Google in Payments: Why Yesterday was BIG News

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management. This is a V.me killer… from both cost, and advertising perspective.

16 May

—- Correction — MA rate for non-regulated debit is 160 bps (not 105). My old Google card in the NFC wallet was card present.. I forgot to make the change to card not present…  Rate table below —-

Yesterday Google rolled out InstantPay, and a new planned P2P service integrated with Gmail, wallet, … etc. Although this is a step back from the physical card revealed by Android Police in November.  This is a VERY BIG DEAL for payments. Why?

Merchant Value Proposition

  • Reduce payments cost. No matter what card customer uses, everything will be priced as a non Durbin Debit (160 bps). This marks the First Time Ever a provider will take a LOSS on every payment, to get the data.
  • Customer uses whatever card they want, credit, debit, Amex.. or even ACH.
  • Merchant keeps current processor. The payment metaphor is a 16 digit PAN.. a Google MA that wraps everything else (see don’t wrap me).
  • Increased Conversion (particularly mobile). One button (pay with Google) and everything is filled out.
  • New performance measurement tools in google analytics
  • New offers and ad types possible (dependent on redemption, and/or number of purchases)
  • Possible loyalty programs
  • New physical merchant use cases (buy on mobile pick up in store).instant buy

Consumer Value

  • Centralized payment instrument/fraud protection. I’m not giving my card number out to all merchants
  • Ease of use.. no more form filling
  • Centralized e-reciepts
  • Use any payment instrument I want
  • Store coupons/incentives in wallet
  • Wallet on Android no longer NFC dependent

Consumer “downside”

  • Google gets to see more of your data.. but who do you trust with it? Google vs. Banks vs. none of the above.ma rates non-regulated

Core INNOVATIONS

  • Expanding the google master account (GAIA) to manage verified identities and making new services available (to these consumers it has verified)
  • Ad delivery: Leveraging customer insight and “touches” to influence consumer
  • Ad quality: closing the loop with payment.. what ads contributed to what ACTUAL behavior
  • PAY FOR PERFORMANCE Advertising!??  No more CPC? one obvious future is if Google can see transaction then the could bill merchant for advertising based upon the purchase (not on the click). This is the Holy Grail of advertising and if there are indeed plans here.. it is beyond a moon shot. As an advertiser I would only pay for marketing that led to customers buying from me. This would spawn an entire new industry of campaign managers. More on this in future blog.
  • Phone as tool for Authorization of a given identity.
  • Business model… big win for merchant (cost, conversion, experience and reach) and consumer (protection, convenience)…

For eCommerce/mCommerce merchants this may be the biggest “no brainer” since Cybersource offered to offload card processing/fraud risk management.  This is a V.me killer…  from both cost, and advertising perspective. The primary challenge Google faces is that 70% of eCommerce sales are controlled by Amazon, eBay/PayPal/GSI, and Visa/CYBS… They can make it difficult for smaller brands to turn this on.. but it will happen… Amazon may even want to let Google eat 1% interchange on all their sales.

Osama and the Google team have done great work getting this out to market. Congrats.

P2P

On the P2P side.. not quite sure. Sending money in gmail is certainly better than a stand alone service.. but EVERY SINGLE P2P effort money with gmailhas failed: Obopay, Visa Money Transfer, ClearXchange, POPMoney, Zashpay, paybox, ..  Consumers just don’t pay other people (like babysitters or golf bets) electronically, nor do they PAY FOR PAYMENTS. There is a strong social element in giving and receiving something of physical value (ie cash). Remember when your Grandmother sent you a birthday card with $20 in it? It just wouldn’t be the same if Granny sent me an email with an electronic notice..

With respect to Google’s new service, I will certainly say that Google has done a great job with integration, and there is no more highly used service in the world than Gmail.. so if anything had potential.. this is it. Google is not exactly a culture that seeks operational folks.. more of CREATORS.. not regulatory, payment ops, KYC, dispute, … experts. This will be one GIANT headache of a service to manage (globally).  If they can make this work, and extend to android.. it could be the LINCHPIN to ubiquity and payment success in emerging markets. Payments for “free”!!?? If cross border were enabled, what would this do to Xoom? PayPal? WU? See my blog on Growing the world’s economy and poverty alleviation.

 NFC Thoughts

Is Google walking away from NFC? Don’t think so.. there are probably markets where it makes sense. US doesn’t seem to be one of them.  Remember the NXP chips only just recently allowed more than one card emulation application.. so for last 5 years everything had to be Visa, or MA, or Amex.. ISIS is facing delays because of lack of Gemalto SWP SIMs and the handsets to support them… and consumer “demand”.  The NFC ecosystem is dead in the US… the only people that win are banks and telecos.. Merchants are not enabling contactless.. for a reason. As I told Google 2 yrs ago, to establish consumer behavior, you must use it 5+ times per week. There are 3 critical payment areas for this: Grocery, Gas and Transit.  Without participation here.. no payment change will occur.   See my note on Apple and NFC, and Google Wallet.

My top recommendation is to integrate this tightly with KYC/Authentication initiatives..  See blog on reputation.

Payments and Expanding the Global Economy

The intermediate “flux” period in market creation is painful. There are many entrenched interests that want to keep competition at bay. However we all must agree on basic tenants when operating within existing markets, or we will continue to waste valuable time, capital and people. Investors in emerging markets must find ways to coordinate and discuss conflict more effectively. We must encourage governments to create policies and regulations which enable effective information flow, networks, and markets. As Brazil demonstrates, it’s much better to have a slice of a very big pie.. than control a share of a very small one.

27 December 2012

With the end of year approaching, I was a bit reflective this weekend. What problems in the World really matter? Poverty alleviation, the global economy, war, …etc.

Readers need not worry that today’s blog will take the form of a Dyadic Peace exposition, however as Christian and Capitalist I fundamentally believe in the tie between Democracy, Capitalism and Freedom (a fantastic book). A concept which seems obvious and in no need of defense… However I’ve recently been challenged to defend capitalism particularly as it relates to the poor and less fortunate. Quite frankly capitalism takes time to defend and explain… it’s not at all obvious how market forces benefit all of society.

Capitalism holds money and people accountable. Therein lie many issues, for example: what do you do with people and businesses that don’t perform? Entities which serve a “good cause”? What functions should be assumed by the government, corporations, individuals? When should choice be allowed? When are market incentives “broken”? Who decides what is “broken” and what other controls are there to “correct”? (see Milton Friedman’s book above for detailed discussion).

Modern democracies assume control of many functions and services (ie banking, health care, transit, home lending, …), but how will these services take place in markets with dysfunctional economies and governments? What is the precedence: Government? Markets? or Freedom?

My belief is that information is the first critical step toward democracy, freedom and an effective market based economy. Informed individuals can make efficient choices both in goods and services, as well in their government. Given that most individuals will act in their own self-interest, information ensures markets operate efficiently at a macro level. The same should be said of Democratic Governments which should operate with necessary checks/balances but, regardless of their efficacy, will be held accountable both by individuals with information, and external markets (aka Greece, Italy, and the US). As we have seen, the accountability of governments to both individuals and markets is usually not aligned…  elected politicians are seldom incented to make rational market decisions. Yet I digress..

