Ignacio Mas

This is a guest blog by Ignacio Mas, an independent consultant who has written extensively on mobile money.  He is former Senior Advisor with the Financial Services for the Poor team at the Bill & Melinda Gates Foundation and at the Technology and Business Model Innovation Program at CGAP. 

Mobile money feels right for mobile network operators (MNOs): it is an extension of the basic prepaid platform and distribution networks they already operate. Mobile money does require greater surveillance against fraud and money laundering measures, but it’s all fundamentally about secure messaging.

From a telecoms regulation point of view, mobile money is another instance of a value added service and those tend to receive a light regulatory treatment. All the specific regulations that pertain to the safety and soundness of mobile money –who can issue accounts, conditions of service, data security and privacy standards, supervisory treatment, consumer protections, etc.— should be the domain of the banking regulator.

But MNO participation in retail payments presents competitive challenges which banking and telecoms operators will need to monitor closely and perhaps address jointly. The problem is that MNOs are both component suppliers and direct competitors to banks wanting to offer mobile financial services. There is a risk that MNOs transfer market power from their core market to the emerging retail mobile payments market, in such a way as to effectively shut banks out of mobile payments. In the future, most financial services can be expected to have a mobile component, so such a situation would have severe implications for competition in the financial inclusion space more broadly.

This is quite understandably spooking many banking regulators into preventing MNOs from playing directly in the payments/banking space. That’s unfortunate, the fact is that we need to enlist MNOs to push the frontiers of financial access, while guarding against any potential abuses of market power on their side. We need to allow MNOs to contest the market without dominating it.

Authorities need to identify specifically those components of mobile communication services over which MNOs have bottleneck control and which are essential for the provision of mobile financial services. One asset MNOs control is the SIM card – a smartcard which identifies every mobile user. Access to the SIM card provides benefits in terms of security, since SIM cards may contain pre-loaded security keys which can implement end-to-end data encryption from the mobile handset all the way to the transaction authorization server. Access to the SIM card might also enhance the usability of services, since the SIM card controls the on-the-phone menu onto which mobile money can be incorporated directly.

However, there is no precedent worldwide for establishing equal access rules to SIM cards, as unbundling the SIM card might have severe implications for the security of mobile networks. In any case, the problem of proprietary control over the SIM card is mitigated if banks can build an equivalent service through other means.

MNOs also control the phone’s communications (or bearer) channel. The more common channels, such as voice, SMS (the protocol underlying text messaging) and packet-data (under various flavors such as GPRS, EDGDE, 3G or HSDPA), are broadly made available by MNOs under standard commercial offers. In this case, it should be fairly easy to establish and monitor a requirement of non-discriminatory access by banks and third-party providers of mobile money services to these channels. Since the market for these bearer services is sufficiently large and lucrative for the MNOs, we can expect MNOs not to over-price their voice and SMS services or to degrade the quality of their service specifically to lock out banks from using them to construct competing mobile money services.

The challenge is with a less common bearer service called USSD (Unstructured Supplementary Service Data), which is not widely commercialized by most operators. (You may recognize it as the service you use when you are asked to dial a sequence of numbers starting with star and ending with hash after you buy a scratch card.)  The session-based nature of USSD presents two strong advantages over SMS as a channel for mobile financial services: it lends itself to implementing network-based menus which makes it easier to use, and it entails no storage of messages anywhere which makes it more secure. It may also be more feasible than using voice in countries where voice tariffs are still expensive, or packet-data in countries where most people still use simple phones. For banks without access to the SIM card, USSD may be the only realistic option.

In this case, simply stating non-discriminatory access to the USSD service may not suffice as long as USSD is used primarily for banking services, since MNOs may price it specifically to preclude competition from emerging in mobile financial services. Therefore, the telecoms regulator ought to monitor USSD pricing to see if it bears a reasonable relationship with the price of alternative access channels such as voice and SMS. Moreover, an operator might be forced to offer USSD to other mobile financial service providers provided that: (i) the operator has an installed USSD capability (even if it is only used for the MNO’s own purposes, such as airtime top-ups), and (ii) the operator is offering its own mobile financial service through a proprietary channel (e.g. SIM-based) not available to others.

