device, whether there is an underlying bank account or not. This document focuses on the use of mobile technology to enable international remittances to the Caribbean from the UK, and possibly other EU member states (France and Netherlands). It explores the available service models and, based on contextual data, discusses in more detail the most realistic models for ECIC banks. Key to the success of this initiative will be the ability to establish strategic partnerships with a number of players, including: Local banks in sending country Mobile banking application provider / Bank mobiliser International remittance provider Local mobile operator in the Caribbean Prepaid card issuer Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 2
Indeed, building a comprehensive service offering for international remittance will have to heavily rely on existing solutions and platforms as opposed to building everything from scratch. Possible partners are discussed and overall architecture is described for the relevant service models. Recommendations Although m-banking is still in its early stages of development in the Caribbean, a number of players are getting actively involved in some form of mobile financial services. It is therefore crucial for ECIC banks to secure a first mover advantage. Current regulatory environment (discussed at lengths in another report) and state of play in the market are structuring in regards to the provided recommendation. Also, the recommendation suggests a phased approach with a first step towards implementing sophisticated mobile banking on the sending side (through partnerships) and limited mobile banking on the receiving side (building on current discussions). Next, a mobile wallet based mobile banking solution is recommended for the Caribbean, enabling a rich set of functionalities for the local population, banked and unbaked. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 3
I. REMITTANCE ENVIRONMENT The previous sections provided a detailed overview of the key regulatory aspects and the main challenges faced in relation to establishing a legal representation in the UK and operating money transfer services between the UK and the Caribbean (more specifically to Grenada, as a pilot country). The current section discusses the options and opportunities for ECIC banks willing to engage in that space. Remittances have historically been of significant importance to the Eastern Caribbean economies. By orienting their mobile-enabled international remittance approach around the convenient, cost-effective, secure delivery of services to the Caribbean Diaspora and their families back home, ECIC banks have the opportunity to transform the mobile banking landscape in OECS countries. Consistent with global trends and best practices, mobile enabled remittance services can be designed around the specific needs of customer segments both in sending countries as well as in the territories where ECIC banks operate. At the same time, m-banking approaches shall seek partnerships that most effectively leverage existing infrastructure and services, as opposed to building everything from a blank slate. In the following, the discussion will focus on understanding the importance of remittances to the Caribbean economies, the models that are available as well as the options moving forward. 1. Remittance to the Caribbean Remittances to the Caribbean have been historically important due to the larger number of migrants from the Caribbean to the US/Canada or the UK, and to a lesser degree to France and Netherlands. Indeed, the Caribbean has one of the largest Diaspora in the world, and this due to a number of reasons: Pull factor: Caribbean professionals/workers often find opportunities with higher wages abroad Push factor: there are limited domestic opportunities for the highly educated Low cost factors: geographical proximity with the US and Canada and English as a common language makes it easier for migrants from the Caribbean to travel there As a result, all Caribbean territories have seen large number of migrants moving to OECD member states, as illustrated in the diagram provided below. In turn, these migrations have had a direct impact on the volume of remittances flowing back to the Eastern Caribbean territories. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 4
60 Percent of Labor Force that Has Migrated from the Caribbean Countries to OECD Member Countries, 1965 2000 50 40 30 20 10 0 Haiti Bahamas,The Dominican Republic St. Lucia Trinidad and Tobago Belize Barbados Jamaica St. Vincent & Grens Antigua and Barbuda Dominica Guyana Suriname St Kitts & Nevis Grenada Source: Mishra 2006 As of today, the Caribbean is by far the world s largest recipient of remittances relative to GDP: 12 10 8 6 4 2 0 East Asia and Pacific Europe & Central Asia Latin America Sub-Saharan Africa Middle East and Northern Africa Source: World Bank 2008 Data South Asia Caribbean Also, the opportunity that the remittance market represents needs no further justification. However, it is interesting to note that after a few years of significant growth, remittances to the Caribbean have started stabilizing in 2008 (only 1% growth was recorded for the whole of 2008) and a decline is expected in 2009 due to the current global economic situation. The main factors impacting international remittances in 2009 are the following: Inflation: inflation increases the needs of the families back home, but it also makes it more difficult for migrants to send money back home. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 5
Economic downturns: downturns in European markets (UK, FR, and NE) are making it more difficult for immigrants to find well-paying jobs. Migration climate: migration towards remittance sending countries has decreased as a result of current crisis. Value of the dollar: some non-dollarized eastern Caribbean economies have seen their currencies appreciate against the dollar. As a result, the money sent back home does not go as far as it used to. In light of these changes, the need to attract Diaspora money back home has become more pressing, and ECIC banks may well play a pivotal role in fund mobilization from their Diaspora. The following will discuss the basic structure of remittance and then the specificities of the market that is being targeted. 2. Basic structure of remittance In order to determine how to capture a share of the remittance market, one should first aim at understanding the basic structure of remittances. The basic traditional structure of remittance is described in the chart below. It involves a number of players and various flows. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 6