Information and Emerging Markets

The global economy is at the cusp of something truly transformational: empowering individuals with both information AND basic financial services. Most of this transformation has happened in the first world, for example 64% of the global GDP is created by US, EU and Japan (13% of population), but emerging markets are a far different creature (economically and politically).  My belief is that mobile phones are the key network and “enabler” to deliver: connectivity, information, infrastructure (ex payments/financial services). Connecting individuals will enable market forces which will effect both governments and economies. The best model of success is Brazil, the most successful democratic BRIC which also has the fastest growing and most profitable payments environment in the world.

Efficient Markets, Financial Services, and Payments all share network dynamics. Just as a commodity market helps the farmer expand price awareness beyond a local buyer, a banking market allows for competition in saving and lending. It is difficult to underestimate how poorly formed emerging market networks are. For example, 92% of all electronic transactions are completed within the world’s top 10 markets. There is a density and n2 (“n squared”) effect in networks and their efficiency. The exception to network success in emerging markets is mobile: 5.3B mobile users (77% of the global population). How can we leverage this mobile network to transform economies (see MPesa’s impact on Kenya)?

Although this transformational “summit” is in reach, there are many obstacles ahead, some of our own making. For example, information and “connectivity” are tremendous threats to governments and entities that are in control, and uncompetitive, today (example is the recent ITC efforts to “govern” the internet). Banks also tend to view telecom networks as a threat and most work actively to block expansion of their “payment” capability.  Other examples include efforts by well meaning NGOs and philanthropists to kick start financial services (as I outlined in my Blog from Dubai last year). Entrepreneurs and investors have learned important lessons in the last 5 yrs, one of which is nothing is sustainable unless market forces can operate (ie. stay away from highly regulated markets with artificial incentives and NGO money).

Payments and Financial Services

Why do I care about payments and financial services? It is the “phase 2” of a functional market; the lifeblood of commerce and competitive markets. Recent emerging market successes: Brazil, Kenya, Philippines, Columbia, Peru and Pakistan. There is no one single ingredient for success, if there were every country would follow. It seems to entail many common elements, among them: consumer protection, consumer information, capable service provider, stable economic environment, supportive banking regulator, consumer marketing, sustainable pricing/margins, merchant participation, cash in/out, …

Like Brazil, functional markets which begin this phase 2 will see tremendous investment in services that surround basic financial network, thereby evolving it to maturity. Governments will benefit from commerce transparency and moving black/grey markets to taxable ones. Consumers will benefit as service providers unleash basic lending (individual) and investment (commercial) in emerging markets. Our common purpose is to spur the global economy and lift billions out of poverty.

For example, while I ran Channels for Citi a key constraint for growth (Card and Direct Banks) was the availability of real time (positive) credit bureaus. It was very difficult to open accounts outside of the branch, or to loan money. What if consumers could build a reputation separate from their bank? I have a reputation on Facebook, eBay and Amazon. Of course this reputation is different from the one of I have at my bank, but could it be of benefit to basic financial services? These questions are emblematic of what is possible once we “connect” consumers to a network and the network evolves from supporting information to commerce.  account opening sighting

Of course I’m not the only one to see this. I’m very fortunate to know leaders much more skilled than I am in this area: Nick Hughes (MPesa creator), Amy Klement (Omidyar Network), Chris Brookfield (Elevar Equity), Sriram Jaganathan (CEO Bharti mFinance), Abrar Mir (UBL Pakistan), Monica Brand (Frontier/Accion), Nvalaye Kourouma (CEO AfricExpress),  … Why hasn’t more been achieved? In my view it goes back to Capitalism and market forces. There is a conflict in approach to providing basic financial services. A conflict which much be discussed as it is impeding progress, or worse destroying sustainable initiatives.  My strong belief is that success requires sustainability, and a profitable business is by definition sustainable.  It’s fair to say that “profit” is an offensive word to many people in emerging marketsYet our goal must be to enable markets and market driven services… there is no other option.

Investment Conflict

While there are many great people (with very noble objectives) operating at the base of the pyramid; there are few capitalists and business executives. It is very tough to build a business that serves the poor, margins are very tight and success therefore means building volume. When volume is important, existing networks with distribution are a key consideration (see previous blog MNOs rule in Emerging Markets). The areas where we do see great executives, and expert emerging market investors (ex Accion, Omidyar, Elevar, …etc.), their efforts are frequently impaired by money that seeks no return (Aid groups, NGOs, and Philanthropies).

Although grant money does wonderful things for areas that do not infringe on markets (ex. Pre-natal vitamins, clean water, …), the money can completely destroy competitive markets through the creation of unsustainable organizations. For example, if Pakistan had 5 companies competing in payments and only 2 of them received $10M Gates Foundation grants, guess what happens to the 3 that did not receive money? They are priced out of the market.

Money that seeks no return (Grant, Government, …) in commercial activities not only influences sustainability, it also influences the “orbit” and strategy of everyone in the ecosystem: regulators, banks, press, talent, …etc. Support entities develop in this fertile  “free money” environment that are geared toward attracting grants, running the programs. For example, a consulting group operated as program manager to Gate’s UBL investment.. their expenses represented 30% of the total grant (I promptly left the formal advisory group)! Fortunately the UBL team is top notch and knew better than to pursue grant goals of financial inclusion over economic goals of sustainability.

For Capitalists and Investors the dynamics above translate into volatility. Volatility always exists when there is a high degree of uncertainty and money is not held accountable for performance. Commercial areas that attract NGO money are hit hardest (ex. Payments and financial services). Thus the very markets where I most want to help are harder to invest in. For example, our companies could do everything right.. and still fail because of external (non market) forces.  Investors in this area could all tell 100s of stories about India particularly a country ripe with opportunity yet rife “entrenched interests” (to say it kindly).

Our common cause

The intermediate “flux” period in market creation is painful. There are many entrenched interests that want to keep competition at bay. However we all must agree on basic tenants when operating within existing markets, or we will continue to waste valuable time, capital and people. Investors in emerging markets must find ways to coordinate and discuss conflict more effectively. We must encourage governments to create policies and regulations which enable effective information flow, networks, and markets. As Brazil demonstrates, it’s much better to have a slice of a very big pie.. than control a share of a very small one.

Our objective is not to spread the global GDP around more evenly, nor are we talking about global labor arbitrage. Our objective is to grow the global GDP.. markets create wealth.. A premise which needs well informed defenders and advocates. We should not be ashamed to say we want to create profitable companies in emerging markets… this is a tremendous vocation.

Wrap up

Although Starpoint is 80% focused in OECD 20 countries, our emerging market activities are invaluable. My personal reasons for involvement are both philanthropic and aspirational. The opportunity to provide financial services for 600-800 million people over the next 6-10 years could be THE KEY event which drives global GDP growth (and hence poverty alleviation). Make no mistake the entire pyramid of consumers (affluent at top, poor at the base) will grow, but it is the base of the pyramid which will dominate the numbers.

