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.

Visa and Cashedge

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous).

16 March (updated 17 March)

http://www.prnewswire.com/news-releases/cashedge-and-visa-to-expand-network-offerings-118071239.html

Visa has been chasing after any party with direct links to DDA accounts. This in an attempt to “end run” around poor OCT adoption (see previous blog).  I understand that Obopay is also set to announce support of VMT. What a change from their MasterCard approach!

Visa is getting decent traction in Asia/ME in receiving VMT, problem is that there are no send capabilities, and the majority of banks are telling Visa to “pound sand” with their OCT transaction set mandate (see previous). I was told yesterday that the OCC is looking into both the mandatory nature of Visa’s OCT and the AML controls.

It will be interesting to see how Visa explains the loss of international wire fee revenue to their member banks. Why pay $40 for an international wire when you can use CashEdge to send to Visa, then VMT to send to India/Mexico, …? As I ran Citi’s online properties I can tell you this completely overlaps with my Citi Global Transfer service and I would not be happy at all.

As a banker, I’m mad as hell at Visa. Why don’t I like this VMT?

  • Visa will keep the directory of cards, mobile numbers, and DDAs. The last 2 really really make me mad. Who says they can hold my customer information?
  • Visa runs it..Continues to build Visa brand on your ACH
  • You own the risk, Visa develops new services
  • Circumvents all of the industry controls on ACH (ex. Early Warning)
  • Unfunded Reg E research burden and consumer support reqs.
  • Confusion in online services
  • Cannibalizes existing bank products (wire transfers)
  • Customer service/research nightmare .. all unfunded
  • Visa may have a much smaller role to play in debit.. why would I want to add new services to their group?
  • it will be very, very hard to shut down once it gets moving.

Fortunately for banks, CashEdge is a bank friendly vendor. Actually, it wins the prize for  best bank vendor (I signed 2 contracts w/ them).  Visa will not do enrollment, nor will they have directory of DDA/Debit. CashEdge is providing multiple service/pricing  options t0 participating banks:
– Send to DDA
– Send to phone
– Send to e-mail
– and new option.. send to Visa Debit Card (w/ fee)

Each bank has flexibility in determining IF they want these services and how to price them. As you can tell.. I would never let the Visa option happen.. but then again I don’t run the online bank anymore.

I’m beginning to wonder if I’m just a pessimistic nag. I’m tired of being negative on things… What do I like this quarter? Google and NFC, the Chase QuikDeposit app, PayPal at the POS, .. oh and I loved (past tense) ISIS until they fell on their own sword.

No blogs next week.. will be out of pocket…

AT&T, Verizon in Mobile Money Newco w/ Discover and FirstData

Don’t think about this as a card business, think about this as the next Google and payments are the KEY that ties together the mobile, virtual and physical world. NewCo will be to mobile advertising what Google was to online. For example, rumors are NewCo is attempting to consolidate $1-5B+ in Madison Avenue marketing spend in first year (See consumer scenario here). The MNOs are brilliant! Their collaborative efforts here are a severe threat to both banks and established payment networks. Widespread adoption of NFC will revolutionize consumer payments and may result in the next boom cycle for silicone valley. Make no mistake, NewCo will be the leader of the next great ecosystem.

AT&T, Verizon, T-Mobile, .. create NewCo to deliver mobile payments w/ Discover

2 August 2010

In press today – Bloomberg Today – AT&T and Sprint to create prepaid venture

Previous Posts

Mainstream press has added a few additional details to what we outlined back in November. The biggest surprise to me is that Discover is the network partner (quite frankly I assumed it was Visa). Discover is an interesting partner, given its capabilities (issuer and acquirer) and reveals much about the mobile network operator (MNO) plans to bring a merchant friendly (lower interchange) strategy to market. It appears that First Data is in this alliance as well acting as the trusted service manager (TSM).  NewCo represents a major investment (rumors are that the major operators are investing north of $200M) and may start a new venture wave  in the valley as NewCo positions itself to be the “Google” of mobile advertising.

Don’t think about NewCo as a card business, think about this as the next Google and payments are the KEY that ties together the mobile, virtual and physical world. As I discussed in March:

Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker?

Answers

  1. Tipping point for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world, aggregating every other account type and payment instrument.
  2. A new business for AT&T which could drive 30-60% growth in LT revenue
  3. Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
  4. New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
  5. Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
  6. Cash replacement for small value payments as merchants of all types adapt POS to accept NFC, and small merchants take out POS terminals in favor of making their phone a cash register
  7. .. would love to hear from you on the next 100…

There are at least 3 major elements to this announcement which warrant further discussion, as impact on the venture and payment community will be significant:

–          NewCo business model: It’s all about marketing and control

–          Payments shift from banks, Visa, and MA

–          Mobile payment value proposition. Can NewCo make this work for consumers and merchants?

