Archive for: Business Case

Over the last few weeks on this blog, we’ve looked at M-PESA in Kenya and Tanzania (read more about this comparison at www.cgap.org/technology), Zain’s Zap product that recently launched in Tanzania, and Zantel’s launch of Z-PESA. Here are some of my concluding thoughts on mobile banking in Tanzania.

With the success of mobile banking in neighboring Kenya, many people assume that similar success would be quick to arrive in Tanzania. And indeed there are many important lessons from Safaricom’s implementation of M-PESA in Kenya for m-banking launches all over the world. Marketing must be clear and simple, targeted at the common citizen’s need for a specific service. A strategic commitment from the entire company and the specific m-banking team must be strong. A willingness to make considerable investments, such as SIM swaps, must be present. And somehow Kenya was able to get agent acquisition to an auto-catalytic level.

Yet the mobile banking landscape in Tanzania is quite different from that of Kenya and must be adjusted accordingly. In some ways, we already see that happening in a form of “m-banking 2.0” emerging.

1. Zain recognized the need to pay commissions to agents much quicker than Safaricom has done in Kenya. In fact, their business model is such that agents receive commissions immediately. In response, Vodacom has also restructured its commission payments so that agents receive commissions directly into their float account.
2. Zain created a richer product proposition than simply “send money home” like that of M-PESA Kenya. In addition to remittances, Zap is focused on micropayments and business to business transactions. This makes it attractive to banked and unbanked customers alike.
3. Zantel and Vodacom realized that initial float accounts can prove an obstacle for agents to begin offering Z-PESA or M-PESA. They are both considering financing to help these agents get started.
4. Finally, pricing has been approached differently in Tanzania, both by Zain which allows customers to negotiate directly with agents and by Vodacom which has created a more segmented price scale for transaction amounts, making it more affordable for customer to send small amounts of money.

Perhaps Kenya is more of the exception than the rule to always be followed. While there are many good lessons to be learned from the Kenyan experience, it may not always be possible to carbon copy it anywhere in the world.

Over the last several weeks, I’ve been discussing the mobile banking landscape in Tanzania. I started with a comparison of M-PESA in Kenya and Tanzania, and next looked at Zain’s Zap product.

The third mobile payments product that has entered the Tanzanian market in the last year is Z-PESA offered by Zantel, the fourth operator in Tanzania. Zantel originated on the island of Zanzibar and only arrived in Dar es Salaam three years ago. It is now slowly expanding its network throughout the country and has recently achieved national coverage. But as the fourth operator in Tanzania with 8% market share as of 2008, it is already one step behind Zain and Vodacom in competing in the mobile payments space.

USSD-based Z-PESA launched in April 2008 in a race with Vodacom to offer the first mobile payments service in Tanzania. Like M-PESA, Z-PESA got off to a rocky start when it initially launched in April 2008. Looking back at the launch, Zantel believes that it was done more from a technology perspective instead of a commercial perspective. As a result, a new team is currently re-evaluating Zantel’s overall strategy towards Z-PESA, from commission structures to pricing to marketing. There is a comparison of agent commissions and pricing at www.cgap.org/technology.

Business Model & Agents

Zantel has found the task of building its agent network a challenge, as have many MNOs. While they are working with their high volume airtime dealers, they recognize the need to go beyond this network. They have lowered the initial float amount required for agents to get started. They are also considering putting up half of the initial amount and providing the other half to agents as a loan. In addition, agent locations previously required a computer to log transactions. But this made it very difficult to ramp up the agent network, so now agents simply have a physical log book to record transactions.

While Z-PESA may be a few steps behind M-PESA and Zap due to Zantel’s market share, it is still another competitor in this increasingly crowded space in the Tanzanian market.

If you didn’t catch the comparison we did recently of M-PESA in Kenya and Tanzania, you can read about it at www.cgap.org/technology. But in addition to M-PESA, there are several other mobile payment products that have launched in the Tanzanian market over the last year.

Perhaps Vodacom M-PESA’s toughest competition is offered by Zain, the second-largest mobile operator in Tanzania after Vodacom.  Launched simultaneously in Tanzania and Kenya in February 2009, Zain’s new Zap product aims to link micropayments to merchants, thereby circumventing the need to convert money into cash. From Zain’s perspective, there are two ways to approach a mobile payments product. Either an MNO focuses on transfers and remittances or it focuses on micropayments. Zain has chosen the latter approach with the goal of going beyond remittances in offering a service that focuses on small payments made directly to merchants.

