Introduction

When in 2004 Globe Telecoms of the Philippines launched its G-CASH product 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 the way poor people received financial services. The 2009 MicroSave-Microenterprise Access to Banking Services (MABS) Mobile Banking Dialogue, held in Manila, provoked reflection on what has changed in ten years in the mobile banking environment. This briefing note considers some of the key developments.

Platform / Protocol In the early days of mobile payments, two main issues worried potential providers. Will there be coverage in the areas where the unbanked and potential users will be located? And what applications/communications could the phones support? It turns out that they should have been more concerned with business models and customer value propositions.

The coverage problem has largely disappeared, at least for Global System for Mobile Communications (GSM) services. Few would-be mobile payment service providers now seem concerned about coverage. In most low-income markets, general packet radio services (GPRS) are already available and 3G has been launched or is anticipated. Network reliability may still be a concern, but it’s probably not a bigger hindrance to operations than other infrastructure constraints commonly faced in remote areas (power outages, poor roads, etc.). In fact, in many countries, mobile communications networks have proven to be the most resilient in times of crisis. The evolution of the phone is harder to track, but it’s certainly changing fast. Three trends seem relevant. Figure 1 highlights the extent to which more and more phones are “enhanced,” meaning they can handle wireless application downloads using GPRS.

A major concern ten years ago was the hassle factor experienced when customers needed to download an application using the Subscriber Identity Module (SIM) toolkit. In fact, most of the early solutions that required menu downloads or customers to remember long “number code strings” were not commercially successful and created an asymmetry between target and reached segments. Although targeted at the unbanked, it was largely the banked and literate who were able to manage the download process and the unbanked need dedicated assistance and support to manage this process, which dramatically increased the costs of launching a service. With more modern phones, a dramatic drop in phone costs, Java applications, GPRS services (and an increasingly tech-conscious market), these problems seem to have been largely solved for many users. Of equal concern was the ability of SIM cards issued by mobile operators to handle additional applications. Although little data is available, it appears that most networks have successfully migrated most users to 64k SIM cards in the normal course of business, thereby removing the restriction and also removing the need for customers to complete a potentially confusing SIM swapping to take advantage of a mobile payment. Service.

The third issue concerns security, as operators must make trade-offs between ease of deployment and use and security. These themes remain and continue to be a key feature of discussions about the appropriate business model and the partnerships needed to be successful. There are now probably three groups of “core solutions” and related business models competing in the marketplace, reflecting these trends:

i) Embedded and SIM dependent solutions: The best known example of such a solution is Safaricom’s M-PESA, which is now pre-loaded on all new Safaricom SIM cards. Being integrated into the SIM card, the solution can and was designed to work on the most basic phone and has end-to-end encryption. However, given the degree of technology integration, this type of solution is extremely difficult for a non-mobile network operator (MNO) to offer and therefore gives an MNO a huge advantage over other mobile payment providers and , therefore, is a core feature of the leading MNO business. Models

ii) USSD solutions: Equally successful are solutions that use unstructured ancillary service data (USSD) and simple menus to provide mobile payment solutions. Banking mobile payment providers in South Africa have had the most success with USSD

services. However, since the initial leg of the transaction is not encrypted or secure, most of these services have been limited to “closed-loop transactions,” where money is transferred between accounts or users at a single bank, but not between banks. This is a major limitation to achieving widespread use of mobile payments, as interactions will be limited to the bank’s own customers and off-net payments must be made in cash. Since all phones can use USSD, the solution can reach large target segments, and since the USSD service does not require SIM card integration, these services can be launched with minimal involvement from an MNO. Although the MNO must agree for the service to be available and this has been a problem in some markets. In USSD solutions anyone can “play” and the banks are usually the winners.

iii) GPRS/Java solutions – involving downloads. As noted above, downloading solutions to an “improved” phone is considerably easier, and more and more people have better phones, or will soon. It’s likely that most people who are banked now have phones that can handle these kinds of downloads. This business model is perhaps the most debatable, as the downloadable application can be from a bank, a mobile network operator, or any other third party. The drawback remains that the solution is no more secure than accessing the Internet, and to compensate the provider for the associated risk, transaction fees tend to be higher.

What could the future hold? The future terrain of the industry will be governed by client and platform ownership. While mobile operators will continue to have the largest natural market share and brands, their ability to use this to attract customers to the products and services they provide will likely decline. In the current weaker global market conditions, and even with some emerging markets achieving saturation in the mobile phone market, it seems likely that the cost of upgraded handsets will continue to fall and their penetration will continue to increase. Over time, as with the Internet, this will give a greater advantage to whoever has the best app and marketing campaign to get the app to the user’s phone or drive them to their mobile-enabled website. In this regard, the announcement that Nokia phones will come in the future with a pre-loaded Nokia money solution that allows some form of card-to-card payment (since it is based on a service provided by Obopay, http://www. .obopay.com) signals the start of a much bigger competition over which app will define the mobile payment space.

What does this mean for mobile operator-led strategies? Mobile operators face an interesting dilemma. Its mobile payment services currently leverage three “assets”: its ability to provide services from the SIM card (and its control of the SIM card), its ability to determine message prioritization, and an extensive delivery infrastructure (which was originally created to sell airtime). However, some mobile operators have an explicit strategy to use their mobile payment platforms to allow users to purchase airtime at a significant discount. This implies considerable cost savings for the MNO, since the cost of depositing funds into a mobile account is usually much cheaper than the amount an MNO pays to its reseller network. However, it is not in the long-term interest of the reseller to enroll customers in a mobile money service, as to the extent that customers stop buying airtime through the agency’s network, their business will decline. . Resolving the complexity of the role of the reseller in promoting the mobile payment service is therefore a key element in the design of the business model. In some cases, MNOs rely on agents to promote mobile payments, although due to the discount offered to users, it represents a long-term threat to agent business. This contrasts with M-PESA in Kenya, where no refund is offered, precisely to protect and promote the interests of agents, who play a key role in client registration and payments. In the Philippines, the dilemma is solved by having separate sales and service channels, without resellers being responsible for selling the service. At the same time, it appears that for the customer, instant access to airtime at a discounted rate remains one of the main drivers of mobile payment adoption in most markets.

For banks and MFIs, the opportunity is to catch up. Few have yet been able to reduce their total cost of serving low-income customers by leveraging mobile as a low-cost channel, but at least in South African banks and several rural banks in the Philippines, there is enough experience and customer acceptance to start consider mobile as a central part of the “package”. This experience, as well as new revenue from airtime sales, remittance revenue and bill payments, will increasingly feed into estimates of customer profitability and market opportunities. Similarly, an increasing number of younger customers access and purchase value-added services on their mobile phones and need to find a cheaper way to finance such purchases instead of using air minutes (or charging). The natural extension is therefore that more and more users adopt solutions that link their mobile phone with their bank account, or download applications that facilitate this link.

Bottom line for MFIs: more options with less investment Whether mobile payments remain operator-led or more like the card industry doesn’t matter much to an MFI. Whenever a pervasive and interoperable transaction infrastructure emerges, there should be great opportunities for MFIs 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 adopting a mobile payment solution carefully examines the value proposition for its clients and what competing products/solutions are available.