Traditional remittances typically involve: A sender: the sender would typically be a Diaspora member residing in a northern country, likely to be banked and a mobile user An agent: the agent could be a bank staff (in the case of a traditional remittance via a bank) or alternatively a money Transfer Operator (MTO) agent. The agent performs KYC and handles remittance functions (cash-in, cash-out, remittance requests) on behalf of the organization it is affiliated to The remittance institution: the remittance institution is the organization offering the service (bank or MTO for instance in our example) The payment processing operator: the payment processing operator is the entity that operates the remittance hub and fulfills the remittance. It connects sending parties and receiving parties, manages compliance with international regulations and takes care of clearance and settlement. Examples of payment processors are SWIFT, Western Union, Banks such as Citibank, Belgacom ICS etc. A receiver: typically, family residing back home and depending on their relatives support to meet their financial requirements. Information about the remittance generally flows directly from the sender to the receiving party. The sender would inform the receiver of the remittance and would provide all required details for the receiver to be able to collect the funds. Physical money is exchanged in sending currency between the sender and the agent on the sending side, and in receiving currency between the agent and the recipient on the receiving side. Clearance and settlement flows occur between the remittance institutions at both ends and the payment processing operator. 3. Market overview In order to identify how m-banking technology can better enable international remittances, a proper understanding of the market is required. This section aims at highlighting some of the important characteristics of the market. 3.1. Senders and recipients In a first analysis, it can be found that the majority of the senders in the countries of interest would be both banked and mobile users. This implies that the majority of senders would currently bank with existing financial institutions and would also be reachable via a mobile phone. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 7
On the receiving end, most recipients would be mobile phone users and a fair share of them would be banked, depending on the territory of consideration. This is better illustrated in the following chart: The direct implication of such finding is that both recipients and senders can be reached via the mobile channel, either to dispense information, or to provide a richer portfolio of services including transactional capabilities. This finding will be re-used at later stage in the report. 3.2. Existing market players In addition to the sender/recipient situation, understanding the competitive landscape and the comparative strengths of each player is essential in defining a new offering and a successful approach. A number of players are currently offering international remittance services to the Caribbean. Among these, the most prevailing are: Money transfer operators: Western Union and MoneyGram dominate by far the international remittance landscape They have developed a traditional strength in a single line business Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 8
They boast strong distribution networks and marketing capabilities, and generally enjoy an acceptable footprint across Eastern Caribbean territories They remain fairly expensive but are by far the most utilized Internet-based / Prepaid card providers: PayPal and ikobo are typical examples of such players They offer accessibility and convenience, with the ability to deliver a service at a very low cost Both sender and recipient would need to be banked and the sender needs internet access Postal service: Postal service has high acceptance and benefits from a high trust in the local communities It enjoys a good distribution network but suffers from lack of confidentiality and long queues at post offices Banks: Banks are the natural deliverers of financial services Indigenous banks (ECIC) have a long relationship with their customers and are in most cases the leading banks in their markets However, banks seem to have shied away from MTOs as the latter have shown remarkable skills at operating international remittance services effectively and at low costs. Instead, banks have focused on other core banking services. Telecom operators: The 2 largest mobile operators (Lime and Digicel) are not yet active in the international remittance space, mainly due to regulatory obstacles Currently, their focus seems on international top-up services, that target similar segments to great extent As a significant advantage, they enjoy large customer bases across territories and benefit from a strong brand, in addition to their willingness to move into that space Informal markets: Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 9
Informal markets are seldom used (except family) due to lack of trust 3.3. Remittance costs Costs vary from one channel to another. A high level assessment of remittance costs indicates that costs remain relatively high to the Caribbean, mainly due to willingness to pay and lack of specialization on specific corridors. Also, there seem to be clear opportunities for banks willing to position themselves in that space with laser-beam focus. The main challenge, besides reaching out to the senders and recipients (but as was discussed before, the mobile channel seems to be quite adequate for that), is going to bring down the cost of service. Related options and opportunities are being discussed in more detail in the following section. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 10
