Mobile Money Can Deposit Great Change in Emerging Markets
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In developed countries, mobile phones are just another way to access traditional banking services, but in developing nations, the effect of “mobile money” on financial services is already monumental.
When the Internet came along, banks in developed countries rushed to provide online banking services. This changed the customer interface and moved services out of the bank branch. Today, mobile phone users pull up an app on their phone rather than on their computer screen. But under it all, the services and the customers have remained essentially the same.
Contrast that with developing countries, where mobile phones are bringing financial services to billions of consumers who had previously been completely excluded from the formal financial sector. Many refer to this group of people as the unbanked. The more astute identify them as potential clients: They are the billions of potential clients who need and want financial services and are ready and able to pay for them.
The push for mobile money
Mobile money services in developing countries are primarily targeted at the unbanked. It is estimated that 2 billion people have a mobile phone but do not have a bank account. This means that over half of the world’s unbanked can be accessed through a basic cell phone. With this unprecedented level of access, the push for mobile money continues to increase for both social and profit motives.
Financial inclusion is a priority in emerging markets. It has been shown to alleviate poverty, increase social justice and improve quality of life. Increased financial inclusion also contributes to the economic growth and stability of an emerging market. Consequently, the potential for mobile phones to overcome so many barriers in serving the unbanked has created great excitement.
Many developing countries lack the physical infrastructure required to offer financial services, such as roads, bridges and electricity. These issues make it cost-prohibitive for banks to set up branches in rural areas. Mobile phones enable banks to overcome these physical barriers.
Even for banks willing to serve the unbanked, the fees necessary to cover the associated costs of serving them — particularly people in rural areas — tend to be prohibitively high for the target consumer. Variable costs for financial services tend to be based on number of transactions and not number of customers. This is particular troublesome for those living on a low income, who tend to perform frequent, low-value transactions.
Mobile money systems allow financial services to be provided with low overhead and therefore at reasonable rates. Such systems also charge customers a fee per transaction, which allows consumers to weigh the costs against the benefits of frequent transactions and to determine their own personal optimal number of transactions.
Mobile money and microfinance
For mobile money to be sustainable in the long term, it must be profitable. It is estimated that up to 364 million low-income individuals will be utilizing mobile money by the end of 2012, which would generate $7.8 billion in revenue. In Kenya, the M-PESA mobile money service is the success case most often referenced when discussing profitability. Offered by Safaricom, the country’s largest mobile network operator, M-PESA’s gross revenues amounted to $157 million in 2010, up 56% from the previous year.
M-PESA accounts for 13.3% of Safaricom’s total revenue and is a significant part of its operations. However, this level of profitability is thus far unique. The mobile money market is still very young, so while the potential exists, the level of profitability predicted is still to be achieved.
When mobile money services were first offered by mobile network operators (MNO), they consisted of money transfer and payment systems. Then financial institutions soon began leveraging the mobile channel as well. Financial institutions began offering formal financial services, such as credit, savings and insurance, to newly accessible geographic areas and consumer groups.
While microfinance institutions already serving the unbanked are familiar with the unique needs of the poor, larger financial institutions still struggle to design products for this new client base. Microfinance products are not simply standard financial products sold in smaller amounts. Success in this market requires new products lines designed specifically for those with small incomes.
A future mobile money ecosystem
The mobile money market is spreading quickly across the developing world, particularly in Africa. In 15 African countries, more than 10% of adults used mobile money in 2011. Globally, there are 137 live mobile money deployments, with 95 mobile money services in the planning stages.
But the current mobile money ecosystem is siloed. Each mobile money service stands alone, with minimal interconnection to other services or to an international payment service.
Despite its shortcomings, the current mobile money ecosystem is maturing at a rapid rate. While others started the movement, it is now time for companies with years of IT, financial and mobile expertise to start playing a more significant role. The initial obvious players, MNOs and financial institutions, are being joined by others, such as cell phone manufacturers, platform providers, service integrators and international payment providers. Each of these players is key to developing and expanding the mobile money value chain, and leaders are emerging with the expertise, reputation and market power necessary to shape the market.
Whether a mobile money system is led solely by an MNO or through open partnerships, mobile money will always require a strong multiplayer ecosystem. However, for the mobile money market to maintain and expand its value proposition, these players will need to develop an open, interoperable ecosystem based on a scalable, agile and cost-effective platform.
The future structure of the mobile money ecosystem is yet to be determined. However, the potential for a unified ecosystem is already coming to fruition. Western Union has numerous partnerships established with international mobile network operators. Visa and MasterCard are already developing and supporting multiple mobile money services. As linkages with international payment networks transform national mobile money systems into a unified international mobile money ecosystem, the life-changing benefits of mobile money will truly be realized.
ERICA SALINAS is a strategy consultant in CSC’s Federal Consulting Practice, North American Public Sector.