Business Model

The AT&T Universal card changed the credit card landscape in 1990. AT&T demonstrated it could both create a card business AND leverage distribution muscle as it attracted over 10M card holders in under 2 years. Citi acquired the AT&T Universal card for $3.5B+ in 1997 and it remains the largest affiliate card in Citibank’s portfolio.

As I wrote back in November, The US market is ripe for a break from the 6 party political “fur ball” that is hampering delivery of mobile payment (Card Issuers, Acquirers, Network, Merchant, MNOs, Handset Mfg). For those outside the US, MNOs have substantial control over handset features and applications, and have been leveraging this “node control” to “influence” direction of payments. The central US MNO argument being: “it is our customer, our handset, our network we should get a cut of the transaction rev”. Unfortunately existing inter-bank mobile transfers/ payments are settled through existing payment networks that provide limited flexibility in accommodating a “new” MNO role and the network rules leave much room for improvement in: authorization, authentication and consumer “control”. The Discover partnership would appear to offer NewCo the opportunity to define new rules, rates and incentives for consumers and merchants to participate.

The key to unlocking this new business model is not interchange, but creating a new market for mobile advertising, NewCo will be to mobile advertising what Google was to online. For example, rumors are NewCo is attempting to consolidate $1-5B+ in Madison Avenue marketing spend in first year (See consumer scenario here). The MNOs are brilliant! Their collaborative efforts here are a severe threat to both banks and established payment networks. Widespread adoption of NFC will revolutionize consumer payments and may result in the next boom cycle for silicone valley. Make no mistake, NewCo will be the leader of the next great ecosystem.

More tomorrow.

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

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
  • Mobile Money: Emerging Markets/Emerging Models

    To reach the worlds poor, the advantages to an “open” system with compatibility and interoperability are clear… in the long term. In the short term, the urgency is to get something started by an entity that is motivated to invest. Regulators should consider the history of successful networks in order to balance constraints, competition and incentives to invest. Regulatory and legislative actions focused on: consumer protections, competition and financial accountability may be the most effective short term focus areas…

    Regulators need to allow closed systems (for mobile money)

    18 April 2010

    As I stated in my previous post (reference)

    Regulators in Africa and India 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 then that which exists in today’s developed countries. This opportunity for “leap frog” improvements will be driven by the unique path toward evolution given existing infrastructure and consumer penetration of both financial services and telecommunications.

    Bank Regulators in emerging markets face many challenges in expanding basic payment and (mobile money) services to the rural poor and unbanked. The MNOs have proven their ability to delivery services to these consumers, and are therefore the entities most capable of delivering services. Governments and regulators must continue to encourage investment and innovation by MNOs, and resist the temptation to apply “open network” standards to this quickly evolving area. Although there is substantial academic research on two sided networks which shows social benefit of network “compatibility”, mobile money is clearly an exception (to compatibility constraints) given the absence of profitability for any current provider. Until a sustainable business can be built to serve this function it must be either driven by an existing company prepared to make investment, or by the government in the form of a monopoly. (see Open and closed systems of two-sided networks . Schiff, A. 2003, Information Economics and Policy, 15)

    Network business models are complex, whether they are: banks, railways, shipping, telecommunication, cards, electricity …etc. Historically new networked business started as a closed proprietary system which was coordinated by a single “channel master” (or state sanctioned monopoly) which defined standards, and made sustainable capital investments. Early business models seem amusing compared to current evolved uses (Telephone Wikipedia)

    At first, the benefits of a telephone exchange were not exploited. Instead telephones were leased in pairs to a subscriber, who had to arrange for a telegraph contractor to construct a line between them, for example between a home and a shop. Users who wanted the ability to speak to several different locations would need to obtain and set up three or four pairs of telephones…. Signaling began in an appropriately primitive manner. The user alerted the other end, or the exchange operator, by whistling into the transmitter.

     Similarly in banking, early in the US there were over 7,000 varieties of paper money until 1861. During this chaos, early US banks each issued notes which were not universally accepted by other institutions (http://www.secretservice.gov/money_history.shtml)

    During this same period (1793 – 1861), approximately 1,600 private banks were permitted to print and circulate their own paper currency under state charters. Eventually, 7,000 varieties of these “state bank notes” were put in circulation, each carrying a different design!.