Happy New Year

Other Reading

Banking the Masses… Prepaid?

We are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable.. This is what the Fed is concerned about.. where do they go?

9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

  • Retailers as banks
  • Retailers constructing their own payment network
  • Retail pre-paid products (ex GDOT/WMT)
  • Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
  • New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
  • Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…

Reaching the Unbanked: Thoughts from Pakistan

Mobile presents 2 primary “disruptive innovations” to the world’s second oldest profession: 1) Access/Cost to Serve and 2) Acquisition. Let me emphasize, mobile does NOT present a “silver bullet” solution to banking. Bank products must still be profitable. In emerging markets, banks have a very poor reputation at the base of the pyramid. Banks are limited in their ability to develop products which can be priced and distributed at the base of the pyramid, not just in emerging markets, but here in the US as well. Mobile banking will not solve this problem, but only allow poorly suited banking products to reach more people at a slightly lower cost. Although mobile does not significantly impact existing banking models, it may allow for the development of a “new products”, one of which is payments.

23 March 2011

(sorry for the typos in advance)

I’m up early in Dubai.. meeting with the UBL/Omni Pakistan team on their mobile money initiatives. I love visiting emerging markets to learn about successful projects. Pakistan is well on its way to becoming a leader in reaching the unbanked through mobile solutions, perhaps surpassing the Philippines, Brazil and Kenya. Beyond having a fantastic regulator, they also have 2 excellent teams:

#1 Abrar Mir of UBL/Omni and

#2 Nadeem Hussain, CEO of Tameer Bank, (ex Citi executive) Telenor/Tameer.

Make no mistake, their success to date has been 100% domestic.

In the US, we frequently get caught in a rather narrow “US centric” view of everything. Keeping a connection open to emerging markets is a great way to keep a fresh perspective and question “foundational” paradigms. New ventures in emerging markets are frequently challenged in attracting capital, even in high growth “BRIC” economies. Although many countries have worked hard to replicate the US venture model, few have succeeded. US/EU venture money normally focuses on investments which are geographically close to provide active management and reduce legal complexity (ex. control, investment, share holder rights, liability, intellectual property, …). Emerging market innovators are left with a much reduced set of options: “local” venture firms, banks, private investors and a small number of specialist US venture teams (Elevar, Omidyar, …etc).

Although Starpoint is 80% focused in OECD 20 countries, our emerging market activities are invaluable. My personal reasons for involvement are both philanthropic and aspirational. The opportunity to provide financial services for 600-800 million people over the next 6-10 years could be THE KEY event which drives global GDP growth (and hence poverty alleviation). Make no mistake the entire pyramid of consumers (affluent at top, poor at the base) will grow, but it is the base of the pyramid which will dominate the numbers.

For those of you that have followed my blog, I have been tracking several Indian projects over the last 2 years. I’m so frustrated by the bureaucracy and corruption in India, that I have given up on that country. There are a number of companies (ie Bharti, Vodafone, SKS…) that could deliver, but they are stymied by a regulator that cares more about control than progress ( MNOs Rule). It’s important to understand the political dynamics of emerging markets, particularly for well meaning investors that want to take part in the growth opportunity.

The last 7 years has been a time of much experimentation. Many mobile initiatives have been spun up by MNOs, Banks, Card Networks, NGOs, MFIs, MSBs, … etc. Within the unbanked world, MPESA stands out as the “model” unbanked success. It was started in 2004 by Vodafone after receiving ~2M GBP in grants (from UK’s DFID ). I’m highly appreciative of efforts by the World Bank, CGAP, USAid, UK’s DFID, NGOs… (Aid Groups). These teams are comprised of tremendous people driven to make a difference in the world. My trip to Dubai today was my first focused interaction with the Aid/NGO community, as most of my life has been spent in the private sector.  I have several observations which may be of benefit to start ups and investors in this area.

Objectives of Mobile: NGO/WorldBank/US Aid vs Private Sector

There are not many “new” ideas in banking. It is perhaps the world’s second oldest profession. Banking in emerging markets has several challenges: laws, consumer protections, consumer identification, literacy, bank infrastructure, regulatory infrastructure, … etc. This challenge is compounded by poor market profitability and network effects associated with existing money services providers (agents, money lenders,  foreign remittance, …).

For context, let me provide a very short primer. Poverty alleviation and financial inclusion is a primary focus of the world bank and many independent aid organizations. They come together in many areas, with CGAP serving as a key organization for collaboration. Micro Finance has been a key focus for this group over a number of years. A key “model” MFI is Grameen Bank, particularly after Muhammad Yunus won the Nobel Peace Prize in 2006 for his work there. There are 2 points I want to make on MFIs: they are “sustainable” at the margin and use very little technology (predominantly paper based in much of the world). For those interested in more detail I encourage a review of these 2 articles

As a banker and VC my immediate inclination is to recoil at any business which is not profitable. Profit is a sign of health of a business, if you don’t have it.. you die. However the objective of “aid” money is not profit, but rather to maximize the “impact” that every dollar of aid has. We all know the successful Aid examples of DDT, immunizations, pre-natal vitamins, .. etc. What happens when “aid” and NGO money floods into “banking” activities? Does it accelerate banking? Suppress margins? Create sustainable businesses or infinite dependencies? What is the right thing for Aid groups to invest in? Does Capitalism work in emerging markets?

Given that the US and UK dominate the Aid organizations, you would think that the last question would have an obvious answer. However, imagine yourself working in an Aid organization for 20 years, with very little time in the private sector. Everyone is biased by their life experience and in this case it is no different. Suffice it to say that there are tremendous differences in views and experience when compared to the private sector. These differences could become strengths if there was effective interaction between sectors (ex. CGAP’s market knowledge and Citi’s G2P Payments capabilities).

In my view there is much room for improving public/private collaboration, and many current Aid based efforts are at risk of negatively impacting market growth and adoption of sustainable commercial enterprises. One of the primary negative effects is subsidization of poor ideas. There are very limited market forces driving Aid based projects. Aid/NGO subsidies (note this is not investment) in commercial activities influence both price of services/products, the entities that deliver them, and consumer adoption. While the goal of Aid is to maximize “impact” the goal of investment capital is to provide a return, and hence sustainability. At a minimum, Aid groups must ensure that they have a team with experience in the private sector.

As I stated in MNOs will Rule in Emerging Markets, mobile operators are the first commercial organization to develop a sustainable model that serves the worlds poor. MNOs are clearly not philanthropists, they are focused on profitably serving their customers. MNOs have built both a physical communications network, and an agent distribution network that has driven their explosive growth. So while banking is the world’s second oldest profession, mobile operators are perhaps the newest. What happens when the 2 get married?

There are many, many groups seeking to take advantage of both of the MNO assets above. Both of these assets are networks and, as with any network, they are aligned to deliver value along well defined value proposition(s).  In my previous blog Will RBI Disintermediate Agents, I detailed the implications of hijacking the agent network for payments. The communications network is also an asset that can to deliver other services, it is a tool for “inclusion” as well as communication.