II. MOBILE OPPORTUNITY This section aims at discussing the options and viable scenarios for ECIC banks in their attempt to offer mobile-enabled international remittances. As it is, ECIC Banks can leverage a number of strategic assets that shall play to their advantage: 1. ECIC is looking at a presence in the UK and, as shown by the regulatory assessment, a Payment Institution status would be easy to obtain and would allow ECIC member Banks to offer international remittance and other financial services (this could also be achieved through a correspondent bank until such time that local registration process is completed) 2. ECIC member Banks are market leaders in most territories where they operate 3. Higher interest rates on savings in the Caribbean are likely to appeal to the Diaspora communities 4. ECIC has initiated talks for mobile banking and is about to launch a new product All these elements converge towards a favorable environment for ECIC banks to engage more actively in mobile banking and mobile enabled remittances in the present time. The chart below describes these strategic assets and maps them into the main service options that would need to be considered: Phone to Phone: money transfer from phone to another phone Cash to Phone: money transfer from cash to phone Phone to Cash: money transfer from phone to cash Prepaid Card: prepaid card issued and sent to recipient, attached to an account funded by sender Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 11
These various options will be discussed in more details in the following. 4. Elements of a value proposition As a starting point, and given the number of players already active in that space, one would need to consider what a relevant proposition should contain. A recent survey about the criteria that remitters would use to select their service provider, published by ikobo, showed the following results (in decreasing order of importance): 1. Ability to send money directly from internet / mobile phone, no queuing at agents 2. Convenience for the person receiving the money 3. Better price than other MTOs 4. Assurance that the right person gets the money 5. Safer for person receiving money 6. Personal information is safer than using a form at agent These comments confirm that the convenience factor plays a significant role (in fact a primary role) in the decision making process for the sender. Equally, convenience for the receiver is also important. Other aspects refer to reliability, proper information and customer protection, which can all be achieved leveraging the mobile channel. The next section discusses the service models in more detail. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 12
5. Possible service models Multiple service models are possible, based upon on the regulatory environments on the sending side and the receiving side, as well as depending on the availability of the related technologies / partners. This section shall discuss all the models in detail and provide recommendations pertaining to the most relevant ones. 5.1. Description The following tables illustrate the possible models. Each model assumes a mobilization mechanism at the sending end (cash at agent, or phone used in a mobile banking fashion or with a mobile wallet). It also assumes the use specific funding, transfer mechanism, cash-out arrangement and partnerships. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 13
While all these models are theoretically implementable, their practicality will be determined by a combination of factors: 1. Relevance of the model to the market that is targeted 2. Regulatory frameworks at sending and receiving ends 3. Technology availability and maturity at both sending and receiving ends 5.2. Comparative relevance of the models The comparative relevance of the models needs to be determined against the characteristics of the segments that will be targeted both on the sending side and receiving side. As discussed earlier, senders are likely to be banked and mobile phone users. Recipients are likely to be partially banked and mobile phone users. Based on these premises, the chart below illustrated the comparative positioning of the various models and identifies the most relevant models to consider (circled in red). In light of the targeted market segments, it clearly appears that the Phone (m-banking) to cash and the Phone (m-banking) to phone, combined with a Prepaid Card offering are the most relevant approaches in the current state of play. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 14
Besides, this direction is corroborated by a number of other elements: 1. E-Money, as discussed previously, is primarily regulated as a micropayment instrument in the EU. As a result, mobile-wallet funded international remittance is not practical due to prohibitive limits and constraints 2. E-Money is not yet regulated in the Eastern Caribbean. Although regulatory work is under way, mobile wallet based approaches are not recommended in the receiving side until such regulatory framework is properly established and offers the right level of certainty and confidence 3. Mobile wallet technology has not yet been implemented by mobile operators in the Caribbean, while ECIC has made some great strides in the mobile banking space 5.3. Discussion on the recommended models.5.3.1. Phone (m-banking) to cash The phone to cash model assumes fund mobilization via the mobile channel in the sending country. That implies that ECIC would have to partner with all the banks where the Diaspora in currently banking. This would need to be achieved in a cost effective manner, either by selecting the right correspondent bank or leveraging strategic partnerships with bank mobilisers such as Monitise. Indeed, only a strategic partnership will enable to quickly scale up and achieve the critical mass that is key to the Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 15