    To reach the worlds poor, the advantages to an “open” system with compatibility and interoperability are clear… in the long term. In the short term, the urgency is to get something started by an entity that is motivated to invest. Regulators should consider the history of successful networks in order to balance constraints, competition and incentives to invest. Regulatory and legislative actions focused on: consumer protections, competition and financial accountability may be the most effective short term focus areas…

    Obopay and Firethorn

    Spoke to most of the top 5 US banks this week. Neither Obopay nor Firethorn will have any traction at the top US banks.

    2 March 2010

    Related posts

    Spoke to most of the top 5 US banks this week. Interesting to note that Firethorn is out of all of them.. even in the model where Firethorn paid one of the majors $1M to take the application and integrate it. As of the latest QCOM 10-Q we can now see that total Firethorn revenue was $3M for the 2009 YEAR!  Wow.. no wonder Len lost his head for buying this thing and making it a separate division.

    QCOM and Firethorn have a new product planned:  SWAGG (www.swagg.com). Good luck trying to figure out what this thing is.. could this be associated with Visa/ATT? (Youtube here). There seems to be a pre-paid debit card associated with it (from Dr. Jacobs CES presentation). Hey QCOM is one of my favorite companies… the people there are absolutely brilliant. But the Firethorn team is adopted.. and therefore the  genes do not extend here. They need a top exec to drive this thing.

    On another note, Obopay showed up to at least one of the top 3 banks last month (BankX) touting its mobile payment solution. Undoubtedly with “millions” of subscribers (actual estimated at less then 20k). Always interesting to see spin here, they also reportedly told BankX that Citi’s departure was only temporary. Other banks should ask them to get specific.. very specific.. (probably not the US and there is no commitment on use).

    From compete.com (Hard to spin facts..8,000 unique visits last month .. estimate only 20% use the service)

    The “big secret” in mobile payments is that there aren’t any… (with very few exceptions). Those exceptions usually deliver “payments” as part of an existing value proposition (see  MNOs will rule in Emerging Markets). Banks know that changing consumer behavior is a 20 year effort. Card based payment schemes have particularly high hurdles in emerging markets due to interchange rates and rules that are ill suited for low value payments by unbanked. Toward this end countries such as India are contemplating the development of new domestic payment networks.

    Thought for the day

    RBIs Payments Vision 2012

    Cash Replacement – Part 2

    The common win-win for both mature economies and underdeveloped appears to be Cash Replacement. Cash Replacement has been the subject of thousands of reports originating from: economists, bankers, academics, non-governmental organizations. The objective of this blog is to provide a market basis for investors and small companies attempting to “quantify” the opportunity in cash replacement, specifically e-Money and non-card based schemes.

    December 15, 2009 (PDF VERSION HERE)

    Part 2 – Cash Replacement (V1)

    In my previous Blog (see Investors Guide to Mobile Money) I outlined a simplified categorization of payment schemes for “first world” economies. The common win-win for both mature economies and underdeveloped appears to be Cash Replacement. Cash Replacement has been the subject of thousands of reports originating from: economists, bankers, academics, non-governmental organizations and consulting groups (a few of which are listed in references below). The objective of this blog is to provide a market basis for investors and small companies attempting to “quantify” the opportunity in cash replacement, specifically e-Money and non-card based schemes.

    Global debit and pre-paid card growth have been the key instruments leading in cash replacement use within top global economies. The card infrastructure (ie “card rails”) that provided for this success was “built” on the credit card value chain over the last 35+ years Cap Gemini’s 2009 World Payment Report provides an excellent overview of key trends. Key excerpts below:

    • The worldwide volume of payments made using non-cash instruments (direct debits, credit transfers, cards and cheques) grew 8.6% to 250 billion transactions in 2007. The use of cards continues to be the single strongest driver of volume growth. Global card transactions (credit and debit) grew 14.5% in 2007.
    • The ten largest markets accounted for 92% of all non-cash payments transactions in 2007 (when they represented 84% of global GDP).
    • Unlike in the US, where cash in circulation has decreased by 7.4% in 2007, cash is still increasing in Europe, albeit at a slower rate of 7.8%.