Mobile presents 2 primary “disruptive innovations” to the world’s second oldest profession: 1) Access/Cost to Serve and 2) Acquisition. Let me emphasize, mobile does NOT present a “silver bullet” solution to banking. Bank products must still be profitable. In emerging markets, banks have a very poor reputation at the base of the pyramid. Banks are limited in their ability to develop products which can be priced and distributed at the base of the pyramid, not just in emerging markets, but here in the US as well. Mobile banking will not solve this problem, but only allow poorly suited banking products to reach more people at a slightly lower cost. Although mobile does not significantly impact existing banking models, it may allow for the development of a “new products”, one of which is payments.

As I stated in Banks will Win in Payments, retail banks historically focused investment in credit related payments and treated DDA payments as a cost to retain the deposit account. Future mobile payments plays (bank driven) would center around a simplified transactional account to allow for cash in/out, domestic remittance and bill payment. This is not a savings account, nor is it a typical DDA. The closest existing product is a pre-paid card.. and there is a bank behind every pre-paid card in the world. Bank PPC revenue is driven by net interest margin (NIM) on non-interest bearing balance as well as transaction and account fees. A cardless mobile payment product has the opportunity to bring down cost to serve by eliminating plastic issuance, customer communication and account opening (ex. KYC at Agent). The world wide explosion of pre-paid cards should correlate well to the future explosion of mobile payment accounts.

In Pakistan, UBL/Omni is pursuing a bank led approach to this opportunity while Telenor purchased Tameer Bank to pursue an MNO led approach. I’m somewhat biased here, but the reasons I like Omni: it is “open” and can support multiple MNOs, interoperates with existing bank controls, full regulatory support, path to growth into more complex account types.

Conflicting priorities

I have never met an Aid organization or NGO that likes pre-paid cards. It seems their perspective has not changed in this new mobile account type. While I don’t fully appreciate their definition of financial inclusion, a non-interest bearing payment only account does not seem to qualify. CGAP/NGO needs and priorities would be irrelevant if their grants did not invest in competing models. One of their core issues is “closed” networks: Aid organizations hate them.  But as stated previously, every network begins with delivering commercial value to at least 2 parties.

History has shown that closed networks form prior to open networks (in almost every circumstance) as closed networks are uniquely capable of managing end-end quality of service and pricing. This enables the single “network owner” to manage risk and investment. How can any company make investment in a network that does not exist, it cannot control, at a price consumers will not pay, with a group that can not make decisions or execute? Answer: Companies cannot, it is the domain of academics, governments,  NGOs and Philanthropic organizations.

The success of MPESA, GCASH, UBL/Omni, Oi Paggo, .. clearly indicates that payments is a valuable service to the base of the pyramid. These are successful networks that have developed a specific value proposition. Aid groups have “impact” objectives which do not necessarily align to profit objectives of these networks. Opening a network in order to deliver a non-commercial value proposition is not an easy task.

As stated in Cash is King, I’m a pragmatist who firmly believes that the best approach to serving the unbanked is supporting a model where at least one entity has an economic incentive to invest. This is the definition of sustainability. The alternative to economic sustainability is unprofitable zombie shells that require continued aid and investment.

As I have stated previously (see Mobile Money: MNOs will Rule in Emerging Markets and Mobile Money: Emerging Markets/Emerging Models) MNOs operating in closed systems appear to be best positioned for creating a sustainable value proposition to the unbanked in next 2-3 years. My trip to Dubai also shows that a fantastic regulator and bank team can create a new bank product as well (UBL/Omni). 

Items for CGAP/NGOs

  • Investment in commercial efforts amounts to subsidization and “picking winners”. Are you operating as a VC? Be cautious of destroying a valuable service to the poor by compressing margins for entities that do not receive your grants.
  • Stop with the “openness” requirement. Closed systems must develop first… the biggest failure will be India’s common platform initiative. Who wants to invest in that?
  • Policy advocacy and best practice are win/wins
  • Don’t force the consumers into MFI deposits through mobile money. Help with marketing.. yes.. but be careful what you advocate. There is very little market data to support unbanked demand for savings.. it would seem they would rather buy a goat.
  • Don’t belittle or begrudge commercial efforts. What you want to encourage is sustainability and investment … the elimination of grants.
  • Every now and then.. perhaps you should get at least one person on your team with a private sector background. 

Collaboration Needed

The UK’s DFID was an excellent model for Aid, channeling it through a group (Vodafone) that could deliver a “prospective” solution for MFI interoperability. What really makes this model a success is that DFID provided flexibility in “impact” and allowed a commercial organization (Safaricom) to refocus MPESA based upon market needs and adoption. Remember neither DFID nor Vodafone ever anticipated the “payments” use until after the solution was implemented and in the market. DFID acted like a VC.. chartering a COMMERCIAL team to make it work.

There are several conversations which prompted this blog, which I can’t detail as my goal is not to deride the AID groups.. but rather highlight the challenge in investing in mobile money within emerging markets. Quite frankly I was shocked at the attitude of Aid/NGO organizations with respect to commercial initiatives focusing on unbanked needs (ex. SKS Microfinance). The idea of private money creating businesses that serves the poor at a profit was an anathema. The theme of Aid groups view on SKS’s efforts was “greedy capitalists, they just don’t understand microfinance”. Knowing SKS and their investors, this view could not be further from the truth.

As an independent 3rd party the NGO/Aid view may have been driven by a lack of experience and respect for the private sector. While I greatly appreciate their service to a worthy cause, they have a very biased view of solutions, business and economics. Differences in approach are frequently driven by differences in goals: Aid groups want to maximize impact, SKS wanted to build a sustainable business. The real issue is not the divergent views, but the divergent goals and the money being spent to pursue them.

India: Instant Interbank Mobile Pmt Service

Just as in the case of RBI’s MPFI group they are attempting to build a standard (ie platform) by which everyone must play, and therefore exert control. These platforms will continue to fail, as there must be at least one group with a sustainable business case. IMPS does nothing to address the unbanked needs and seems to be an outgrowth of NEFT and MPFI

National Payments Corporation of India (NPCI) launched the instant interbank mobile payment service (IMPS).

From MyDigitalFC

To use the IMPS service, customers have to register their mobile number with the banks where they hold an account. When the customer registers, he will be assigned a three digit code that will be their mobile money identity (MMID) and each bank will be assigned a four digit national bank identification number (NBIN).

Both the sender and the receiver needs to get their NBIN and MMID in order to facilitate the transaction. The funds transfer can take place in seven seconds by using the MMID and NBIN numbers of both the banks.

This is a concerted effort by RBI to take a leadership (control) role in mobile payments as the MNOs continue to work for necessary regulatory change.  RBI and the banks are under substantial political pressure to develop services to the rural poor, and create mechanisms/licenses for agents (and MNOs) to serve this demographic. Announcements like this just further a “delay game” by which RBI seeks to create an image of progress.  