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Going Cashless at the Point of Sale: Hits and Misses in Developed Countries is the latest CGAP Technology Program paper in which Ignacio Mas and I analyze six instances of electronic money initiatives in the developed world. We hoped that these experiences would provide us with insight into what to do and what not to do with similar initiatives now being attempted in many developing countries around the world. The last post in this series looked at the first scheme under the category of mobile operator-faciliated payment instruments (Mobipay). Now I have taken an excerpt from the second such scheme, Moneta.

SK Telecom (SKT) belongs to the third largest chaebol (conglomerate) in Korea. SKT controls around half the market for mobile telephony, with 20 million customers. It has developed a comprehensive framework for mobile payments (Moneta), mobile banking (Mbank), and mobile commerce. Moneta was launched in November 2002 as a mobile wallet application that allowed customers to make proximity (in-store) payments through several mechanisms. Moneta initially supported a mobile cash payment product (Moneta Cash) and evolved toward a platform to support credit card payments through mobiles.

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In a recent CGAP Focus Note, Ignacio Mas and I wrote about six cases of e-money schemes in developing countries. Going Cashless at the Point of Sale: Hits and Misses in Developed Countries intended to extrapolate lessons from these experiences to shed light on the work being done with e-money in developing countries. In past posts, I chose excerpts of the paper that discussed smartcard-based electronic-cash provider schemes. Now I turn to mobile operator-faciliated instruments, looking first at Mobipay.

Mobipay is a mobile payment mechanism that allows customers to pay for goods through their mobile phone using a range of payment instruments: credit cards, debit cards, or the operator’s account. It supports both in-person and remote payments. The platform is open to any mobile operator or payment instrument issuer in Spain.

Each Mobipay customer gets a virtual wallet, which can contain up to nine different payment instruments. Each time the customer wants to make a payment, the system will ask which of the available payment instruments the user wishes to pay with. Customers can register a new bank payment instrument in their mobile wallet by requesting it from its issuer (through their branch, ATM, Internet banking, or telephone banking channels) or by sending a short messaging service (SMS) with the keyword ALTA (subscribe) followed by the card number. Mobile operators automatically register the mobile account as a payment method (whether the customer is on a prepay or postpay plan) when their customers use Mobipay for the first time.

There are three main ways of initiating a payment. For smaller, in-person transactions, customers can give their phone number to the merchant, who will then issue the payment request. Larger retailers can use a special barcode reader that can acquire the customer’s mobile phone number directly by reading a tag on the customer’s phone, which reduces the possibility of error. For purchases from machines or for remote purchases, the customer can enter a transaction code that identifies the product to be purchased (e.g., a parking meter might display the code *145*980*122#). In this case, the customer initiates the payment request.

Mobipay was trialed in mid-2002 in a small town and launched nationally in late 2002. In less than a year, it acquired 17,000 customers and 4,500 merchants (2,800 online and 1,700 bricks and mortar). Six years later, there are only 400,000 registered—not necessarily active—users, amounting to less than 1 percent of the population. And less than 2000 transactions are processed daily.

This dismal performance can be explained by two main factors. First, Spain is highly penetrated with banking services and infrastructure, so Mobipay struggled to open up a niche in the retail payments market. Second, Mobipay did not have a marketing budget to promote its own service; it had to rely instead on promotion by its shareholders (who were also its customers). These shareholders, in turn, did not see much benefit in promoting the Mobipay brand, because they felt that their competitors (whether the telecoms or the banks) would benefit equally from their marketing expenditures. As a result, Mobipay has languished in the absence of effective marketing or a “killer application” that can raise public awareness of the service.

You can read about the other cases we analyzed in the paper here.

Recently, Ignacio Mas and I wrote a CGAP Focus Notes entitled Going Cashless at the Point of Sale: Hits and Misses in Developed Countries. We wanted to analyze the history of electronic money schemes in developed countries, more specifically in Europe and Asia. We thought it would prove a useful exercise as CGAP works towards sustainable branchless banking models in developing countries. As expected, our research shed light on important lessons.