    Background

    A historical review of products attempting to gain traction in cash replacement reveals a battlefield littered with the “corpses” of plastic and digital products.  (Ref 1)

    • Mondex, now owned 51% by MasterCard and national franchises owned by big banks, is after years of testing still confined to trials, often internal to banks.
    • VisaCash. See history here http://www.mondex.org/main_page.html.
    • DigiCash eCash, licensed by several big banks worldwide
    • CyberCash never rolled out a stored value system at all; after announcing a trial in September 1996 the CyberCoin system was never rolled out except on a limited scale at Barclays in the UK.
    • eGold. http://lawvibe.com/e-gold-founder-admits-e-gold-used-for-money-laundering/
    • Geldkarte in Germany
    • Paybytouch
    • Obopay

    These “failures” were less to do with technology, and more to with competing against an existing payment network(s). Payment networks are inherently “sticky” with investments required by consumers, merchants, and banks for effective functioning. Payment networks also have substantial government involvement to support Commerce and Treasury functions that ensure stability, resilience and protection of parties. Innovation in payments is challenged by this network dynamic. As most small companies know, getting a bank to make a decision is tough… but nothing compared to getting 4-6 groups (issuers, acquirers, merchants, MNOs, Regulators, networks, ..) to collaborate in making coordinated change. A level of difficulty that is only superseded by the challenge new entrants face in competing directly against these existing networks.

    Why read further? Although I’ve painted a very negative picture of past payment failures and the challenges of competing against the traditional networks, the payments business is undergoing tumultuous change and where there is change, there is opportunity. To understand the forces and competitive dynamics of cash replacement, it is important to understand both the local and global forces driving this change (see pdf above).

    Emerging Market Regulation

    As this blog is largely focused on emerging markets, it is worth noting several “unique” regulatory challenges within emerging markets as regulations surrounding MFIs and Money Transfer Services have been evolving at an astounding rate.  This regulation evolution is not taking place in a vacuum, as regulators always work with the entities they regulate.  Teams capable of local engagement and partnerships are therefore much better suited to operate in this dynamic regulatory environment. As an example, Vodafone has developed enormous competency in the payments space, extending not only its “product” success in MPESA, but developing talent which can be leveraged to seed other local teams (in the 40+ markets it serves).

    As a generalization, there are 4 bodies of legislation that impact mobile money:

    1. Bank Regulation (particularly role of non bank agents, and payment networks)
    2. Micro Finance Institution
    3. Electronic Transaction Legislation (Consumer protection, admissibility of electronic records, prosecution of electronic crimes, …)
    4. Telecommunication Regulation

    MNOs success to date has not been in isolation, given that in every instance (above) the MNO partnered with either an MFI or Bank.  2009 Mobile Money Summit in Barcelona provided several excellent presentations covering the global regulatory environment, an environment that is both complex and evolving. It is imperative that your team understand the local regulatory environment. 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).

    Network Effects – Stating the Obvious

    For payments to flourish, a coordinated system of instructions which can be read by trusted participants is necessary. Providers of payment services must consider what network participants are providing in order to collaborate in risk management and settlement; the greater the number of consumers and businesses that participate, the greater the collaboration and interdependency. As more people adopt the payment system, its value increases, since it provides access to more people; this encourages larger networks. Not only do the benefits increase as the network expands, but the per unit cost of service falls. This behavior is the basis for what economists refer to as a “network effect”.

    Once a payment system reaches a “critical mass”, economic value will be created at the ends of networks. At the core- the point most distant from users-generic, scale-intensive functions will consolidate. At the periphery-the end closest to users-highly customized connections with customers will be made. This trend pertains not only to technological networks but to networks of banks as well as small merchants and even to consumers who engage in shared tasks9. From a payment network perspective, this means that the “routing” of payments will provide much less revenue opportunity than managing the end points (e.g. the customer interaction or the products which are sold on the network).

    Transportation has proven to  key opportunity for electronic money: Oyster in the UK, Octopus in HK, CashCard in SG, …etc. Success in these transportation initiatives has been “relative” because they have been challenged to generated consumer adoption beyond transportation “core”, and they have note generated an attractive margin to the network (for the economic reasons that Georgios lays out above).

    The European Central Bank (ECB) has provided a new regulatory framework for electronic payments (see ECB ELMI overview by M. Krueger, and World Bank). The ELMI framework, as well as Singapore’s Electronic Legal Tender (SELT) concept, demonstrate a tremendous collaborative multi year effort between central banks, governments, financial institutions and business to provide rules, law, consumer protections and an environment which would support alternatives to cash. However, it also highlights the scale of effort needed to move a consumer behavior that has existed for millennia.

