HOW will cellphone money accounts change banking? Your first instinct might be, not very much. Mobile money, as it’s known, focuses on the unbanked not on the banked; it involves tiny transactions; and is a minuscule fraction of total banking transfers.
But the speed with which mobile money is taking off, especially in Africa, is so eye-popping, it’s forcing this question to be asked in a different way. Mobile money will crash into conventional banking somewhere in the future. The question is not whether, but how and when?
The main misconception about mobile money is that people tend to confuse mobile money with banking services conducted by means of a cellphone. Services such as Safricom’s M-Pesa programme in Kenya describe themselves as a "mobile money transfer solution", not a mobile banking service.
By framing itself this way, M-Pesa opts out of a small mountain of banking regulations. There is another advantage: they pay no interest on deposits.
But now that the M-Pesa float — the amount of unspent money sitting in all the mobile money accounts — stands at 60% of Kenyan gross domestic product (GDP), you have to ask whether this characterisation is remotely accurate. (It underlines too, by the way, what I wrote last week, that most African GDP numbers are pretty meaningless.)
How the mobile money environment is shaping up is fascinating.
The notion has been around long enough now for some trends to begin showing themselves, and what they are showing is totally contrary to what I imagined.
I’m relying here on research house GSMA’s 2012 Global Mobile Money Adoption Survey, released a week or so ago. This is only the second in the series — the industry is that new. The most eye-catching statistic is that there are now more mobile money accounts in sub-Saharan Africa than there are people signed up to Facebook.
But what I love about this report is that it pops so many misconceptions about mobile money. The first misconception is that this is really an African affair, and mostly an East African one at that.
East Africa has been the innovator, and the customer level is high in this region. The report finds there are more mobile money accounts than bank accounts in Kenya, Madagascar, Tanzania and Uganda.
It finds that there are more mobile money agent outlets than bank branches in at least 28 countries. These agents are a critical part of the process, taking deposits and "cashing out" in much the same way a bank teller would. There are now more than 500,000 of them throughout the world.
The second misconception is that this is a solution that only works in poor countries that have a history of poor and expensive banking services. Hence, rich countries can more or less ignore mobile money. But the study found that among the 49 countries in the sample, "there was no statistical linear relationship between success in mobile money and GDP (at purchasing power parity or PPP) per capita".
There were success stories in countries with a GDP (PPP) per capita lower than $1,000 and in countries where it is more than $5,000. Nor was there any correlation between the level of financial inclusion and the success of mobile money deployments. For example, no correlation was found between success in the industry and the percentage of the adult population with a bank account, the number of commercial bank branches per 100,000 adults, or the percentage of the population living on less than $1.25 a day.
The third misconception is that success depends on a business model, or the kind of organisation that initiates the service, or the level of marketing and a host of other technical business notions. All these factors play a role, but the main determinant between success and failure is the legislative environment. In other words, government is the primary factor in the success or failure of mobile money.
This is crucial. It means if a country does not have mobile money, the chances are the banking lobby has convinced government that workable mobile money (in other words, new competition) is undesirable. The correlation between mobile money success and countries with poor banking systems may in fact be a correlation between mobile money failure and countries with great banking industry lobbyists.
The report also tries to discover which mobile money operators are successful. To do so it identifies 14 mobile money "sprinters" around the world. There are 150 live mobile money services for the unbanked, almost a third of which were launched last year — this is how fast this industry is growing.
There are almost 30-million active users of mobile money services who performed 224.2-million transactions totalling $4.6bn in June last year.
But even though it’s very new business, lots of launch failures are registering, along with the 14 "sprinters", the report finds.
In interviews with the sprinters, the researchers found some commonalities between these companies. Most of the sprinters are run by cellphone companies, all have serious CEO commitment, most constitute their own unit within the business, and all use intensive above and below the line marketing.
Surprisingly, the capital commitment to starting the division in all cases was tiny, about $1m, but operating expenses can be larger. Nine of the 14 sprinters are breaking even, and five are not. Clearly, expansion is the priority.
So what are people doing with mobile money? The successful operators focus on a few kinds of transactions, mostly person-to-person transfers and air-time payments. But these services are diversifying fast. Most offer "net-in" and "net-out" services too, in which money can be deposited by an outsider into the network, and a subscriber can provide cash to someone outside the service, in the same way that you Skype-in and Skype-out. Bill payments are coming online fast too, and there is a big demand for international payments, and those too are beginning to be offered.
The report does not mention it, but one of the most interesting developments is services offering mini-loans via the system. When that happens on a large scale, we are deep in banking territory.
I revert to the question of the role of government in creating a level playing field between banks and mobile money operators, because the report includes a case study on the issue. In August 2007, the National Development Bank, a licensed commercial bank, and Dialog Axiata, the main cellphone operator in Sri Lanka, launched a mobile money product called eZ Pay. The central bank required eZ Pay customers to open a bank account before they could sign up. The service didn’t gain traction. After four years, it had only 15,000 customers, despite Dialog having 7.4-million GSM subscribers. Last year, the central bank relaxed its "Know Your Customer" requirements. The new arrangement allowed an ordinary account of up to 10,000 rupees, about R500, and then a "power account" with much higher limits. The result is that eZ Pay now has 800,000 customers.
SO, after all that, will mobile money crash into banking? It seems unlikely in the short term. At the moment they are focusing on different markets and people are mostly using them for different things.
But in the long term, I hope they do crash into one another. Something that makes me nervous about mobile money is that the extraordinary powerful banking lobby will try to make sure mobile money doesn’t happen, and thereby keep a powerful competitor out of the market. Its argument will be simply that a deposit-taking institution must be "properly regulated", as they are. They will criticise, no doubt, the fact that your money earns no interest while in the account.
I hope regulators see through these arguments. I think the argument that accounts don’t earn interest is specious, since most formal bank accounts don’t pay interest — they earn interest, but they earn it for the bank, not the client.
Where they do earn interest for the customer, this is easily outweighed by fees charged. Most people, as we are beginning to discover, don’t have bank accounts for the few cents interest they earn in the unlikely event they have a positive balance at the end of the month. Most people have bank accounts in order to facilitate transactions.
There are lots of different ways of looking at a bank, but one way is to think of a bank as a database combined with a reputation. But there are other organisations out there that have very large, very effective databases. And they have great reputations. Some are sitting on large piles of money. They are called cellphone companies.
What the arms deal probe may yet find
AN ODD thought occurred to me about the new arms deal investigation which seems, rather inevitably, to be unravelling. The Sunday Times reported that the Seriti commission has already notified the lawyers of long-time anti-arms deal campaigner Terry Crawford-Browne that the African National Congress (ANC) was not being investigated because no allegations had been levelled against the organisation. Given the number of ANC members allegedly involved in arms deal kick-backs, this seems astounding. But, it would be astounding if a commission appointed by an ANC government were to find the organisation, as opposed to people who might happen to be members, in some way culpable.
Obviously, arms deal opponents hoped the commission would do its job by wading through the information, following the money, and doing some investigating slog-work itself. Political parties are not stupid enough to accept bribes directly; they would use intermediaries. It’s the commission’s job to fill in these gaps. Sadly, this commission seems determined not to investigate anything. It just intends to hear the evidence of others and come to some sort of half-baked conclusion.
But here is the odd thought. It’s at least possible that if the commission did some actual investigating, it might not find much evidence of money reaching the ANC’s coffers at all. It might not find any evidence not because there was no bribing, but because the intermediaries decided to keep the money for themselves. If that were the case, the decision by President Jacob Zuma to appoint the seemingly self-accusing commission would make a lot more sense.