Mobile Money Arrives, With Or Without Banks: Eric Auchard

Making mobile phones work like credit cards or wallets strikes some people as visionary and others as crazy, a kind of licence to print funny money if security goes awry. The phone industry sees mobile money as a vast new market beyond existing voice, text and data services. But, banks, with support from financial regulators, long have resisted efforts by mobile phone operators to edge in on their customers. That’s not stopped the phone industry from making inroads into basic financial services such as money transfers, payments and transactions, especially in emerging markets where banks may have shallower roots.

The issue comes down to who is prepared to assume risks such as security, credit and the threat of potentially endless fraud. Banks have long experience in managing such risks and have a head start in storing money or extending credit. On the other hand, phone companies are used to billing millions of people in small increments for network usage. The phone industry is gearing up to introduce phones for cashless purchases. These will act as secure substitutes for cash or credit cards and could be mainstream within three to four years.

In the developed world, where many electronic alternatives exist in financial services, it’s proved harder for phone companies to demonstrate the need for mobile money services. More innovative banks such as HSBC’s FirstDirect UK phone and Web banking unit are gearing up to offer account access directly to Apple iPhone users. But mobile banking services remain limited both by technical complexities and lack of demand. The answer for phone companies is to target the billion or more mobile customers globally, who have no bank account.

The vast majority live in developing markets that, not uncoincidentally, are enjoying the most spectacular growth in mobile phone use. Plummeting costs have allowed nearly 40 percent of African consumers to buy mobile phones, for example, and that penetration is expected to reach 70 percent within four years. Seventy-seven percent of Africans have no bank. The consulting group McKinsey forecast this year that mobile money services are set to surge, with 364 million unbanked customers taking advantage of them by 2012. That’s up from just 25 million to 30 million mobile money users, according to one estimate, including both those with and without bank accounts.

Where are the banks?

The debate over who is best placed to provide mobile money services, and how, was the focus of a conference this week in Barcelona, Spain. Mobile phone companies from across the globe were joined by payment processors like Visa and Western Union, technology providers that supply payment and billings systems and financial regulators seeking to get a handle on the new market. Everybody involved was there – expect for the major banks.

But Hannes van Rensburg, the chief executive of Fundamo, the largest independent provider of mobile financial systems, says the stand-off between banks and mobile communications firms is overblown. Many banks are actively creating mobile services for their own customers, he says. Van Rensburg should know: His South African-based company is the largest independent provider of technology used to run such services. More than half its customers are communications companies, but more than one third are banks, he says. There is no reason to assume that banks won’t jump into the mobile market when their customers demand it. The problem is that mobile money has caught on with customers still largely outside the traditional banking system.

Stephen Mwaura, who oversees payment systems for the Central Bank of Kenya, says there is less risk with money transfer services because no credit is involved, and therefore lighter regulation is needed. “The more you add elements, the more you complicate your life,” he said of moves by phone operators to provide more sophisticated banking services, which he said should remain governed by stricter controls. Zain, a fast-growing mobile operator in 24 markets across Africa and the Middle East, has signed up four million users in East Africa to a phone plan that does away with roaming charges and lets immigrant workers transfer money home to families via their phones. It plans to expand into all 24 of its markets by year-end. The Kuwaiti government-backed company has joined forces with Western Union, which handles $67 billion in money transfers a year to offer mobile payment services worldwide to phone companies and customers in other markets.

Making Mobile Money Pay

Mobile money makes sense, even if profits remain elusive. Jojo Malolos, head of financial services for Smart, the biggest mobile operator in the Philippines, says such services help his company retain customers and drive up average revenue per user. “The objective right now is gaining critical mass,” he says. He won’t say when his company expects such services to turn a profit. Only that, ten years into the initiative, Smart continues to invest in mobile money projects and is confident of their value.

Malolos demonstrates on his phone how simple it is for immigrant workers in the Middle East to transfer money to families in remote rural areas. Customers can pay bills via text message. He counts more than 2 million active users of his service, which combines mobile money and a MasterCard debit card issued by national banking partner, Banco D’Oro. With a few clicks on his phone’s menu, Malolos can make the case for mobile money anywhere.

This and similar services elsewhere show the technical issues to making mobile money work can be overcome. It’s up to phone companies and banks to make it easy. The great irony of the mobile technology revolution in developing countries is that, despite widespread poverty, these markets remain unencumbered by older, less connected financial systems. Every few generations of phones push these societies further toward electronic banking. Faster, more reliable networks and smarter devices with higher resolution screens will remove the physical barriers to mobile banking. Then it will be a matter of overcoming the inertia of regulators and squabbles between banks and phone companies. For banks, embracing mobile services may just be a matter of waiting until there is real money to be made. (Eric Auchard/ Reuters)