    Financial Case

    In general, economists and bankers agree that there is a strong macro economic case for cash replacement when accounting for the “shoe leather” costs (Ref 5). However, it remains to be seen “who” will pay for this convenience. Ref 1. Electronic Money and the Possibility of a Cashless Society by Georgios Papadopoulos provides and excellent analysis:

    “…the high social cost of cash is all too general. The costs and the benefits for cash as well as for electronic money are not distributed evenly. The cost of issuing cash is paid by the state and financed by taxation. Most of the infrastructure for e-money is paid by the issuer, which in turn is charging the user for this payment instrument, even though the distribution of the costs between the consumers and the merchants is uneven. Consumers may pay a fee for the card (either directly or as a part of their checking account), while merchants have to pay a fee to the issuing bank(s) either pro transaction or as a percentage of the total value of the transactions and in addition carry the cost for the infrastructure“… from Georgios Papadopoulos

    This “free nature” of cash, combined with its unique qualities (i.e. anonymity, history, physicality …etc.) further challenge new payment models and the barriers they face from existing card and bank networks. Payment networks are resilient, this is both a strength and a weakness. In 2000, the average transaction cost for credit card transactions was around US$0.70 (ref 1) and thus did not serve as a viable option for cash replacement. At the time, VISA cost studies showed that card transactions of amounts of less than about US$10 are in fact unprofitable for the Issuer bank and amounts of less than US$38 are unprofitable for the Acquirer bank. Any product attempting to take the place of cash must make low value transactions efficient and profitable to the parties providing the service.

    The “debit revolution” for the card networks began with pricing and risk. For the non-bankers reading, issuing debit cards was (and still is) a highly contentious fight within banks. Large issuers did not want to forsake the high margins of credit cards (350bps + interest on ANR) for the paltry returns of linking a current account to a card (150-250 bps and no interest income). This fight was exacerbated by the fact that banks typically run the “card business” separate from the deposit “retail” business. Banks began supporting debit when they realized that Debit DID NOT displace credit cards, but rather supplemented it, providing net incremental (non-interest) revenue to the bank. After this realization, banks then began to take issue with PIN Debit vs Signature (another story).

    The story of interchange rates, and how they are negotiated is complex and full of intrigue. For those of you interested, read the US Federal Reserve’s “History of Interchange”. As you can see from the table above the trend (across all products) seems to point “north east”, a trend not lost on merchants and consumers. It is important not to assume that these rates will remain static. Banks (issuers and acquirers) can respond to competition, a state which does not seem to be of an immediate threat.

    The debit success led the way for pre-paid cards. Pre-paid may present the best “global” opportunity to reach unbanked customers and further impact cash (See US Federal Reserve Study on Prepaid). Pre-paid is a category with both open and closed loop models. Open loop prepaid has benefited from Visa and MasterCard’s recent independence from their bank ownership model (in 2008 and 2006 respectively). In the US Pre-paid has seen substantial participation from non-banks such as Wal*Mart (11/2009 American Banker) whose business strategy aligns well with reaching the unbanked and delivering disruptive value in bank like services.

    US Federal Reserve – Interchange Fees (Cross border excluded)

    In the US, Gross dollar volume (GDV) for all prepaid cards is expected to grow at a compound annual growth rate (CAGR) of 21%, approaching $250 billion by 2012. Open loop prepaid cards are likely to produce a 36% GDV CAGR and closed loop gift cards a 5% GDV CAGR between 2008 and 2012 (First Annapolis). The EU provides a much larger opportunity in pre-paid market. Research indicates that the EU prepaid market is likely to generate a turnover of €132 billion across the predicted 418 million cardholder base, with transaction volumes of 4.4 billion by 2015. Within Asia and Africa, it remains to be seen whether prepaid cards will gain traction outside of Japan, Korea, SG, HK, and AU. New payment innovations present opportunities for non banks to create local (non card) networks (ex: MPesa, ZAP, GCash, …etc. )

    The network motivation for pre-paid is quite simple, just as it is with credit and debit, there is very little incremental costs to adding transactions to the network. For merchants the incentive is to decrease costs. Unfortunately merchants are limited, within their existing card agreements,  in their ability to pass on these costs directly to consumers ( surcharge on payment type). This limits merchant ability to incent consumer behavior toward the lowest cost payment channel. An excellent paper covering network effects economics and interchange is covered in Ref 7 (highly recommend).

    Global Network Volume – 2009

    Card products (particularly debit) are filling most of the convenience gap, as PIN Debit competes quite well with Cash at most merchants (see The Move Toward a Cashless Society: Calculating the Costs and Benefits) Debit card volume growth has exploded globally, many would argue that it is the closest competitor to cash. Consumers have shown a tremendous reluctance to bear the “direct” cost payment. In other words: would I like to wave my phone at Starbucks to pay for my next cup of joe? yep… would I pay $0.10 for it? nope… I will use cash.

