Mark Pickens is a Microfinance Analyst with CGAP’s Technology Program. Prior to joining CGAP he consulted to Amret Microfinance, Bank of Africa, USAID, UNCDF and worked with Development Alternatives, Inc. , a consulting firm specializing in economic development solutions in emerging markets. Pickens has helped launch four institutions that successfully mix for-profit sensibility with social mission, including CGAP’s technology program, New York City’s largest business incubator for immigrant entrepreneurs, an award-winning internet news portal, and a public health non-profit in Madagascar. He has a Master’s degree in microfinance from Columbia University.
Airtime as Remittance: good deal for the poor?
The New York Times recently highlighted the work of Jan Chipchase, a Nokia researcher trying to understand how the poor use mobile phones. The article includes a report that Ugandans are using prepaid airtime as an informal money transfer mechanism, particularly to get value back to family in rural areas.
“Ugandans are using prepaid airtime as a way of transferring money from place to place, something that’s especially important to those who do not use banks. Someone working in Kampala, for instance, who wishes to send the equivalent of $5 back to his mother in a village will buy a $5 prepaid airtime card, but rather than entering the code into his own phone, he will call the village phone operator (“phone ladies” often run their businesses from small kiosks) and read the code to her. She then uses the airtime for her phone and completes the transaction by giving the man’s mother the money, minus a small commission.”
We’ve seen this in many countries, such as DRC (several reports on this as far back as 2005) and more recently stories of overseas Kenyans using airtime to send value home to family members in need during the post-election turmoil.
While undeniably innovative, it also shows how sub-par other money transfer options are which the poor have available to them. Prepaid airtime as a currency substitute is quite costly in percentage terms, due to VAT (while a prepaid scratchcard is bought at fave value, VAT represents a hidden increase to the cost of minutes), operator’s discount (again, built into the cost of airtime), and a commission for whoever turns it back into cash (in the Uganda example). We estimate the all-in cost from the Uganda example at at least 25% of the value sent. That’s quite high, and not all that far off from the high fees Western Union has been lambasted for charging with small value transfers.
Still, other options could be even more costly, especially if risk-adjusted, e.g. to account for the possibility of money lost when sending money with people. And other means also come with the hard-to-quantify but very real “worry factor” of waiting days or even weeks to know if the money arrived.
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Mobile security in Mobile banking
For providers and regulators alike, the idea of mobile banking is inseparable from the question of mobile security. When stories like this pop up – about dozens of mobile banking clients defrauded in South Africa earlier this year – it raises warning flags for some. But are questions about mobile security really new questions, and does it provide cause to pause in pursuing mobile banking?
A new study from Bankable Frontiers digs deep into the issues. Some issues are very familiar: the use of outsourced IT providers, customers protecting their PIN numbers. Several are newish, but really permutations of issues with any electronic banking channel: the reliability and end-to-end security of communication networks carrying sensitive data.
These factors do not make most mobile banking channels more or less risky than other forms of e-banking. In fact, the range of m-banking technologies already available includes some with the highest degree of security possible. But automatically requiring the most technically secure platform carries substantial tradeoffs, not least of all that high-end technologies are substantially less likely to be suitable for low-income clients.
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Pakistan issues Branchless Banking Regulations
State Bank of Pakistan has cleared the way for banks to use agents to handle cash, and outlined a risk-based approach to customer due diligence to enable banks to extend their reach to lower-income clients. The regulations also come with detailed guidance on minimum standards for data and network security, customer protection, and risk management procedures.
But only for banks… This shouldn’t be a surprise. SBP’s policy paper on branchless banking (last year) was clear on this point: a nonbank model “may be allowed at a later stage after we have sufficient experience in mitigating agent related risks using bank led model and need to think about mitigating only e-money related risks.” So for now, mobile phone companies are still waiting for the door to be opened to them as well, test the waters without clear permission and detailed guidance, or find a JV with a bank. For those with deep pockets, buying a bank outright might be an option, too.
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Mobile meets the world of central banks
Mobile operators find navigating financial regulation isn’t quite so easy as sailing through the telco world.
If they want to convince central bankers that hold the keys to the payments space, mobile operators will make persuasive arguments about how mobile financial services meet traditional thinking about deposits, the new domain of payment system regulation, and the hot button issue of anti-money laundering, especially when sending money across borders.
No operator better illustrates this than Vodafone and its M-PESA money transfer service. Read the rest of this page »
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India gears up to regulate mobile banking
RBI Executive Director R B Barman said this week that a central bank committee is examining the regulatory challenges raised by mobile banking. The committee is expected to report recommendations next month, leading next to RBI drafting the requisite changes to the country’s regulatory framework.
The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.
RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.
What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?
The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?
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Who Says Cash is Frictionless?
Conventional wisdom says cash is king. It’s cheap to use, attracting no fees or minimum balances, unlike credit and debit cards.
But the equation can radically change in emerging markets, making cash unduly expensive for financial service providers and clients alike.
