What do we mean by mobile money interoperability?

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[Susie Lonie]Intuitively, interoperable mobile money schemes sound like a good thing.  Telecoms services interoperate; bank accounts (mostly) interoperate; and many case studies have demonstrated that interoperability caused these markets to grow, to the benefit of all.  So why not mandate interconnected platforms for mobile money?  It’s a “no-brainer”.  Or is it?

The MM market is currently afflicted by a lack of agreed terminology – as is normal for any new market – so first we must define exactly what we mean by MM interoperability.  If we put international remittances to one side for now, there are two distinct high level domestic candidates:

  1. The ability for customers of any mobile money operator (MMO) to connect with a range of other types of financial service provider, such as banks and payment services providers (PSPs)
  2. The ability for customers to send e-money between MM accounts provided by different MMOs on different platforms

Type one, more accurately termed interconnection really is a no-brainer as discussed in my previous blog post [http://www.chyp.com/mobile-money-practice/blog-entry/time-for-mobile-money-to-start-playing-with-the-big-boys]  .  Indeed it can be argued that in many markets, especially those where domestic remittances are less common, this interconnection is needed in order to create successful MM services.  It will certainly result in growth of the whole MM market, particularly in “dual economies” with a more developed financial service infrastructure as well as a high unbanked population.   It could theoretically be achieved by multiple bilateral agreements between MMOs and the various financial institutions.  In practice this is likely to be limited to interconnection between MMOs with large customer bases and the friendlier financial institutions and thus be slow and self-limiting as a mechanism to grow the MM market overall.

The more likely recipe for success will involve one or more interconnection services which plug MM transactions on one side of their switch (or other suitable infrastructure) and conventional financial service providers on the other.  These interconnections will allow much faster development of an integrated market with more participants than are possible from multiple bilateral negotiations and technical integrations.  The organisations successfully providing this connectivity are yet to emerge although there are already a few contenders lining up.

There may also be a third way to interconnect for specific use cases such as the WinguPay service concept for in store payments [http://www.chyp.com/media/library].

The second type of interoperability, between MM systems, has fewer advantages at this early stage of the industry’s development.  There are two levels of interoperability:

1.    Customers with MMO1 can send funds directly to the account of MMO2 and vice versa

2.    Customers of MMO1 can use the agent or merchant recruited by MMO2

Sending funds directly to an off-net customer account is certainly more convenient than the current norm of sending an “unregistered user voucher” which can be cashed at an agent, and it should encourage people to keep e-money in their account to use for other digital transactions.  But it is not clear that it will dramatically change customers’ use of e-money, particularly as it is not uncommon for them to have accounts (and SIMs) with multiple MMOs.  Undoubtedly MM account to account integration will happen over time but it does not have the same priority as interconnection.Again it may be achieved, when the time is right, bilaterally or via an intermediary.

Agent and merchant sharing is a potential issue for commercial as well as technical reasons.  Companies acting as MMOs are mainly doing so to differentiate themselves from competitors in their core business, and the winners tend to be the services with the biggest and most efficient agent networks.  Agent sharing removes their competitive advantage.  Worse, companies that invest in their agent network will see it given away to their less committed competitors for free.  They are unlikely to regard this kind of interoperability as motivation to invest in their agent network. Further, interoperability tends to imply a version of a four-party banking model, for which there are no scheme rules, technical standards or common user experience.  Suddenly the simple closed loop system becomes much more complex with increased administration and additional entities levying charges.  Few mobile money services can yet sustain a drop in revenue, so they will need to increase the cost to consumers who are unlikely to view higher transaction fees as enhancing economic empowerment.

Interoperability is certainly coming, and done properly will certainly move the MM industry forward.  However the various types of interoperability need to be clearly understood, prioritised, and introduced when the markets are ready, or they may have the opposite effect.

 

 

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Time for mobile money to start playing with the big boys

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[Susie Lonie] Expectations of the mobile money industry are high despite a relatively low success rate as yet in this nascent industry.  The technology is improving, the operators are gaining experience, and number of services with critical mass is growing, if more slowly than we would like. To capitalise on the current wave of enthusiasm and fulfil its huge potential, mobile money needs to mature quickly.  A key element to creating a truly successful industry will be the proliferation of interoperability between mobile money services and the conventional payments infrastructure.

Most mobile money services currently work as closed loop systems, unconnected to other payment services.  This has the advantages of minimising costs, simplified operations, and providing real time transactions.  As mobile money was originally designed for the unbanked as a replacement for cash, a closed loop system was fine.  However, there is a growing demand for services opening up interfaces to make the service interoperable.  For example, to provide utility payments with real time notification to the billers’ accounting systems, and transfers between mobile money accounts and conventional bank accounts.

