When Globe Telecoms of the Philippines launched its G-CASH product in 2004 as a competitor to the successful money transfer launched in 2000 by Smart, the other mobile operator in the Philippines, it seemed clear that it was only a matter of time before mobile payments and mobile banking became an important part of how poor people received financial services. The MicroSave-Microenterprise Access to Banking Services (MABS) M-Banking Dialogue 2009 held in Manila provided some reflection on what has changed in the m-banking environment in ten years. This briefing note addresses some of the most important developments.
Platform / protocol In the early days of mobile payments, two major issues related to potential providers. Would there be coverage in the areas where the unfunded and potential users will be located? And which applications / communication can the handsets support? It turns out they should have been more concerned about business models and customer value propositions.
The coverage problem has largely disappeared, at least for the global mobile communications (GSM) services system. Few mobile payment service providers are now concerned about coverage. In most low-income markets, general packet radio services (GPRS) are now available and 3G has been launched or is expected. Network reliability may still be a concern, but it is unlikely to pose a greater obstacle to operations than other infrastructure constraints routinely faced in remote areas (power outages, poor roads, etc.). In many countries, mobile communication networks have proved to be the most resilient in times of crisis. The evolution of the handset is more difficult to follow, but it certainly changes quickly. Three trends seem relevant. Figure 1 shows to what extent more and more phones are “improving” – meaning that we can process over-the-air application downloads with GPRS.
One of the biggest concerns a decade ago was the annoying factor that customers experienced when they had to download an application using the Subscriber Identity Module (SIM) toolkit. In fact, most early solutions that required menu downloads or requiring customers to remember long “sets of numeric codes” were commercially unsuccessful and created an asymmetry between the targeted and reached segments. Although targeting the non-bankers, it was mainly the bankers and literates who managed the download process and the non-bankers needed special help and support to manage this process, which dramatically increased the cost of launching a service . With more modern handsets, a dramatic drop in the cost of handsets, Java applications, GPRS services (and an increasingly technologically aware market), these problems seem to be largely resolved for many users. Of equal concern was the capacity of the SIM cards issued by mobile operators to handle the additional applications. While little data is available, it appears that most networks have successfully migrated most users to 64k SIM cards in the normal course of business, removing the limitation and eliminating the need for customers to complete a potentially confusing SIM swap to use a mobile payment service.
The third issue concerns security, where operators have to balance ease of use, use, and security. These issues remain and remain an important feature of debates on the right business model and partnerships needed to succeed. There are now probably three groups of “core solutions” and related business models that compete in the market and reflect these trends:
i) SIM Dependent and Integrated Solutions – The best known example of such a solution is Safaricom’s M-PESA, which is now pre-installed on all new Safaricom SIM cards. The solution is integrated into the SIM card, can work and is designed to work on the most basic phone, and has end-to-end encryption. However, given the degree of technological integration, this type of solution is extremely difficult for a non-mobile network operator (MNO) to offer and thus gives an MNO a huge advantage over other mobile payment providers and is therefore a core feature of MNO’s lead business models.
ii) USSD Solutions – Equally successful are solutions that use Unstructured Additional Service Data (USSD) and simple menus to provide mobile payment solutions. Mobile payment providers at banks in South Africa have had the greatest success with USSD
services. However, since the first stage of the transaction is not encrypted or secured, most of these services are limited to “closed loop transactions” – where money is transferred between accounts or users at a single bank, but not between banks. This is a huge constraint on achieving widespread use of mobile payments, since interactions are limited to the bank’s own customers and payments outside the network must be cash. Since all phones can use USSD, the solution can reach large target segments and since the USSD service does not require integration with the SIM card, these services can be started with minimal MNO involvement. Although the MNE must agree to make the service available, this has been a problem in some markets. In USSD solutions, everyone can “play” and banks were often the winners.
iii) GPRS / Java solutions – with downloads. As mentioned above, downloading solutions for an “improved” phone is considerably easier, and an increasing number of people have higher quality phones or will soon have them. It’s likely that most people with a bank now have phones that can handle such downloads. This business model is perhaps the most debatable, as the downloadable application may come from a bank, a mobile network operator or any other third party. The downside remains that the solution is no more secure than internet access, and to compensate the provider for the associated risk transaction costs, these are often higher.
What can the future hold? The future industrial estate will be determined by the ownership of the customer and the platform. While mobile operators will retain the largest natural market share and the largest brands, their ability to use this to lock customers into products and services they provide is likely to decline. In today’s weaker world market conditions, and with even some emerging markets reaching saturation in the mobile phone market, it seems likely that the cost of improved phones will continue to fall and their penetration will continue to rise. Over time, and as is the case with the internet, this will bring a greater benefit to anyone who has the best application and marketing campaign to get the application on the user’s phone or to direct them to their mobile website to lure. In this regard, the announcement that in the future Nokia phones will come with a preloaded Nokia money solution that allows for some form of card-to-card payment (as it is based on an Obopay service, http://www.obopay.com ) marks the beginning of much greater competition over which application will define the mobile payment space.
What does this mean for mobile operator-led strategies? The mobile operators face an interesting dilemma. Their mobile payment services currently use three “assets”: their ability to provide services from the SIM card (and their control over the SIM card), their ability to prioritize messages and an extensive distribution infrastructure (originally set up to sell airtime). However, some mobile operators have an explicit strategy to use their mobile payment platforms, allowing users to purchase airtime at a significant discount. This entails significant cost savings for the MNO, as the cost of depositing money into a mobile account is usually much cheaper than the amount an MNO pays to its reseller network. However, it is not in the reseller’s long-term interest to sign up customers to a mobile money service as the extent to which customers stop buying airtime through the agent network will decrease their business. Thus, resolving the complexity of the reseller’s role in promoting the mobile payment service is an essential part of the design of the business model. In some cases, MNEs rely on agents to promote mobile payments, although this is a long-term threat to agents because of the discount offered to users. This is in contrast to M-PESA in Kenya, where no discount is offered, precisely to protect and defend the interests of the agents, who play a key role in customer registration and payments. In the Philippines, the dilemma is resolved by having separate sales and service channels where the resellers are not responsible for the sale of the service. At the same time, it seems that direct access to airtime at a discounted rate for customers remains one of the main drivers of mobile payment acceptance in most markets.
It is possible for banks and MFIs to catch up. Few have so far succeeded in lowering their total costs for low-income customers by using mobile as a cheap channel, but at least South African banks and several rural banks in the Philippines have sufficient experience and acceptance by the customer to start by considering mobile as a core part of the “package”. This experience, as well as new revenue from airtime sales, remittance revenues and invoice payments, will increasingly be used for estimating customer profitability and market opportunities. Likewise, an increasing number of younger customers are accessing and buying value-added services on their mobile phones and need to find a cheaper way to finance such purchases rather than using airtime (or tax). The natural extension is therefore that more and more users are going to use solutions that link their mobile phone to their bank account, or download applications that facilitate this connection.
In short for MFIs: more options with less investment Whether mobile payments are operator-led or more like the card industry, an MFI doesn’t really matter. If a dominant and interoperable transaction infrastructure is created, MFIs should have great opportunities to redesign the business process to reduce costs using the capabilities of mobile payment platforms. This is already happening in the Philippines and in Kenya. However, it is equally important that any MFI considering using a mobile payment solution carefully examines the value proposition for its customers and what competitive products / solutions are available.