    The payment heads at the major banks echo this view, as consumer data and spending patterns don’t reveal significant gaps where consumers report that they are not served by current payment products. Within Europe, cash replacement in areas such as ticketing and public parking shows significant price sensitivity on part of consumer (assumption of convenience cost). SMS payment providers are heavily subsidized and largely unprofitable.

    Payment Costs

    The benefits of electronic payments are not without costs. Most analysis estimate the cost of payments to be 1.10% – 1.60% of GDP (EU Reference, US Federal Reserve, Journal of Network Economics, Africa, ). Most analysis point to a significant “social” savings potential in moving from cash to electronic payments. However, this data is highly skewed toward developed countries (as significant differences in infrastructure are not accounted for).

    Many emerging economies which did not “ride the wave” of consumer credit access have limited consumer and merchant payment infrastructure (ie. POS terminals, credit bureaus, consumer laws, …etc). In addition to infrastructure issues “Cash is King” in many of these emerging markets because no financial company has developed business model to profitably serve the rural poor.

    Banks typically have challenges pricing “down market” as concern over cannibalization prohibit price led competition of channel focused products which compete with an existing product. CGAP research (also see IAMTN) shows that MNO pricing of money transfer services is substantially lower than services available from either money transfer services or banks.

    Most interviewees in Kibera say they chose M-PESA because of cost. For example, sending 1,000 Ksh (US$13.06) through M-PESA cost US$0.39, which is 27 percent cheaper than the post office’s PostaPay (US$0.52), and 68 percent cheaper than sending it via a bus company (US$1.16).

    Within emerging markets, the primary distribution channel is local agents (An excellent cost analysis for agents has been done by CGAP.) Agent incentives are a very important aspect to any emerging market business case.

    Just as banks have used payments as a “loss leader” to generate revenue from other products (current accounts, cards, …) MNOs and their agents have created a model where payments enhance the value proposition of their core product (communication).

    e-Money

    The ECB definition of e-Money is

    … any amount of monetary value represented by a claim issued on a prepaid basis, stored in an electronic medium (for example, a card or computer) and accepted as a means of payment by undertakings other than the issuer, predominantly for small-value transactions (for example, the settlement of modest transactions over the Internet and of parking or telephone charges and payment for public transport services)9. In common with banknotes and coins, e-money is ‘fiduciary money’, deriving its value not from its intrinsic worth but, instead, from the bearer’s expectation that it can be exchanged for its underlying value.

    Successful eMoney initiatives, in both developed and emerging markets, have typically been tied to an existing value chain. A few examples: Paypal-eBay, Oyster – UK Transit, Octopus – HK Transit, Payforit – UK MNOs, MPesa – Vodafone Kenya, GCash – Global/BPI.  In almost every case, these initiatives began as a closed system and evolved to connect to other payment networks. Once value is stored in a network, every business will seek to connect, at an investment rate proportional to the network’s size, value stored and alignment to current customer demographic.

    Paypal and Vodafone have shown that there are significant revenue opportunities in e-money. As the major card networks seek payment volume, they will likely develop new rate structures to incent MNO led payment initiatives to “ride on their rails” (ex. Pre paid card).

    Network Profitability – 2008 US Volume

    Mobile Money – Emerging Markets

    The emerging market environment is a fantastic crucible for innovation as the network effects associated with the convergence of: finance, telecommunications, consumer access and business fuel economies within emerging markets. For those outside of the mobile payments industry, there are 3 principle emerging market success stories in mobile payments: M Pesa (Vodafone/Safaricom), ZAP (Zain Group), and GCash (Globe/BPI). Understand that my list is contentious given that all three are MNO led (I’m open to feedback, but it must be quantified by data). A more detailed list can be found here

    M-Pesa certainly seems to win the “award” based upon Consumer Metrics and most talked about. Prior to getting started here, I encourage readers to review 2 fantastic briefs M-Pesa: M Pesa by Tonny Omwansa , CGAP brief. My stated bias toward MNOs in emerging markets (See MNOs Will Rule) is driven by the following facts:

    • There are 3 success stories as proof points
    • MNOs have developed a business model to profitably sell and service unbanked customers SEPARATE from banking (phone)
    • Payments enhance the MNO business model in emerging markets
    • MNOs have the resources to invest

    The research on mobile money for the unbanked is tremendous and I can do no justice by trying to summarize. Imagine that you run a local shop in Kenya which sells dry goods and mobile phones, you must come up with 5 reasons why one of your unbanked customers would want to give up cash and pay a fee to load her money on cell phone. A few questions come to mind:

    • Value Proposition? Cost? Convenience? Will it make my life easier?
    • Use. What can I do with it? (something I can’t do with cash today)
    • Trust. Who has my money? Do my friends use it? Brand? Government?
    • Risk. Is it safe? (consumer protections, contract, access to legal system)
    • Support. Who can I see if there is a problem?