The biggest driver for this connectivity comes from “dual economies” with large banked and unbanked populations, and where the unbanked are transacting in an environment with significant conventional payments infrastructure on a daily basis.  For example:

  •          Many of the shops serving the unbanked use tills which are fully integrated POS systems with reporting, reconciliation and stock-keeping systems.  These retailers will not readily become mobile money agents or merchants until their POS devices can be linked to mobile money systems seamlessly, as other payment methods are. (This also implies a need for an system which allows one POS to accept multiple mobile money services, but that’s a story for another day.)
  •          Retailers, whether chains of stores or the more affluent market traders, need to be paid in mobile money then transfer their takings directly to their bank account rather than cash out at an agent then travel to a bank branch to make a deposit.
  •          A key source of earnings for the unbanked is the banked population which employs them to provide, for example, domestic services. In dual economies there is a large banked population, and a lot of domestic employment. The banked senders do not want to withdraw cash at an ATM, and then travel to a mobile money agent make deposit, and then make a P2P transfer.  For them to adopt mobile money at scale, they need the ability to transfer funds from their bank account directly to their own or their staffs’ mobile money accounts.
  •          Many dual economies have, or are developing, social payments.  The cost to the government of delivering money to the unbanked by conventional means can be a significant percentage of the amount disbursed.  The low cost of B2C mobile money transfers are an attractive alternative.  The same benefits are of interest to large scale employers paying their workforce.  However for this to be feasible at scale, the service needs to be provided with the same kind of connectivity and interfaces used to administer conventional disbursement/ payroll systems.

The time is fast approaching for the mobile money industry to “grow up and start playing with the big boys”.  Until it does, the growth potential will remain limited by its inability to interconnect.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The mobile money paradox – if everyone wants it, why is it doing so badly?

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[Susie Lonie] Ever since the launch of M-PESA in Kenya in 2007 the payments world has looked upon mobile money (MM), the precocious newcomer to financial services in anticipation.  There are in excess of 160 live MM services being operated around the world right now, but despite high expectations created by success in Kenya, only a handful have thus far reached critical mass.  (It is generally accepted that a MM service is successful, i.e. can break even and move into profit, when it has about one million active subscribers who are each performing at least one transaction per month.) To have less than 10% of these services successful by this standard six years later is pretty dismal and is the mobile money paradox: consumers want to buy it and businesses want to sell it; yet the industry is neither flourishing nor profitable.

So what is going wrong?

The runaway success of M-PESA in Kenya led many companies to believe that MM is an easy win at relatively low cost and with little effort.  Dazzled by huge customer numbers (for several years M-PESA recruited over 50,000 customers every week) and millions of transactions every day, most have failed to understand that M-PESA’s success in Kenya was neither cheap, nor easy.

The greatest cause of poor performance stems from the culture of the companies offering MM. Grounded in the assumption that it is closely aligned with their core business, telcos treat MM as a value-added service (VAS) akin to launching a mobile internet portal, blithely expecting it to fit within their normal operations.  Meanwhile, banks assume that it is just another kind of mobile banking service, closely aligned to their core business, and able to fit easily into their existing infrastructure.  Whilst MM shares many characteristics with both telecoms and banking, these assumptions are profoundly incorrect.  Companies that have succeeded, whether telcos or banks, have recognised that operating an MM service requires a dedicated team of specialists and operational procedures which depart significantly from their normal practices.  They have also recognised the need to invest significant sums of money into both internal operations and to marketing a new service to traditionally hard-to-reach consumers.

Launching MM is an expensive business.  Creating an agent (branch) network, training it, and maintaining the agents’ engagement in the early days when they have few customers, and therefore little revenue, is not a task for the fainthearted.  Each agent must be persuaded to invest their cash in an e-money float account; cash which could otherwise be used to buy traditional stock for their outlet.  Agents must be incentivised to provide a return on this investment which is sufficiently attractive for them to divert resource from their core business until the service reaches critical mass and becomes a significant income stream.  

Meanwhile, most target customers are utterly unfamiliar with the concept of MM and significant marketing effort is required to educate them on what the service does, how they use it, and why they should trust it.  This requires a hands-on “below the line” approach to marketing which is a far cry from the bank/telco preferred approach of offering high value customers the latest technology via large-scale multimedia advertising campaigns.

Another factor inhibiting success is a regulatory environment which is usually unclear and can be highly restrictive.  Most regulators are just starting to learn about MM, the opportunities to improve governance offered by the technology, and where the risks lie.  Meanwhile, the banking culture tends to be cautious and risk averse.  If in doubt they will err on the side of over-interpreting regulation and imposing restrictive practices unsuited to the low risk associated with low value transactions.  Further, banks nurture their relationship with the regulator very carefully and are disinclined to challenge inappropriate regulation for the new and unproven MM service and in doing so, potentially put their core banking relationship at risk.  Telecoms companies, on the other hand, generally do not have a relationship with the financial regulator and many do not understand the complexities of adhering to their requirements.  By nature telcos are entrepreneurial and willing to make mistakes and they have more appetite to push back to the regulator, if they have the internal expertise to fully understand their options.  Sadly, many do not have this resource and just accept a poor interpretation of the law as the way they must operate. This then becomes their excuse for lacklustre performance.  When regulation requires banks and telcos into formal partnerships, the cultural dissonance can lead to misunderstanding, delays, and excessive regulatory controls as the two compliance teams try to out-do each other as worthy upholders of the law.  

The MM industry is still underdeveloped and largely unproven. The opportunity it provides to serve the large segment of un- or under-represented “poor” is clear and the success in East Africa demonstrates just how transformational it can be.  However, many organisational and regulatory challenges need to be overcome for it to reach its full potential.  If these are not grasped and resolved, mobile money stands in danger of being written off as a niche product with specific application in just a few markets which “just happen to have the right conditions”.

 

Susie Lonie is an associate with Consult Hyperion. If you are interested in becoming an associate too, contact lindi.friel@chyp.com

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.