Mark Flaming is a member of the CGAP Policy Cadre who recently participated in a branchless banking diagnostic in Indonesia.

In Indonesia, mobile network operators are experimenting with e-money services - e-wallets linked to subscribers’ mobile phone accounts. Users can load e-money into their e-wallets and use a mobile phone application to make certain payments. These services are being rolled out to compete with banks which offer customers the ability to make transactions via their mobile phones. But in several ways, these e-wallets cannot compete with the services offered by true bank accounts.

For one thing, telecom firms view e-wallets as a mere value-added service that keeps customers loyal and reduces subscriber churn, not as a core business or revenue generator. Prepaid airtime sales have higher margins and more customers. This is unlikely to change, as e-money issuers will not be able to generate income from the stored value the way banks employ their deposits, because telecoms will be required to sequester the stored value in a bank (like M-PESA in Kenya).

But the real differences lie in the ways customers experience e-wallets - far less flexibly than bank accounts. E-money can be traded with other e-wallet holders on the same mobile network and with the merchants that the telecom has acquired.  But other important links with the payment system are not available.  The e-wallet accounts cannot be accessed through ATMs or used on merchant POS machines, and e-money cannot be sent to other bank accounts. International remittances cannot be deposited in an e-wallet – and even if they could, there is a US$90 maximum transaction cap.  Local P2P transfers are limited by the lack of cash out points.

Bank-based models overcome all of these limitations. Customers can transact with cards or mobile phone applications and access their funds through ATMs, merchant POS terminals and bank branches. Foreign and domestic remittances can flow through the entire payment system without limit. This is a bank’s core business.

In order to offer more interoperability with ATMs, bank accounts and other systems, e-money would have to submit to banking regulations, taking away its flexibility advantage for poorer populations.  And it would seem telecoms have little incentive to invest in an alternate option, building out a merchant network with full payment and cash in/out capacity that competes with the banking payment system.

There are examples of such services that have succeeded - M-PESA in Kenya, and GCASH in the Philippines. But in Indonesia, the mobile operators with convincing business models are moving towards partnerships with banks. Looking ahead in Indonesia - and I suspect in other well regulated jurisdictions as well - the optimal value proposition will come from bank/telecom partnerships that store value in banks, allow banks to outsource customer acquisition (KYC compliance) and cash in/out transactions to the mobile distribution network, and allow account holders to transact through the entire payment system. Payment system technology is already capable of real-time clearing and settling of bank account transactions through any channel. I think business models will maximize the value of this system, regulators will find appropriate risk management vehicles, and most customers will prefer it to e-money solutions.