    Previously I have stated a radical hypothesis: the successes above were driven by the mobile proposition (communication), and payment supported the existing MNO value proposition. The path of evolution for MPesa and its competitors are unclear and will be heavily influence by regulation. Today, MPesa operates out of a single commercial account with the central bank. That account has a balance of almost 10% of the GDP, a fact that highlights the potential to serve the needs of the unbanked.

    The emerging market evolution is not so unlike that experienced with credit cards, although the “value chain” which drove the adoption is different. US, Japan, and EU access to consumer credit drove the development of the card networks; Consumer’s did not want a “card” as much as they wanted convenient access to a revolving credit line. In emerging markets it is the demand for communication that is driving the development of the network.

    Investment (Greater detail in my previous post – Investor’s guide to mobile money)

    As we look a cash replacement we will find that initiatives are frequent and success is not. It remains to be seen HOW the highly regulated world will evolve.  In the long term, Capital is attracted to success and growth. What we see today is a period of enormous flux and experimentation with established players making multiple “bets” (in the form of investment capital and revenue guarantees). Investments from established companies are in the form both in-house and partner led initiatives (examples: Citi Obopay, Obopay India, Nokia Obopay).

    The Silicon Valley model, where a bet is made and a (US) team is built to “figure it out”, faces many hurdles; it is particularly challenged for creating products and services targeted to emerging markets (where paradigms are different and local knowledge is key).  Valuations today are driven by either: revenue, customers or board members. MNOs will lead investment in emerging markets, small companies must find a way to either collaborate with them (or their agents). ISVs should look 2 years down the evolutionary path where value begins to exit the “closed network”. Outside of the top 10 card payment countries listed above, 80% of the world’s population lives… a population that only shops locally with cash. You will have a hard time tackling this opportunity in Silicon Valley.

    http://technology.cgap.org/2009/11/11/new-business-models-in-mobile-banking/

    http://technology.cgap.org/2009/11/11/new-business-models-in-mobile-banking/

    References

    1 Why do stored value systems fail? Andreas Furche and Graham Wrightson NETNOMICS. Volume 2, Number 1 / January, 2000

    2 Electronic money institutions – current trends, regulatory issues and future prospects, by Phoebus Athanassiou and Natalia Mas-Guix, July 2008. http://www.ecb.int/pub/pdf/scplps/ecblwp7.pdf

    3 ECB 2008 Annual Report http://www.ecb.int/pub/pdf/annrep/ar2008en.pdf

    4 Survey of developments in electronic money and internet and mobile payments, Sept 2004. Committee on Payment and Settlement Systems. http://www.bis.org/publ/cpss62.htm

    5 The Move Toward a Cashless Society: Calculating the Costs and Benefits/. DANIEL D. GARCIA-SWARTZ, ROBERT W. HAHN *, ANNE LAYNE-FARRAR. American Enterprise Institute-Brookings Joint Center for Regulatory Studies

    http://ideas.repec.org/a/rne/rneart/v5y2006i2p199-228.html

    6 Optimal pricing of payment services when cash is an alternative/. Cyril Monnet, William Roberds. US Federal Reserve. Oct 2007. http://www.philadelphiafed.org/research-and-data/publications/working-papers//2007/wp07-26.pdf

    7 Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues. Robin A. Prager, Mark D. Manuszak, Elizabeth K. Kiser, and Ron Borzekowski. 2009.  Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. http://www.federalreserve.gov/Pubs/feds/2009/200923/200923pap.pdf

    8 Electronic money and the possibility of a cashless society 18.02.2007. Georgios Papadopoulos http://papers.ssrn.com/sol3/papers.cfm?abstract_id=982781

    9 ECB’s note on regulatory framework surrounding ELMI http://www.ecb.int/pub/pdf/scplps/ecblwp7.pdf

    10 Where Value Lives in a Networked World, Harvard Business Review, Jan 2001, Mohanbir Sawhney and Deval Parikh).

    11 NTT DoCoMo’s Osaifu-Keitai (http://en.wikipedia.org/wiki/Osaifu-Keitai),

    12    “E-Money And Payment System Risks,” JAMES J. McANDREWS, 1999.Contemporary Economic Policy, Western Economic Association International, vol. 17(3), pages 348-357, 07.