In the paper, we discuss three broad approaches, and in each case we look at two providers who met different degrees of acceptance in the marketplace. Although our primary interest is with payment through mobile phones, we start with two cases that use smartcards, because these share many of the same characteristics and issues as payments through mobile phones. The last blog post looked at Mondex. Now we turn to Octopus.

In 1979, Hong Kong’s Mass Transit Railway (MTR) launched a prepaid card with a magnetic strip as a ticketing system for use with its rail services. In 1994, Creative Star (renamed Octopus Cards Ltd. in 2002) was formed as a joint venture between MTR and four other public transport operators in Hong Kong to make it an intermodal ticketing system (i.e., including buses, ferries, subway, etc.). The Octopus card, a contactless smartcard based on Sony’s FeliCa chip, was introduced in 1997, replacing the old magnetic strip cards. The card does not need to be physically inserted into a device to be read, which makes payment very convenient for users in a hurry: all they have to do to pay the exact fare is to swing their purse or handbag near the card reader.

The value is stored securely in the card itself. The card can be personalized for an extra charge with a photo, and personal data can be kept on record. If a personalized card is lost or stolen, the customer can reclaim the remaining value of the card, and the original card will be blacklisted to prevent its use.

At the time of launch, acquiring an Octopus card required a deposit of HK$50, which created widespread resentment with the new payment mechanism. However, adoption was driven by (i) very rapid conversion of all turnstiles to the new system; (ii) a short phase-out period for the old ticketing system of only 2–3 months; and (iii) a pricing scheme of the only remaining ticketing alternative—a single trip ticket—at a much higher price. This amounted to a compulsory conversion by all transport users, such that within 3 months, three million cards—a number equal to half the residents of Hong Kong—were sold (Siu 2002).

The Octopus system is now a widely used electronic cash system. By mid-2008, there were over 17 million Octopus cards in circulation (which is more than twice the population of Hong Kong), with more than 10 million transactions, worth HK$85 million, processed daily (Citi 2008). The cards are used by 95 percent of the population of Hong Kong aged 16 to 65; the average user stores around HK$63–65 on the card.

Van Hove (2005) notes that Mondex failed to take root in Hong Kong, whereas Octopus has taken root. Octopus had four distinct advantages over Mondex:

• Having signed up all the main public transport companies in the territory, Octopus had a de-facto monopoly with a large user base—mass transit users.

• Octopus focused on replacing cash in unattended POS—ticketing machines. The ability to present exact fares at all times through a smartcard at unattended machines offered a big convenience factor for users. In contrast, at least initially, Mondex attempted to replace cash in stores, where not having the exact change is much less of a bother for customers.

• Octopus’s contactless features made it extremely convenient for users—indeed, faster than using cash. The cards do not have to be inserted and, in fact, generally do not even have to be withdrawn from wallets and handbags, to be read by the card readers.

• The card’s personalization feature means that value can be retrieved by users who lose their card or have a faulty card.

You can read about the other cases we analyzed here.

Recently, Ignacio Mas and I wrote a CGAP Focus Notes entitled Going Cashless at the Point of Sale: Hits and Misses in Developed Countries. We wanted to analyze the history of electronic money schemes in developed countries, more specifically in Europe and Asia. We thought it would prove a useful exercise as CGAP works towards sustainable branchless banking models in developing countries. As expected, our research shed light on important lessons.

In the paper, we discuss three broad approaches, and in each case we look at two providers who met different degrees of acceptance in the marketplace. Although our primary interest is with payment through mobile phones, we start with two cases that use smartcards, because these share many of the same characteristics and issues as payments through mobile phones. Here is an excerpt discussing the first case, Mondex.

Mondex is electronic cash on a card. It was designed to mimic cash, particularly small notes and coins (e.g., micropayments), so transactions with Mondex had to be extremely fast and had to incur no transactions cost. Accordingly, Mondex was conceived as an offline transactional method that does not require clearing systems to support individual transactions. Mondex-type systems are generally called “e-purses.” Many such systems emerged across Europe in the late 1990s: the Proton system backed by Visa in Belgium and the Danmont system in Denmark were other early projects.

Under the Mondex system, customers are issued a smartcard, which is a plastic card with an integrated circuit or chip from which data can be read and updated by card-reading devices. The chip stores the money value, but this is not linked to any bank account, and the information is not backed up on a server. Thus, the money value is irretrievably lost if the card itself is lost, and the card provides a much higher level of anonymity for users.