These actions –monitoring MNOs for potential discriminatory pricing and service quality on voice and SMS, and monitoring USSD offers to prevent undue denial of service or pricing that does not bear sufficient relationship with the pricing of other channels— fall in the first instance in the domain of the telecoms regulator, since these are purely about the channel and not higher-level financial services. Of course, the banking regulator could play a vigorous role in helping banks present their case to the telecoms regulator if they feel discriminated against, or to competition authorities if the situation warrants escalation or the telecoms regulator lacks the necessary powers to intervene.

Authorities ought to pass a clear and strong message that MNOs can play at the financial services layer if they play fairly at the communications layer. This might be expressed around a protocol or memorandum of understanding signed jointly by the banking and telecoms authorities, stating how the various authorities will work together and laying out the competition standards to which they will hold MNOs.

This regulatory vigilance will be essential until such time when everyone has a smartphone and the phone (rather than the SIM card) can perform locally all security and menu presentation services. At that point, banks will have credible options to build their own mobile financial services with minimal control by the MNOs. Banking will just be an app on your phone, which anyone can download. That competitive nirvana is now more imaginable than ever, but it is still a ways off in developing countries.

- Ignacio Mas

Today we post a guest blog by Ignacio Mas and David Porteous, both of whom need no introduction. But just in case…Ignacio is an independent consultant, associated with Bankable Frontier Associates. He is former Senior Advisor with the Financial Services for the Poor team at the Bill & Melinda Gates Foundation and at the Technology and Business Model Innovation Program at CGAP. David is Managing Director of Bankable Frontier Associates.

Sarah Rotman blogged recently about yet another breathless announcement about the imminent arrival of the cashless society. She said and we agree that “cashless seems a bit naïve; cash lite seems more realistic although still a big challenge.” The very first part of the challenge is actually to visualize what a “cash lite” world looks like. Is it simply an ill-defined way station on the road to cashlessness, or is there a meaningful state or goal that goes with it?

We think the latter, and for us the defining characteristic is not the amount of cash (let cash do what it will!), but the availability of alternatives for the bulk of the population. It’s freedom from cash, not absence of cash. We have coined a word which encapsulates key elements of a cash lite society: LiFi (see baptismal paper here). Like WiFi, which provides retail connectivity at the edge of the internet cloud, LiFi is about connecting people to an electronic payments grid which provides Liquidity with Fidelity. WiFi is open, general-purpose broadband; LiFi is secure, special-purpose narrowband.

A LiFi world is therefore one in which every person has an electronic store of value which they can easily use to make and receive payments in real time. Just like in places with reliable on-grid electricity, we can turn on a light on-demand, knowing that it will work and that the cost of flicking the switch will be small in relation to the benefits.

Because there is no precedent for cashlessness by fiat and cash can be counted on to still be an option for a long time to come, the key challenge of LiFi is getting people to trust and want to use the LiFi payment mechanism…because it is robust, because it is safe and because it is useful. All these attributes take time to demonstrate to the satisfaction of risk- (and change-) averse users. A LiFi approach recognizes that in two ways.

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This is a guest blog by Ignacio Mas from the Bill & Melinda Gates Foundation.

It’s always hard for competitors to decide to work together on some key aspects of their business. It usually comes down to whether the players involved opt to maximize the total size of the pie or just their slice of the pie. In networked businesses, in general, the more the players work together to grow the pie, the larger the slice each one will get. That’s why mobile operators have a tradition –of which they are rightly proud— of interconnecting their voice and data bearer services. They long since discovered that their customers are best served by making sure they can send and receive messages to/from anyone, even if they are on a different network.