    13    The Economics of Interchange Fees and Their Regulation: An Overview David S. Evans and Richard Schmalensee

    14    Why do stored value systems fail? Andreas Furche1  and Graham Wrightson.

    15    Prepaid Card Markets & Regulation* Mark Furletti. US Federal Reserve. February 2004. http://www.phil.frb.org/payment-cards-center/publications/discussion-papers/2004/Prepaid_022004.pdf

    Obopay India – Another Failure?

    I read this Journal article today and was very disappointed that marketing spin can now make its way into both academia and the WSJ. Serving the worlds poor and unbanked is something to take very seriously.

    November 12, 2009

    http://online.wsj.com/article/SB125774328035737917.html

    I read this Journal article today and was very disappointed that marketing spin can now make its way into both academia and the WSJ. Serving the worlds poor and unbanked is something to take very seriously. One of the few areas where I personally make an impact is: directing investment to opportunities.. My attempt here is to cut through the obfuscation and provide , to those that are investing,  an accurate view of Obopay’s current state, and the challenges that lay ahead for those investing in this space.

    It is a slippery slope for Academics (like WSJ Author) to start acting like marketing agents. This article is beyond obfuscation.. “Thanks to Obopay, millions of unbanked people in places like Africa and India are having access to financial services for the first time in their life.” I question whether there are more the 100k active Obopay customers globally. Obopay has no customers without a bank account today (credit/debit/ACH), therefore Obopay did nothing to provide this “access”. For example Obopay’s service requires you to enroll online.. nothing quite suited for the “unbanked”.

    India is a fantastic emerging market, but Obopay’s success in this market (or any other) is highly questionable. Here are some factors influencing my view of Obopay.

    • Go on Obopay’s website and take a look at the backgrounds of their 8 top execs.. Very “limited” experience in banking, profile seems to be Bay Area software development, or having worked at a card network.  A Payments company should be attracting talent with that has run a payments business.  I doubt you will see this same exec team next year as the BOD makes some tough decisions based upon the progress of the company. (note that since this post they have updated.. thanks for listening.. )
    • Obopay Press releases.. many alliances and awards.. NO CUSTOMERS.
    • Obopay’s US experience. See http://tomnoyes.wordpress.com/2009/10/30/citi-is-out-of-obopay/
    • Obopay’s invested capital http://tomnoyes.wordpress.com/2009/10/13/nokia-moneyobopay/
    • India has some of the toughest regulators on the planet. Its most recent regulation (HERE) in August of this year prohibits non banks from participating in mobile P2P.
    • In India, similar to the US, Obopay is swimming upstream, where regulations require it to tie its products to a debit/credit card and each bank must authorize. For example, Citi only authorizes “send” not recieve.
    • Go to Obopay’s Indian website http://www.obopay.co.in/why_obopay.html.. you will see  “future” services like top-up and bill pay because they are having to morph their strategy due to reg constraints (above).
    • Try to find “fees” for Obopay in India. You won’t find them separate from Yes bank (which goes to scale of use in India.. few customers, and Obopay can’t sell the service separate from a bank/MTO).
    • Unbanked. Grameen Solutions is a fantastic team serving the worlds poor, but their choice of partner in Obopay is not working out. Some of this “blame” could be shifted to the regulations (mentioned above), but the ecnomics of Obopay are just not working for this team. Take a look at http://www.grameensolutions.com/News-Events/. Perhaps Obopay should morph into an NGO ?

    Currently MNOs have the best chance of success serving the unbanked (MNOs will rule in emerging markets). Obopay is currently serving banked customers in India and there are many services that the banks currently offer that compete directly with Obopay. For example, in Citi India Citigold/NRI customers could instantly transfer funds to any Citi customer globally (at no charge).

    India’s domestic banks also have similar services. Put yourself in the shoes of an Indian bank customer, why would you want to pay 1.5% + 100RS (estimate) for sending money when you could use cash or wait until you gain access to your computer?

    Obopay started out as a “cash replacement play” where the sender pays, a model that has not worked well for them. They are continuing to morph their strategy to find a fit…. Banks and MNOs have several strategic advantages here, and will likely compete aggressively in any area in which Obopay attempts to “Brand” payments (to the detriment of existing products and services).  Cash replacement is a win-win area.. stepping beyond that will be challenging for a company whose top execs have no banking background.

    For the unbanked, MNOs will be the industry group most likely to succeed as they are the only business that has developed a business model to sell and support unbanked (MNO/Bank partnerships and new regs).  See MNOs Rule in Emerging Markets

    Other great Blogs

    http://paymentsviews.com/2009/08/06/a-look-at-obopay/

    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/