RBI constituted the NPC in 1999. This instant mobile “press release” is more hype than substance particularly given the adoption of NEFT and processes surrounding electronic transfers today. For example, in A2A (Transfers between domestic accounts that I own at 2 financial institutions) transactions, many financial institutions still require customer sighting and a paper documents FOR EACH TRANSFER. Within India, the NEFT system is just beginning to get traction (NEFT FAQ) as banks are reluctant to give customers control. India’s RTGS system, is also in its infancy (list of bank branches here) with only 60k transaction/day. Indian bank A2A  “controls” are similar to those in the US as banks like Chase and Wells,  as barriers to move money (to another FI) prevents deposit run off. These controls also allow the banker to call and ask “why are you moving money out.. we can offer that rate as well”.

Just as in the case of the MPFI group RBI is attempting to build a standard (ie platform) by which everyone must play, and therefore exert control. These central bank platforms will continue to fail, as there must be at least one group with a sustainable business case (see MNOs will rule).  IMPS does nothing to address the unbanked needs and IMPS seems to be an outgrowth of RTGS and MPFI..  I certainly hope that the unbanked and the MNOs continue to work toward influencing real regulatory reform, as today I have a system for banked account transfers which is “instant” but may require a customer to come into the branch to sign a document first.

Emerging Markets: MMU Revenue Challenge

Subject: In this post I attempt to estimate “critical mass” financial numbers for a mobile money to the unbanked (MMU) service to be sustainable.

4 June 2010

Subject: In this post I attempt to estimate “critical mass” financial numbers for a mobile money to the unbanked (MMU) service to be sustainable.

I’m a few weeks late in publishing this, it just slipped off my radar. Attended the GSMA Mobile Money Summit last month in Rio. Great people in attendance, although the event itself leaved much to be desired.  The MNOs had a focused set of meetings on the opening Monday covering “how to work with regulators” which is certainly a key to success. I was struck by the volume numbers in country pilots.. they are so small.

Safaricom released earnings at the beginning of the month. This data coupled with the data from the Mar 2010 Gates foundation report provides insight into the challenges faced by new payment mechanisms in other emerging markets. Market approaches will surely be tested as other countries attempt to replicate the MPESA success. It has taken 3 years, and some very unique market conditions, for Safaricom drive this service into profitability. 

Summary

  • MNOs must reach around 8M users (or around $300-500M per month GDV) to break even
  • Bill Payment is key to driving payment volume in emerging markets
  • Without a regulatory partnership everyone looses. Phillipines wins prize for best bank, MNO, regulatory partnership in the world.. if you want an example of success talk to Rizza at GCASH.

Safaricom Revenue Data

Safaricom Annual Report shows MPESA “Total Annual Revenue” of 7.56B KES ($93M USD, 9.48M users) for the year. Gross Volume is not published.. but there is other “anecedotal data” to give more color:

  • transferred a cumulative Sh405 billion since launch
  • US $320 million per month in person-to-person (P2P) transfers
  • US $650 million per month in cash deposits and withdrawal transactions at M-PESA stores (Gates foundation)
  • Average Sh1.8 billion a day ($670M per mo total). In Earnings release. (does not align w/ number above)
  • Grew from 5M to 9M users in 2009
  • Interest from $1B+ settlement funds is not included in either Vodafone nor Safaricom’s earnings. Understand there is agreement between CBK and other parties to use for infrastructure, education and microfinance.
  • Note: The Gates foundation numbers on P2P and Tran volume seem high.. I’ve never had them before

Calculation

  • Given growth of 100%, assume average 2010 (May-May) volume GDV of 320+650/2 = $485M USD
  • Monthly revenue of $93M/12 = $7.75
  • Take Rate = 7.75/485 = 160bps (seems about right)

Previous/Related Posts

Unbanked Success: Pakistan

Always on the look out for a success story, I was fortunate to be introduced to Abrar Mir of UBL by the head of cards at a major UK bank. Abrar’s team has built a stellar product that has addressed key needs of the unbanked and more specifically internally displaced persons (IDPs) with applicability in other disaster relief scenarios.

18 May 2010

http://corporate.visa.com/media-center/press-releases/press935.jsp

Always on the look out for a success story, I was fortunate to be introduced to Abrar Mir of UBL by the head of cards at a major UK bank. Abrar’s team has built a stellar product that has addressed key needs of the unbanked and more specifically internally displaced persons (IDPs) with applicability in other disaster relief scenarios.

Fortunately for Pakistan, they have developed the National Database and Registration Authority (NADRA). Since 2000, NADRA has registered over 96M Pakistanis. The ability to issue a national ID, with electronic verification, provides Pakistan with a unique infrastructure which supports KYC in advance of most other countries around the world.  From an emerging markets perspective, distribution and KYC are thorny issues for addressing the needs of the unbanked.

2 years ago Pakistani’s fled the Wazir regions due to conflict. Abrar and his team at UBL worked with the government to issue relief funds, via Visa Debit Cards, to persons displaced from this crisis. As refugees entered camp, they were documented (NADRA), issued National IDs, issued Visa Debit Cards and subsequently educated on how to use these cards through a class and video. Within the camp, stores kiosks and ATMs supported the Visa Debit infrastructure.

As “refugees” moved and assimilated into other areas.. there were issues with debit card acceptance. IDPs had no way of exchanging value on their Visa Debit cards. This is where Abrar and the UBL team stepped in to develop a superb application and innovative model based around agent card acceptance. UBL developed a mobile application which allowed local agents to accept cards and earn commission. This new UBL “Agent” network provided IDPs with ability to transfer funds, pay bills, “cash out” and other services. Agents have signed on with UBL in a structure similar to a “Visa merchant agreement” where they take not only the card, but validate it against the national ID. UBL working together w/ NADRA manage authorization (and fraud issues).

As a result of this effort other institutions (World Bank, World Food Program, USAid and Government of Pakistan) are looking at this as a model program for deployment around the world. The World Food program (along w/ NGOs and Governments) have solid data to support their move AWAY from physical distribution of goods to electronic distribution of funds. It should be noted that Pakistan (and other countries like India) are likely to develop their own internal payment network which would circumvent the costs associated with riding the Visa/MA rails (think Star, Interact, NPC).

UBL is likely to see expansion of card from 200k.. to 4M in next 6 months. The potential card growth in this model is tremendous. 50M in Pakistan alone over next 2 years. I found the UBL “Agent” mobile application very unique.. giving retail shops the ability to support/enhance their role in community by turning merchants’ phones into both POS terminals and terminals to sell/open new bank accounts. This UBL project has become a recent “case study” for Visa … although Visa neither supported or knew of UBL’s efforts until recently.

Key findings

  • UBL thought leadership. What a Stellar team can do in the right environment
  • National ID is a key element of serving unbanked and those in need
  • Business model. Bank led models to the unbanked can be successful, particularly in government (G2P) payments, with government partnership
  • Agents are keys to success for both banks and MNOs
  • Success is driven by people in the field with the contacts, knowledge and ability to execute. This entire model was built within Pakistan, by Pakistani’s.
  • Visa and MA should think about creating new rules and rates to serve unbanked.