Up to 70% of the 2000 ATMs installed in Pakistan are reportedly unable to dispense cash accurately. Pakistan’s has two Rs 1,000 notes in circulation, and the quality of the notes themselves can vary dramatically. As a result, ATMs routinely jam, or fail to accurately count notes dispensed. Branch-housed machines are repaired more quickly, but even there the error rate is reportedly 30%, according to a study by ShoreBank International. Consumers shy away from using ATMs, and banks’ investment in ATMs yields a diminished return, rather than cost savings they may have hoped for as customers are reluctant to give up the teller window for ATMs.
In Kenya, cash represents risk for ordinary people sending money home. Friends and bus companies are the preferred way to send money to family in other parts of the country, according to FinAccess, a nationwide survey of financial service behavior. However, Kenyans are quick to cite neither is perfect: money can too easily go “missing” with friends, and though bus companies are more reliable, the transit times are still long (often days). By contrast, clients of M-PESA, Safaricom’s mobile wallet service, say its cheaper for both them and their family, as there is often a Safaricom agent close by which will receive or dispense cash.
Cash can be costly for providers and clients alike. Moving transactions into electronic channels could make services more affordable to offer and use.
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What do Tata’s Nano and Mobile Banking Share?
They both re-engineer something used for decades in rich countries , rethinking every assumption to make it affordable for low-income clients. And both may be safer than the alternatives poor people are already using.
Tata announced the Nano last week as an ultra simple but stylish car costing US$2500, closer to affordable for Indian families than any other new car. To slash prices, Tata engineers questioned everything conventional wisdom said is a “must have”: why not one large windshield wiper instead of two? Why does the beam connecting the wheel to the axle need to be made of solid steel? Today’s steel is far stronger than what Henry Ford started with, but no one had changed it yet. Less steel equals saved expense, and a lower cost in the quest for something rabidly cost-conscious consumers will buy in emerging markets like India.
But critics are bashing the Nano already for not getting close to meeting environmental and car safety standards like those in Europe, Japan and North America. Isn’t the Nano safer than the typical sight of an Indian family of 6 on one motorcycle, dodging trucks in traffic? 
The lesson might be instructive for those watching the mobile banking space. Would mobile banking, through a licensed bank or reputable mobile carrier, be safer than the informal mechanisms poor people use now: stuffing cash in the mattress? or saving through poorly regulated cooperatives? sending money through bus drivers and friends, who might not deliver it at all? Research is needed to know. Read the rest of this page »
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Agents at the center: reaching low-income clients
Burried in the Economist’s recent article on “The frontier of finance” was the little number that M-PESA is about to hit 1 million users signed up for its mobile payments service in Kenya. So what: mobile banking is gathering steam. That’s old news.
But lost in all the buzz is the critical role third-party agents serve in the play for millions of low-income clients. A broad range of corner stores, petrol stations, lottery kiosks, post offices and other outlets feature prominently in the system architecture for such success stories as Safaricom’s M-PESA in Kenya, as well as in other countries, such as Globe Telecom’s GCash service in the Philippines.
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When is mobile banking not banking?
Small differences in the wording of a law can translate into a loophole big enough to drive a truck through, or a couple of the world’s largest mobile phone companies. In Kenya, the presence of the word “and” in a definition of banking in the country’s Banking Act gave Vodafone ample space to launch M-PESA, a mobile wallet with most of the functionality of a traditional transactional bank account. M-PESA is nearing 1 million registered users (in a country with less than 3 million bank accounts), but Safaricom, Vodafone’s local affiliate, is not currently regulated by the Central Bank of Kenya (CBK). Why? M-PESA isn’t banking, at least right now.
In the Philippines, another pioneer, Globe’s GCash mobile wallet, isn’t classified as banking either, but it is regulated by the central bank, unlike M-PESA (for now). What’s going on? Is there cause for concern? While Vodafone operates in a vaccum, the Philippines central bank crafted a special regulatory window that not only gives Globe’s GCash permission to operate, but gives the central bank the authority it needs to see mobile payments is safe for consumers and the financial system. Read the rest of this page »
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Reserve Bank of India casts gaze on mobile banking regulation
The Reserve Bank of India (RBI) announced it will develop a regulatory and oversight framework for mobile banking, and made clear its concern over the safety of transactions through mobile phones.
“The large scale spread of mobile telephony has opened up new vistas for banking in the form of mobile banking and the potential in this new sphere is enormous; adequate steps to ensure safety and security in a mobile based computing / communicating environment have to, however, be made.”
The statement was included in RBI’s Financial Sector Technology Vision: 2008-2010 released late last week. RBI expects mobile-based services to assume an ever greater portion of banking transactions in general and payment services in particular.
Left unclear is whether such regulations would be developed in tandem with any changes to the use of business correspondents, or third parties doing cash-in and cash-out that provide the connection to the cash economy in which poor people live. At present, a limited set of entities can act as business correspondents, including section 25 companies, cooperatives and the post office, but not any for-profit outfits. Consumer protection features highly in RBI’s thinking: RBI wants to ensure agents will not take advantage of low-income clients. But some providers say their best agents in rural communities would be merchants, due to the liquidity they have in their till.
Can mobile banking take off in India with adequate consumer protections but enough flexibility to make the business model work for providers?
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