A draft set of Guidelines were issued for comment in June, but are still in development. RBI signaled several times in the prior year that it planned to look in earnest at mobile financial services.

CGAP’s Notes on Regulation of Branchless Banking in India took stock of the situation earlier this year.

In principle, one would expect open, interoperable payments platforms to be easier to market and more successful than closed ones. Some early ventures have indeed tried to work seamlessly with existing systems, offering bank cards alongside mobile phone capability (SmartMoney, WIZZIT).

Yet other ventures have involved closed systems, through which users can transfer funds only to other members of the “club” (G-Cash, M-Pesa). Promoters of closed systems may be able to seize time-to-market advantages by not having to engage in lengthy negotiations with partners. Particularly in a context where many customers may not trust financial institutions to begin with, creating a vertically integrated end-to-end model maybe a reasonable market entry strategy rather than outsourcing key functions, such as cash handling or sales and marketing, to third-party agents or even large retail chains.

But whatever market entry strategies are used, in the long run customers will benefit more and pay less if interoperable networks allow them to transact with anyone, at any time.

We are looking into the different pieces of the value chain for delivering information and core banking systems through an application service provider (ASP) OR software as a service (SaaS) model. These functions may be performed by a microfinance institution (MFI), a national or regional microfinance association (MFI-A), a local IT service provider (ITSP), the ASP or SaaS vendor (Vendor), or another, new party.

ASP or SaaS models would seem particularly likely to fall short of customer expectations when it comes to support functions. One reason that MFIs are so dissatisfied with existing microfinance software vendors is that they provide poor quality support after the sale – and in particular that most of these vendors do not have local support providers in the countries in which their MFI customers operate. For example, a vendor from Ecuador may have customers in Peru but no on-the-ground support staff in that country.

When we talk of ASP or SaaS models, there is even less personal interaction between supplier and MFI consumer. Software and servicing post-implementation is touted as being completely remote. To ensure that ASP and SaaS vendors aren’t painted with the same brush as traditional MFI software suppliers, these vendors must pay particular attention to the customer experience post-sale. Support functions, as well as other critical “soft” pieces of the value-chain are asterisked for emphasis. These pieces seem relatively more likely to influence whether an MFI will sign up for the service and how satisfied with the service it will be post sign-up.

In most cases the functions above can be matched easily with one or another actor’s competencies or potential capabilities. But for several functions, none of the actors on the scene seem best positioned to assume responsibility. In general, these functions require a combination of technical and microfinance abilities that typically neither a vendor nor microfinance association possesses. Most functions in this category relate to offering the service to the MFI community – they include the design of packages, the “onboarding” of an MFI onto the service platform, and perhaps most importantly, the handling of responses to MFIs who request bug fixes or adaptations to the service.

This topic is only getting more interesting. Last week I had the opportunity to speak via videolink to a conference in Brazil on how the web could revolutionize - or is revolutionizing - life in developing countries - via cell phones. That was a great conversation, organized by our friends at the World Bank and linked up to the Workshop on the Role of Mobile Technologies in Fostering Social Development, organized by the people who brought you those three w’s in your web browser, W3C.

That conversation touched on issues beyond mobile banking - including health, agriculture, public safety. And there were some fascinating parallels between the different fields. For example, Mark Landry, Office of the U.S. Global AIDS Coordinator talked about a program that his group is working on in Africa that uses mobile phones to reach out to patients to remind them of treatment visits, or send vital information to providers. Mark said something that resonated with me - he said that “mobile heath needs to build on the existing health infrastructure - it’s about getting on the grid.” The same is true for mobile banking. We don’t want to see a bunch of not-connected financial subsystems that leave people out of the formal financial system. That isn’t good for anybody. You can watch the discussion here.

Another comment that was striking came from Brazil - that we all need to be careful to not fall in love with the technology. That we shouldn’t be doing things just because we can. That issues of culture, levels of education, and tradition all have much to do with the speed and efficacy of adoption of new services over technologies such as mobile phones. This is not a new idea - this is something we have been saying at CGAP for awhile, and most recently in Focus Note 46, “The Early Experience with Branchless Banking.” And it’s not specifically about developing economies, either. If you and I trade mobile handsets in a coffee shop, we’re both going to need a few minutes to figure out how to use the unfamiliar device. And if you have an application on that handset for a particular service - that is even more true.

All this has me wondering where mobile banking is on Gartner’s famous (or infamous) hype cycle. If you don’t know it, I’ll let them explain:

Since 1995, Gartner has used Hype Cycles to characterize the over-enthusiasm or “hype” and subsequent disappointment that typically happens with the introduction of new technologies (see Understanding Gartner’s Hype Cycles) for an introduction to the Hype Cycle concepts). Hype Cycles also show how and when technologies move beyond the hype, offer practical benefits and become widely accepted. Read More.

Market momentum is certainly accelerating. There are signs of activity in Latin America, as well as a deepening of the mobile banking work already underway in parts of Asia and Africa. But where are we at in this cycle (hype cycles can be applied to any technology, I’m not just picking on mobile banking). Given the blog buzz, media focus, and parade of conference announcements and press releases, I think we’re somewhere between numbers one or two here (source again, Gartner):

1. “Technology Trigger”
The first phase of a Hype Cycle is the “technology trigger” or breakthrough, product launch or other event that generates significant press and interest.

2. “Peak of Inflated Expectations”
In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications of a technology, but there are typically more failures.

3. “Trough of Disillusionment”
Technologies enter the “trough of disillusionment” because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic and the technology.

4. “Slope of Enlightenment”
Although the press may have stopped covering the technology, some businesses continue through the “slope of enlightenment” and experiment to understand the benefits and practical application of the technology.