MNOs – Will RBI Disintermediate Agents?

Indian legislators should take a pragmatic look at the mobile money regulation. It will be up to consumers (ie Voters) to demand that the structures are in place to support a sound and fertile market for payment services. The economic growth and poverty imperatives greatly outweigh the justifications for RBI’s current approach.

12 May 2010

I’m just amazed at how groups that have the best interest of the rural poor in mind make life so difficult for those that are in a position to actually help. The bank regulations in India, with respect to mobile money, are particularly restrictive (Or perhaps I should say prohibitively restrictive). RBI is encouraging business models which are attempting to build agent distribution networks via business correspondents (ex Fino with 5,000 agents) and non bank financial companies (NBFCs). It would seem their goal is to disintermediate the MNO networks by giving certain agents the ability to represent the banking network AND MNOs. Note: For those unfamiliar with India, Agents are not employees of the MNOs and perform many other functions (sell many other services).

Two recent reports provide an excellent highlight of the challenges facing mobile money for the unbanked (MMU). The data here confirms that only MNO led initiatives stand a chance of succeeding, and even then at the margin:

The lack of profitability in “payments” is something that banks understand well. (See my previous post and History of Interchange). Payment instruments typically compete on: speed, convenience, cost, risk, reward, acceptance, settlement time… Recurring transactions between businesses and consumers in mature economies take place on very low cost ACH type networks. P2P transactions are historically cash based with costs borne by central treasury. Payment services, physical distribution, regulatory compliance, consumer support are direct costs to retail banking. By restricting all payments to banks (and their agents) this cost must be distributed throughout the value chain. In an MNO led model, this infrastructure largely exists already. 

Closed systems first

History has shown that closed networks form prior to open networks (in almost every circumstance) as closed networks are uniquely capable of managing end-end quality of service and pricing. This enables the single “network owner” to manage risk and investment. How can any company make investment in a network that does not exist, it cannot control, at a price consumers will not pay, with a group that can not make decisions or execute? Answer: Companies cannot, it is the domain of academics, governments,  NGOs and Philanthropic organizations.

The success of MPESA, GCASH, Octopus, .. clearly indicates that payments can be decoupled from banking, with sound consumer controls and fantastic consumer satisfaction.

From CGAP (on MPESA)

  • Users say it is faster (98%), more convenient (97%), and safer (98%) than alternatives
  • 4 out of 5 say not having it would have a “large negative impact” on their lives

As a pragmatist (and capitalist) I firmly believe that the best approach to serving the unbanked in India is supporting a model where at least one entity has an economic incentive to invest. As I have stated previously (see Mobile Money: MNOs will Rule in Emerging Markets and Mobile Money: Emerging Markets/Emerging Models) MNOs operating in closed systems appear to be best positioned for creating a sustainable value proposition to the unbanked in next 2-3 years.

Example

As described in the CGAP reference above, both Fino and Bharti have completed pilots with Eko and State Bank of India (SBI). CGAP’s latest research (Fino Agent Profitability) shows a drastically different agent revenue model for bank led mobile payments in India. From the article:

FINO agents in Karnataka offer no-frill bank accounts from the State Bank of India (SBI). Some agents also sell insurance products. The business case for agents is working, but just barely. The average monthly profit is USD 23.42, far below what we’ve seen with M-PESA (USD 130.26) and Brazil (USD 134.42). Last November, account opening was halted while SBI migrates account data to its own servers, and the average monthly profit dropped to USD 8.08

I would hope that Indian legislators take a pragmatic look at the mobile money regulation. It will be up to consumers (ie Voters) to demand that the structures are in place to support a sound and fertile market for payment services. The economic growth and poverty imperatives greatly outweigh the justifications for RBI’s current approach.

Unfortunate news for the rural poor and unbanked: You will face a chaos of offerings from banks, agents, pre-paid cards, NBFIs, MSBs … the brand that you trust (ex. Bharti) and can most effectively deliver service to you is restrained by your regulator. Question to RBI: what is your objective and who is your customer? Most will agree that consumers don’t want (or need) a traditional bank.

Good news for MNOs: Shackled from serving your customer, you can take some peace of mind knowing that there will be no successful mobile money until regulations adapt and to allow your organization to lead delivery of it. Build it in another country and don’t stop talking about it within India.

Message for NGOs/non-profits: Quit pumping money into trials, and start influencing legislators and the RBI. The REAL risk for India is not loss of control of payments/AML and M4 (money supply), it is constraining growth and pro-longing poverty.

Comments appreciated

Related Articles

  • CGAP on building Agent Networks
  • Nokia Presentation: India Recommendations
  • Times of India on RBI regulations
  • CGAP on MNOs incenting w/ Airtime
  • Fino Blog covering business correspondents
  • Inclusion on reaching the unbanked
  • MNOs as Depository Institutions?

    Updated November 10, 2009

    Excellent Background Articles:

    Success and value breed trust and loyalty. MPESA customer surveys by CGAP point to desire for MPESA to offer interest on balances. The genesis of MPESA’s success is not something that Banks have seen before (in emerging markets):

    • Cash replacement (without their control)
    • Technology
    • Customer segment – Growth from the LOW end of customers that banks normally serves

    Deposit taking, and payments are typically a regulated businesses which banks have excelled. However their past success was serving a customer segment that was far different then what MPESA serves today. Can Banks adapt to the new opportunities service the unbanked in emerging markets? Will new Micro Finance Institutions (MFI) emerge as the principle banking entity? Will MNOs seek approval to offer financial services separate from Banks or MFIs?

    In Kenya, the explosive growth of MPESA has put both regulators and banks in a very awkward position. It was originally launched as a money transfer business, and has emerged as an effective cash replacement with an annual transaction volume of over 10% of Kenya’s GDP. Consumers have unexpectedly embraced MPESA, and regulations have had a challenging time adapting (or anticipating) the vector in which it has grown. The regulatory challenge now is “connecting” the MPESA network to the “banking” network and evolving the:  regulatory authority, regulations and controls around it.

