“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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Early registration closes April 1. CGAP encourages you to register with a discount code: CGAPMMSVIP to receive a $100 discount. For questions, contact Jim Rosenberg, CGAP Communications Officer.

Mobile Money Summit 2008 is two-day conference designed for senior executives from financial services institutions, mobile network operators, development organizations, solutions vendors and regulatory and policy makers. The inaugural event will provide for the first time a comprehensive demonstration of the addressable markets, showcase new solutions, and share key success factors and learnings from around the world. The goal of the Summit is to stimulate greater understanding and collaboration between all stakeholders — globally, regionally and locally. Most importantly, Mobile Money Summit 2008 will better equip participants to develop and deploy their own Mobile Money portfolio effectively, efficiently and at scale.

At this highly interactive event, you will learn:

• How Mobile Money can drive top-line growth and customer value in both financial services and telecommunications
• How Mobile Money solutions can drive economic growth and financial inclusion for individuals, communities and countries
• Best practices in the market today, and key innovations coming to market
• Strategic, operational, regulatory and market challenges to effective deployment and scale
• Key propositions for various customer segments in different markets.
• Rationales for partnership between financial services institutions and telecom companies to deliver converged mass market Mobile Money.
• Where and how to kick-start activity most effectively.

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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.

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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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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.

Like the Nano, mobile phone banking for the unbanking does not get close to the product someone in the UK, US or Japan would accept. There’s no personal relationship with your banker, and few mobile banking pioneersoffer any sort of credit or other products beyond a way to save and send funds.

But like the hollow wheel rod on the Nano, mobile phone banking dramatically slashes costs, for providers that can leverage the phones in people’s pockets and the distribution network of merchants selling airtime to accept deposits and withdrawals. And for customers, who don’t need to put out the cost of traveling to a bank to transact.

Meanwhile, the Reserve Bank of India recently indicated it plans to develop the regulatory framework for mobile banking, though it does have concerns about safety of mobile phone-based channels. Nokia’s new factory in Chennai - the youngest of its 10 manufacturing facilities around the world - churned out 60 million handsets in its first 18 months. Small wonder: India accounted for 31 million, or 1 in every 7 of the 225 million subscribers added around the world in the first half of 2007.

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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.

Kenya’s Banking Act [SEC. 2(1)] defines business as the acceptance of money from the public on deposit or on current account and the use of this money “by lending, investment or in any other manner for the account and at the risk of the person so employing the money.” Although M-PESA involves accepting repayable funds from the public, Safaricom structured the product in such a way that it falls outside the definition of “banking business.”

Funds collected from M-PESA account holders are held by M-PESA Trust Company Limited in a pooled account with the Commercial Bank of Africa. Interest earned on this pooled account does not accrue to or benefit Safaricom, and therefore M-PESA fulfils only the first half of the definition of banking (taking deposits) but not the second (employment of deposits to make money).

This is not necessarily cause for alarm. Vodafone has substantial reputational risk which tends to make it super careful about tainting its very profitable voice business. But what about a fly-by-night operator, which may be much less scrupulous and have far less to lose? Right now, Kenya does not have a national payment system law, and consequently CBK lacks the powers it wants to control entry into the mobile payments / banking space, require reporting and supervise for safety and soundness.

In the Philippines, the launch of GCash was also facilitated by the definition of banking in the General Banking Law [SEC. 3.1]. Banks are defined as “entities engaged in the lending of funds obtained in the form of deposits.” GCash involves a store of value for clients’ funds, but lending isn’t part of the service. Ergo, it’s not banking, like M-PESA.

But within a relatively short time span after the launch of GCash, the Philippines central bank crafted Circular 471, classifying Globe’s subsidiary, GXI, as a remittance agent. Rather than place the full weight of banking regulation on the GCash model, which may have been prohibitively expensive, the “remittance agent” category is sufficiently light, but crucially gives the central bank the ability to decide who can operate in the mobile payments space, engage with providers to understand their systems, request changes as necessary, and require reporting, so the central bank can actively monitor developments. Latest news from Kenya is the Payment System Bill will give CBK similar powers. However, the bill has yet to clear parliament and likely will not until the first or second quarter of next year, after Kenya’s election.

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The most recent buzz raises two points: Google-powered phones will likely utilize an “open” operating system which allows programmers to develop additional phone features, and will require Google to strike deals with handset makers and network operators to develop and service Google-powered phones. The former is not likely to make the latter an easy task given the closed nature of the telecoms market, though progress must be underway as an announcement is expected within a few weeks.

If Google has identified a demand for low-cost mobile phones in the US (probably more accurate to say “lower cost than the iPhone” because this doesn’t necessarily imply that the cost will be low relative to other product offerings), this makes me wonder how device makers and network operators are approaching emerging markets.

Ericsson, for one, is taking a “more of the same” approach. By maximizing the immediate benefits of economies of scale and deploying the same network and product lines as in other markets, Ericsson is also minimizing future costs by avoiding a two stream approach. Their reasoning: should they implement low-cost, lower capacity devices and networks in developing countries, the country is likely to outgrow the shortcut solution in just a few years. On the network side this seems like a sound approach, but I’m still skeptical that there isn’t sufficient and sustainable demand for low-cost, streamlined cell phones in emerging markets.

CGAP is currently conducting research with MSR India to understand how illiterate people interface with cell phones and whether customizations would improve customer adoption. Perhaps the research will reveal that the cost of customization outweighs the benefits, proving Ericsson’s point that both people and markets are adapting themselves more quickly than we can keep up with.

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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. 

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“This could completely change the way banking is done, and what’s interesting is that this is happening in the developing world, where 80 percent of people don’t have access to banking,” says Mark Pickens, a microfinance analyst at the Washington-based Consultative Group to Assist the Poor. “M-PESA is the kind of thing that can move the frontier for access to finance…. This is something that can actually change people’s lives.”

Read the full story here: Christian Science Monitor: Unserved by banks, poor Kenyans now just use a cellphone

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The two-day event brought together a great cast of experts including representatives from the Procredit network, GXI(Philippines), Banco Azteca (Mexico), the Colombian Superintendent of Banks, as well as David Porteous and Ernesto Aguirre (who also advise the CGAP Technology Program). This very diverse group of practitioners, regulators, and technology providers created a great base to discuss and share experiences and challenges on how to provide low-income clients in Latin America and other regions with access to financial services.  The presentations touched on a range of issues vital to successfully scaling up microfinance: market research, product development, financial education, innovative delivery channels, and supporting regulation.

Even though the use of technology and new business models to push the access frontier was a major theme of the conference, the constant theme throughout all the presentations was that technology and innovative delivery channels are only part of what it takes to scale up microfinance and reach people we cannot reach today.

BancoEstado from Chile presented impressive information about the clients they want to serve. They used this knowledge on customer perceptions and preferences to design an account product without monthly account fees, but “pay per use.”   In India, banks have been experimenting with ways to support microfinance and ICICI Bank presented its partnership model, disaggregating the microfinance value chain: Banks use microfinance institutions and NGOs as banking agents to handle savings and credit transactions.   The Central Bank of the Philippines explained how they started to adapt regulation to foster innovation, but at the same time protect consumers and the financial system.

All these delegates are true pioneers and still experimenting with the right operational approaches, organizational set-ups, regulatory frameworks, demand-driven products, and a lot of other issues to ensure client take up and increase access to finance in their market.

It will take time to unleash ready-made solutions that reach the very poor in remote areas on a viable basis, and it will require substantial commitment and investment from providers.

Want more presentations? Visit the Asobancaria website.

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