But we haven’t yet seen this logic extend to mobile money. In most countries, mobile money providers working together is probably less a matter of if and more about when, just like it has been for banks with sharing ATMs and mobile operators with sharing towers. And it’s probably not even about when but about how.

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I attended SWIFT’s SIBOS conference last week. This event couldn’t have been scheduled for a more exciting time – it opened with the fresh news of the turmoil on Wall Street. There was much talk about that.

As for the issues we are focused on, there was a panel discussion on mobile banking. A Western Union representative said that their average remittance size is $350. But in mobile trials (from Hawaii and UAE to the Philippines, using both Philippine telecom services Smart and G-Cash) the average remittance size was less than $100. So that’s evidence that there is demand to send lower amounts, if only the commission structure permits it. A Wells Fargo speaker said their average remittance size is closer to $500.

From India, ICICI explained their mobile remittance product. Essentially, the recipient gets notified by SMS, and then punches the code he gets on his SMS into a specially-enabled ATM to withdraw the cash. So the mobile is used purely for notification purposes, not for fulfillment.

As for some of the more cutting edge technologies, estimates on NFC-capable phones by 2011 or so ranged from 10% to 30% of installed base. So either way, it is not likely to reach poor people in developing markets in sufficient volumes any time soon.

SWIFT is creating a new messaging type especially for international remittances. Their main messaging business is related to inter-bank transactions, whereas they want to support person-to-person transfers. This was deemed by all banks to be essential to make it easier for each bank to set up bilateral relationships with other banks along remittance corridors, without having to agree a separate set of messaging syntax, rules and contracts. SWIFT would standardize all that and carry the messages too, in return for a commission. A dozen or so banks are now piloting this new product.

I’ve just finished teaching a course at Boulder on the use of branchless banking channels and technology to reduce transaction costs. This was well-attended; the four-day, 10-hour course had 39 students, and a shortened single day, two-hour version had 20 students.

We had a very interesting class discussion on whether group loan repayments through branchless banking channels would undermine the group ethos, and there was surprising consensus in that it need not. Another much discussed topic was how to balance cash in and cash out at the agents, and how to promote savings on the back of electronic payments.

In terms of use of agents for deposit-taking, we know there is a very fundamental business model problem. Agents are used to taking something like 10% commission on selling a coke bottle, a mobile prepaid card, etc. So why would they do cash in/out for much less than 10% commission if that saddles them with extra security risks and extra trips to the bank? And with that sort of commission level, microsavings are dead. There are several answers to this:

• The practical solution happening out there: agents are used mostly for special transactions where someone is prepared to give them extra commission: mobile prepaid cards, international remittance termination, bill payment (if the utility wants to get out of collecting itself). But there is very little traction on savings.
• The purist solution: use product portfolio and marketing levers to balance cash in and cash out at the village level. Agents can then manage local liquidity as a ‘closed loop.’ This would need to work community by community, and there could be no universal answers. It would have more chance of working if branchless banking was a tool managed and used by local microfinance institutions with the required level of grassroots presence and understanding. But in my view it can’t work so long as branchless banking is the preserve of the larger banks and telecom operators, as today.
• Take the agent business out of stores. This gets away from high overhead and higher opportunity costs. Combine the susu collector with Wizzkids: roving people in market stalls, going door-to-door, etc., offering to buy and sell cash for electronic value. This way, you turn the agent problem into a livelihood activity.
• The shock solution: go for total cash substitution. Eliminate cash and you eliminate the cash in/out problem. Radical, but something that one colleague said could perhaps see traction in conflict areas. The security aspect can then be a powerful driver for eradicating cash by having clients express preference for electronic over cash payments.

The general feeling was one of excitement at the potential, but a realization that these channels will, at least for a while, be dominated by larger banks and mobile operators who have the wherewithal to invest in this area. MFIs should seek to share in their infrastructure rather than to try to create their own, knowing that interoperability will take a while to develop — just as it did for ATMs and POSs.