    In 2005, Kenya drafted the Deposit Taking Micro Finance Bill which was past at the end of 2006.

    http://www.microfinanceregulationcenter.org/files/25464_file_Kenya.pdf

    http://www.microfinanceregulationcenter.org/files/39171_file_Microfinance_Act_2006.pdf

    In addition to supporting traditional MFIs, the Act made it possible for non-banks to participate in deposit taking as an MFI (in the future), and now the first “non-bank” MFI has been accepted (just 3 months ago in June 09).

    http://www.microfinanceregulationcenter.org/resource_centers/reg_sup/article/57056/

    It remains to be seen whether an MFI license will be granted to MPESA, to extend its money transfer license. A more likely route will be for (multiple) MFIs to be approved to source funds from MPESA (MPESA as payment network)

    The Philippines may provide the best example for MNO/Bank collaboration in mobile money. GCASH in the Philippines is the mobile money solution from MNO Global in conjunction with Bank of the Phillipines (BPI).

    http://www.bpiexpressonline.com/index/find_page.aspx

    Last year Global and BPI partnered in the creation of a new microfinance provider:   Pilipinas Savings Bank

    http://www.syminvest.com/market/news/microfinance/philippines-ayala-corp-bpi-globe-set-up-rp%E2%80%99s-first-microfinance-bank-to-help-small-business-/2008/10/31/1322

    The Philippines was one of the first countries to develop a comprehensive law in support of MFIs. In 2000, Philippine regulators acted in response to the updated General Banking Law which mandated recognition of microfinance as a legitimate banking activity. Regulators developed a unique set of rules and regulations MFIs as the updated Law declared microfinance as a flagship program for poverty alleviation.

    http://www.microfinanceregulationcenter.org/resource_centers/reg_sup

    Bank as Depository Institution

    Before tackling the issue of Deposit taking in Kenya, let’s discuss the issues surrounding existing (non MFI) banks servicing MPESA customers. Having spoken to several of the key parties in Kenya, the business issues surround: who “owns the customer”,  who is assuming the risk (“money transfer” v. bank ) burden for this connection. For purposes of example, let’s take the KYC requirement in Kenya (as in most countries) a customer sighting (by a bank employee) with valid ID. Kenya has had problems with counterfeit IDs

    http://www.standardmedia.co.ke/InsidePage.php?id=1144013210&cid=472&

    How should regulators proceed? Bank infrastructure in many parts of the country is immature. There are over a million people that would need to go through the KYC process, most of which do not have an identity card (separate from issues in article above). Should regulators relax the KYC burden? Should money transfer agents be allowed to operate under MFI regulation? In my post below, I’ve outlined a few of the regulatory approaches

    http://tomnoyes.wordpress.com/2009/11/01/mnosrule/

    I would certainly like additional feedback, but my understanding is that regulators are taking a concurrent track: Updating the MFI regulations (originally designed in 2005), updating the “Money Transfer” regulations as covered within the General Banking Act, approving MFIs to source funds from MPESA (services on the MPesa Network) and defining a new regulatory scheme for mobile money which would touch both banking and telecommunications regulations. Vodafone’s regulatory experience here will likely prove to be a tremendous differentiator in future markets, as their ability to field a team capable of partnering with regulators further enhances their creditability.

    (A very broad summary of the issues, apologize in advance for the gaps.) From a Bank perspective, concern is justified over MNOs ability to create a liabilities business. Banks should have the right to compete for these deposits, with a level regulatory playing field. From a MNO perspective, banks have not served these customers in the past. For MPESA, the Banks interest in this segment arose after the MNO developed it. The banks should pay for this “customer acquisition” and servicing, and the MNO should be able to offer products and services that support customers.

    MNO Deposit taking

    There are currently 3 separately regulated parties that are positioning to provide interest bearing accounts: Money Transfer Services, MFIs, and Banks.  Emerging markets have invested significant resources in defining MFI regulations, however these were drafted prior to the success of services like GCASH and MPESA. The CGAP data in Kenya clearly shows customer “interest” (pardon the play) in using MNO services beyond that which a “money transfer agent” is licensed to perform. However accelerating the attractiveness of these money transfer services, by providing interest bearing accounts, may further exacerbate an already challenging regulatory situation. I would expect to see regulators requesting that MNOs open up/partner with traditional banks (as the depository institution) prior to approving MNOs as an MFI, or enabling traditional MFIs to compete. Interoperability between these licensed entities must be addressed. This view flows out of MNO incentives (e.g customer ownership, high fees for cash out) and current agreements with bank(s) with regard to settlement of funds. With that said, I would expect very little success for traditional banks attempting to provide this service, as it does not align to their business model. A model which will likely succeed is MFIs access to “non-traditional” payment services, as both MNOs and MFIs are nimbal and able to adapt quickly here and support their existing business model. See Western Union example below (in India)

    http://www.dnaindia.com/money/report_western-union-takes-mfi-route-for-rural-spread_1299994

    The challenges that MPESA faces, while challenging, are extremely exciting as it represents the “Phase 2” success of mobile money in emerging markets. Just look at the rate of change in issues facing service in Kenya today, compared with 18 months ago

    http://technology.cgap.org/2008/05/28/can-m-pesa-work-for-microfinance-clients/

    Mobile Money: MNOs will Rule in Emerging Markets

    Payments, banking and regulation may well evolve differently in emerging markets over the next 5 years as new services establish a unique ecosystem that serves 1 Billion consumers never “connected” to the world’s economy.

    Updated Dec 15, 2009

    Regulators in Africa and India are working actively to ensure consumers (and the global banking system) are protected in the exciting confluence of mobile and finance. Their involvement is completely appropriate given the opportunity to improve the lives of millions of unbanked people around the world. Defining responsibility and the commensurate controls associated with connecting non-traditional (unregulated) networks to highly regulated banks is a herculean effort which may lead emerging markets to remake a “payment system” that is more efficient than that which exists in today’s developed countries. This opportunity for “leap frog” improvements will be driven by the unique path emerging markets are evolving. Key stakeholders will be able to leverage learnings of developed countries, and trials in emerging markets, as they develop infrastructure necessary to support a network that enables both financial services and telecommunications.

    Today’s regulatory approach, within these emerging markets, may be best summarized as an “experimental period” with simplified controls. Very early regulations have focused on simplicity by ensuring that the “value” stays within the MNO network, and limiting: balances, ticket size and beneficiaries. By constraining transfer of “value” to well defined  MNO services (ex top-ups) regulators have certainly addressed many risk, AML and audit issues. These early controls have provided time for regulators to review progress and fashion new regulations in which existing regulated entities can comment. This order, with which emerging economies are proceeding, may come as a shock to some in the developed world.

    Many believe that this more cautious orderly approach in mobile payment was driven by the unstructured success of MPESA (links below). An estimated 10% of Kenya’s GDP currently passes through this channel.  Governments, banks and MNOs leveraged the learnings of the Kenyan market, first among them is: once a new payment system takes hold, it is hard to change. The alacrity with which MPESA was adopted by Kenyans has caused “a new awareness” among governments and business for both the opportunity to provide access, and the challenges faced in managing it. For regulators, there is a renewed sense urgency for defining the “rules” by which to protect consumers and hold participants accountable. Ex in India below

    Vodaphone MPesa in India

    Regulatory changes have significantly impacted many investments made to date, with the key example of Reserve Bank of India’s Aug 2009 regulation preventing non-banks from domestic money transfer (destroying Obopay’s P2P plans). Banks have created much friction for the expansion of “pilots” and their capabilities. The banks’ position is that once value is exchanged between network participants, or to another network, that these services compete directly with a regulated “payment system”. So we have a “dance” of 4 parties: Regulators, MNOs, Banks and Consumers. In my discussions, the regulatory approach may be generalized by the following:

    A)    Experiment.  Set interim guidelines with expectations that they could be revoked/changed. Communications regulators are driving this approach as they try to assist their stakeholders. MPESA began because of Communication regulatory authorization… not KCB

    B)    Review. Require submittal of plans to both communication and banking regulators.