success of this project. In that regards, the partnership approach will be a defining elements of the project and will, to a certain extent, determine its feasibility. Besides, partners like Monitise run an existing mobile banking application that works with 70% of the banks in the UK, hence offering a platform that is potentially reaching out to 70% of the Diaspora community, having a significant impact on time to market. Besides, the phone to cash scenario also leverages the existing mobile banking developments on the receiving side. It will enable to provide the recipients with informational services pertaining to the arrival of funds, and, for the unbanked, a one-time PIN code to withdraw money from any ATM. The following chart illustrates how the model operates: Funds are mobilized through a mobile banking application in the sending country. The mobile application shall mobilize most of the banks via direct bilateral agreements with each bank or facilitated by a global technology partner. A relationship via a correspondent bank can also be considered. At any rate, a relationship with a technology partner that is bank agnostic and Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 16
has the ability to broker and mobilize any bank would dramatically facilitate the process. Funds would then be transferred by ECIC to a remittance hub (or a payment processor) for international transfer. Specific rates would need to be negotiated for the relevant corridors with the remittance partner. The funds would then be deposited at the local ECIC bank, and the recipient would be notified via SMS in partnership with a local mobile operator. If the recipient is banked, funds are credited to his/her bank account. Otherwise, a one-time PIN code mechanism would enable the recipient to withdraw the funds from existing financial infrastructure (ATMs). The business model for such a service obviously depends on the commercial arrangements with: The correspondent bank (if any) The mobile banking application provider The various banks that are mobilized via the application The remittance service provider In a first approximation, it seems that such a model would be able to compete with the likes of Western Union, since it is in the interest of all parties to lower their margins in order to capture volume..5.3.2. Phone (m-banking) to Phone Phone (m-banking) to phone presents the same characteristics as Phone (m-banking) to cash on the sending side, but assumes a mobile wallet at the receiving end. In that regards, it is an evolution of the previous model that will add another layer of services suitably enabled by the mobile wallet. This option is recommended as a second stage in the development of ECIC offering, when the technology is available and the regulatory framework enables this type of approach. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 17
The following chart illustrates the way the model operates: Funds are mobilized and transferred similar to the previous model but instead of being deposited in the recipient s bank account, they are deposited by the local ECIC bank into the Mobile operator s bank account (assuming the mobile operator is the wallet provider). The mobile operator then issues an equivalent amount of electronic money that is being credited into the recipient s mobile wallet. This would then enable a new range of domestic / regional financial services from the mobile wallet such as mobile payments, mobile money transfer, purchase of goods, payment of utility bills etc. Hence, this is a natural evolution of the previous model. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 18
6. Recommended approach Based on the previous discussions, 3 main approaches can be outlined: While the third approach can be discarded from the outset, the first approach seems still premature. In the current state of play, regulatory gaps and technology limitations do not provide the required certainty nor do they enable the development of a mobile-wallet based service. In the interim, the second approach appears to be the most effective trajectory, and will eventually lead to the implementation of the first scenario when the time is right. The following table compares the various approaches: Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 19
Also, the recommended approach is a phased approach that will first leverage on existing initiatives and strategic partnerships on the sending side, and then expand the scope of services that can be offered at the receiving side via a mobile wallet based approach. This approach is summarized in the following diagram: The regulatory implications of the various approaches are discussed in the following: Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 20
As a conclusion the recommended approach is scenario 2, which is based on the phone (m-banking)-to-cash model, combined with a prepaid card offering for the unbanked. From a regulatory standpoint, this approach would be possible with a correspondent bank relationship, or a Payment Institution status. While the PI status would give more flexibility to ECIC and remove an additional intermediary in the value chain, the correspondent bank could become a short term option. From a business perspective, it would require partnering with: The local banks in the UK A mobile banking technology provider so as to be able to mobilize funds from all the banks A remittance service provider (could be one of the banks) A mobile operator in receiving territory for SMS notification The ATM network in receiving territory for ATM withdrawal From a technical perspective, adjustments would be required to existing mobile banking applications in sending market to include the new remittance service, and developments would be required at the receiving end to enable mobile banking (SMS notifications) and ATM withdrawal. Cost wise, it can be expected that the main costs will be costs of establishing ECIC presence in the UK (via correspondent bank or Payment Institution status) and marketing costs to create awareness about the service. As far as technology is concerned, existing mobile banking investments could be leveraged in the short term to minimize additional investments. Titre du projet, Moi année (Verdana 8 ou plus petit : le titre doit rester sur une ligne vert - bold) 21