5. “Plateau of Productivity”
A technology reaches the “plateau of productivity” as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. The final height of the plateau varies according to whether the technology is broadly applicable or benefits only a niche market.

So again, I think we’re somewhere between “Technology Trigger” and “Peak of Inflated Expectations” here. Gartner did look at consumer mobile applications about a year ago. The key is to think about getting to numbers four and five, right? To see this through to when it can actually become widespread. Something to remember if we get to the “trough of disillusionment.”

Outsourcing allows banks to focus on their core competency: providing financial services. Outsourcing can also reduce operating costs, help the institution make efficient use of technology, save on investment in hardware and software, streamline reporting to management and regulators, provide access to additional functionality, improve data security, and the list goes on. The perceived benefits seem to be paying off as the number of US banks outsourcing IT is increasing, especially among medium-sized institutions.

Microfinance institutions face many of the same technology challenges as banks in the US. If technology is such a headache and outsourcing can help alleviate some of these grievances, why aren’t more MFIs outsourcing their information systems?

While there does seem to be increasing chatter on the topic, some of the big differences between microfinance institutions and US banks may explain the lag. First of all, unreliable electricity and internet connectivity is a fact of life in many (most?) MFIs. Technology providers need creative solutions to reach these markets in a way that improves upon systems already in place (i.e. more convenient and lower cost). Second, MFIs require specialized software designed for things like group loans and compulsory savings. A company which outsources for US banks, for example, would need to tailor its products and services to be compatible with the particular needs of MFIs.

Despite the potential hurdles, outsourcing appears promising for microfinance. Will the outsourcing trend transcend geographic and other boundaries?

That said, who will pay for interoperability? If I am a service provider, why should I subsidize/pay for the infrastructure that could benefit my competition?  Visa/Mastercard and the like were not interoperable at first, and we might well expect the same in the mobile banking space. So initially, it makes sense that the field of mobile banking is developing the way it is.

This week our team has been in Cairo for the first ever Mobile Money Summit. Organized by CGAP, DFID, IFC and the GSM Association, 429 delegates from 67 countries gathered to hear from telecom CEOs, banks, microfinance organizations, solution providers, and regulators. GSMA tells us that delegates were more or less evenly comprised of these four groups: telecoms, financial service providers, vendors, and the NGO/government/donor community.

In between powerpoints and conversations in the exhibition hall, some common threads have emerged:
-an awareness of the need for developing domestic financial services and systems, not just international remittances;
-a real emphasis on the vital role played by banking agents, who conduct the cash-in and cash-out function on behalf of a service provider;
-seeing poorer customers as a big opportunity.

As noted in a recent CGAP Focus Note, mobile banking won’t automatically benefit poorer people. There’s a need for the development of interoperable payments platforms, practical and risk-based approaches to regulation, as well as shared networks of cash-handling agents. There is also a need for product development that overcomes the lack of human interaction and reliability concerns that may hinder customer adoption today.

Those challenges are evident in places such as Kenya. Andy Chung of Vodafone spoke about M-PESA, which today boasts 2.3 million customers and is expanding in Afghanistan and would like to expand into even more markets. But are those customers poor people? Would M-PESA automatically reach poor people?

“Any new product penetrates from the top-down. This is the early adopter model that we see with all technologies,” said Chung.  Only with active engagement and perhaps subsidy from development organizations would the people making less than $2 a day begin to take on such services.

Is this discouraging? No. It just means that for mobile banking, it is really early days. The  Mobile Money Summit has been billed as the world’s first global mobile banking conference, and that’s true. It would have been difficult to convene a gathering of this size and shape even one year ago. Now seems to be just the right time to convene this sort of gathering.

What is next? Will industry momentum continue? Will poor people be served by ever
more providers? What will the status of industry be one year from now?

Watch this space.

“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.

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.

M-PESA’s commercial launch in Kenya required months of discussions with the Central Bank of Kenya about why M-PESA is more a payment service than a bank deposit. Once launched, the market responded with an excitement banks must marvel at: 1.8 million registered users in the first year (in a country with only 4 million bank accounts total). Central banks in other countries may be attracted by efficiency gains in the national payments system, but they won’t always be ready to allow mobile wallets if they are treated like deposits.

One solution may be payment system legislation that creates a licensing window for payment service providers that take funds from the public, but solely for the purpose of facilitating a payment or transfer. The EU’s Payment Service Directive will do just that, but much still has to be worked out by individual national governments before the November 2009 deadline. That means EU experience could become an important signpost to emerging market countries down the road. But it’s likely to be several years before a European track record emerges on carving out dedicated rules for firms in the payments business.

In the meantime, mobile operators may be better off pointing to countries that have crafted more ad hoc but, so far, very workable arrangements to oversee mobile financial services. In the Philippines, the central bank constructed accommodations allowing one mobile operator to offer a mobile wallet directly (Globe), and another model in which banks outsource the vast majority of functions to the operator (Smart). Both required some flexibility on the part of the regulator, as banking laws could easily have stood in the way. Together, Globe and Smart have over 7 million registered users for mobile financial services.

But the hurdles don’t stop here, as Vodafone seems to be finding out in switching on its UK-Kenya remittance service via M-PESA, according to this report. Moving money across borders immediately attracts concern about money laundering and terrorist financing. Vodafone is partnered with Citi, but it seems regulators still have questions about KYC. At the Kenya end, M-PESA customers open accounts via agents, who are neither employees of Citi or Safaricom, Vodafone’s Kenyan affiliate.

And that may be the one quick lesson for mobile operators: partnering with a bank may not automatically solve all your regulatory problems.

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?

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.