    C)    Establish. Legal/Regulatory accountability. Define responsibility and audit guidelines for responsible regulators. For example in Kenya their was very little consumer protections for electronic transactions, the Kenya’s electronic transactions act was just established this year and serves as a model for Africa.

    D)    Define Audit responsibility for MNO. May force partnership with regulated bank for clearing and settlement. Set auditing guidelines for MNOs under communications regulations (Monitor/audit payments and transfers).

    E)     Constrain. Set limits on MNO services and “value” allowed to accumulate in MNO “wallet”, …etc. Example RS 5000 in India, Prohibit/restrict any bank functions in MNO. ex, No interest bearing accounts.

    F)     Isolate. Restrict payments connections external networks. Ex in Africa.. Commercial “beneficiaries/payees” must be approved over a certain volume threshold. (regulatory Instrumentalism). Note: MNOs have addressed this by shifting value to a “regulated” payment (ex. Pre-paid card) and partnerships.

    G)    Enforce KYC responsibility for MNOs engaging in payments at Cash in/out points. Example retail partner is responsible for validating identity.

    Business Model

    It is difficult for established businesses to create effective business models “down market” from their current customer base (see Clayton Christensen – Innovators Dilemma). MNOs may be best positioned to execute, on the mobile money value proposition, given that the “unbanked market” is market that they serve much more effectively today (reputation/brand/service/efficiency), and the fact that “mobile money” is a key to sustaining their growth.  I cannot underestimate this point. For banks serving the unbanked represents a low margin (if not money loosing) value proposition for all of their current products. Similarly, payments are a profit neutral business for banks separate from the lending or commercial services which surround them. Bank product lines are typically not focused on accounts with balances of less the RS 5,000 ($100). In addition, existing Bank systems typically do manage millions of small ticket real time money transfers (think SEPA or Wire) with associated risk, authorization, and AML controls. This “gap” in serving emerging markets is prompting indigenous efforts (ex RBIs: RTGS, National Infrastructure for Mobile Payments, and India Card).

    For MNOs in emerging markets, mobile money is aligned to their current business and in fact essential for growth. Allowing “cash in” and “transfer” enables customer usage  through pre-paid plans. For MNO consumers, access to money services provides ADDITIONAL value to their EXISTING MNO relationship (more on this later). MNO success in “mobile money” is assured because the service further enhances the EXISTING MNO business model, a model which the team and infrastructure to: market, sell and service the unbanked is established (and profitable).

    The consumer value in mobile money stems from the macro economic transformation that exchange of value provides in moving from “informal” communication to money centered “business” communication. Payments and value may well evolve differently in emerging markets over the next 5 years as payments, telecommunication, regulation and new services establish a unique ecosystem that serves 1 Billion consumers never “connected” to the world’s economy. It is the combination of “network access” and “value access” that provides transformational opportunities to the world’s consumers. This market dynamic leads to transformational “leap frog” opportunities within emerging markets.

    MNO Fragmentation

    The principle challenge for MNOs to address is in emerging markets is: fragmentation. A large reason Vodafone was successful in Kenya was that they had 80% of share. Fragmentation of consumers in highly competitive mobile markets, combined with conflicting standards, technology and retail partnerships may cause consumer confusion. This chaos is anathema to the “trust” necessary to establish consumer confidence in payments and value storage. For example, in Nigeria can you pay your utility bill on any cell plan? Dominant MNOs will likely race to establish payment networks and partnerships, even in the constrained regulatory environment. Less dominant MNOs will likely look to regulators, standards, interoperability and other mechanisms to level the playing field. It is essential that MNOs get this right the first time, as “trust” is something earned over many years and quickly destroyed.

    In emerging markets, MNOs may be best served by attacking “breadth” opportunities first. Very simple services that can have very broad impact, with very little assistance from external vendors may provide better support for immediate growth:

    • Nature of network effects are that you must deliver value to everyone on the network (whether a bank or an MNO). Successful networks must have established physical distribution points.
    • Objective in payments is to establish use and acceptance. Example, receive your pension… now establish a savings account, or send money to your grandson.
    • Trust.. Serviceability, manageability, and risk management in “simple services”.

    For Bankers

    As a banker myself, I never admit defeat in attacking a profitable market segment. Given that payments are not particularly attractive for banks (separate from the products and balances that support them), there are several strategic options (Beyond the scope of this post.. but which I would love to discuss). In general banks should maintain engagement with regulators and MNOs, and focus on providing services that protect their network and enable access to consumers. Examples:

    • Switching. Extending payment capabilities in existing accounts and networks. Switching between multiple MNO value stores
    • “Participating” on the mobile network. Micro lending through “supporting role”.
    • Risk Management.
    • Partner w/ large existing customers in their participation. Example, Pension/Payroll to mobile plans, or connecting to MNOs to business (retail lockbox on mobile)
    • Managing compliance. Example: Cash out

    For Software Vendors (ISVs)

    In emerging markets, I would expect to see rapid evolution constrained only by regulation. Expect to see very simple services that can have very broad impact, and support MNOs existing value. A key distribution point for these services are local agents. For those of you in the US, think of these agents as the local “country store” of 80 years ago, trusted members of the community that frequently extend informal credit. Banks in Kenya are just gained access to agents in distribution of their services in order to compete with Vodafone and ZAP.

    Many of the “consumer facing” services will require very little assistance from external vendors until the networks mature and value is transfered beyond the MNO network. Example issues for vendors today:

    • MNOs have very solid SMS development skills. Look at MPESA, ZAP, GCASH.. who developed the software behind them? The MNO.
    • Simplicity lends itself to better risk management, a key for reinforcing the “integrity” of a new payment system. Solid risk management is even more pronounced in the face of new regulations.
    • CEO visibility with MNOs, Banks and Retailers. Paying a “US Vendor” for anything relating to a payment function is not likely. Citi mobile teams have built tremendous SMS applications in weeks (sorry Silicon Valley).
    • Government Visibility. In addition to CEOs, governments and regulators are highly involved in addressing the needs of their citizens, whether “unbanked” or “unphoned”. Regulators globally are looking to share learnings from Kenya, Philippines, India, … Banks expect between 600M-800M people will gain first time access to financial services over the next 8 years. A tremendous market, that will be served much differently then banks (and retailers/MNOs) have operated in the past.

    This is not to say that ISVs have no role, but rather their role will be supportive of facilitating exchange of value… NOT leading with a brand (ex Obopay). Examples:

    • Government  pension distribution across multiple MNOs
    • Business connection to multiple MNOs payments
    • Businesses clearing settlement, AR integration and reporting
    • CRM solutions for customers, automated response
    • Assist MNOs, Banks and Businesses in compliance and reporting.
    • Bank connection to MNO networks. Ex: micro lending… receive your pension… now establish a savings account, or send money to your grandson.
    • ISVs should look at supporting services in connecting business to this new network.

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