Consumers load Mondex value by transferring money from their (separate) bank account using an ATM or a Mondex-enabled telephone, which has a card reader and is connected to the Mondex system. The float is kept by the Mondex issuer (a private company set up by Mondex International in each country), from whom participating banks would “buy” Mondex value to meet their customers’ requirements for Mondex value.

Extensive field tests were conducted in Swindon, in the United Kingdom, during 1995–97 and in Guelph, Canada, in 1997–98. Both involved a very strong marketing push to get a critical mass of merchants to take up the card-reading devices. In the Swindon trial, 14,000 cards had been issued by the time the trials were discontinued after 3 years, compared with the uptake of 25,000 cards that had been anticipated for the first year alone (Van Hove 2005). Use of the cards turned out to be much more disappointing. Although this service still lingers in a few countries, it never met much market success.

Mondex is one case which shows that customers will adopt (or not) a new payment service or technology when (i) it provides clear benefits relative to current alternatives and (ii) they can trust it based on a clear understanding of the risks involved. Mondex failed to convince the public on both grounds.

Read the rest of the cases we analyzed here.

Today we begin a blog series from a recent CGAP paper, Banking on Mobiles: Why, How, for Whom? In it, Kabir Kumar and Ignacio Mas examine the business case and deployment options around mobile banking for smaller banks and microfinance institutions. With effective partnerships and technical choices (which affect customer uptake), we believe there is a strong market opportunity to reach poor people with a broad range of financial services.

If you are a small bank thinking about doing mobile banking, then you are where Abbas Ali Sikander, the group executive director of Tameer Microfinance Bank in Pakistan, was a year ago. He wondered then: “How does Tameer get to market rapidly without the burden of physical infrastructure investments, especially in rural areas?”

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Mobile operators have notched some high profile successes in offering financial services to the poor. Think M-PESA in Kenya or GCash and Smart Money in the Philippines. They’ve have logged several million users for their mobile money transfer services which appear cheaper and more convenient than traditional banking products.

Will banks respond by emulating their new competitors from the mobile world? Banks have an appetite for offering multiple products to their clients, so it would be a boon to the poor if banks wanted to ramp up their offerings via new electronic channels. But the emerging picture is not always rosy.

Many banks see mobile as merely a threat, according to IFC’s Andi Dervishi, who leads investments in alternative-payments systems for the IFC. “Banks remain conservative. They don’t see this as a big opportunity. They are taking a more defensive position, rather than offensive, and not really going after the customer. Their business model needs to be changed.” Countries like India, China, Brazil and Russia now have more mobile phones than ATMs, giving rise to the notion that mobile will support the next wave of innovation in banking in emerging markets where low-revenue customers means banks need to find low-cost channels. But instead of jumping to explore, most banks are playing defense.

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This is an excerpt from a recent CGAP paper, The Early Experience with Branchless Banking. The paper synthesizes the observations and research of the CGAP Technology Program. Gautam Ivatury and Ignacio Mas wrote the paper, with substantial input from the entire program team. This blog series will cover seven observations, four uncertainties and four predictions for branchless banking – what we call mobile banking and other technology-enabled banking solutions.

Early movers with a disruptive business model can afford to be picky about the segments they address. Emboldened by a dramatic cost advantage over established players, they are able to focus on the most attractive customer segments. As long as these constitute a sufficiently large pool of people to meet their growth aspirations, they have little incentive to expand into others. They will concentrate on building defensive barriers through scale (growing quickly) and depth of retail network, rather than on expanding into new segments and service offerings. Thus it is, as explained above, that early branchless banking projects have not addressed the currently unserved population.

However, the benefits of the cost advantage will be eroded overtime as their own success induces new entrants or the adaptation of existing players to the new cost structure. With greater competition, the focus of new entrants will be on expanding the market so as to avoid head-to-head competition for market share with early movers who will have secured a strong position through scale. Hence, we can expect targeting of currently unserved customers to come not with the innovation but with the competition phase of branchless banking.

One should not underestimate the market-transforming potential of solutions that cut the cost of service provision at least 50 percent or so. What is less clear is how long it will take for the competitive dynamics to play out for the benefit of currently underserved populations.