Tag Archives: MPESA

Emerging Markets: MMU Revenue Challenge

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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?

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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

    • Cash Replacement – Part 2

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    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

    MNOs as Depository Institutions?

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    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

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    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.

    Related articles


    Unbanked: Cash is King

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    Tackling regulatory and consumer issues in emerging markets

    While I was consulting w/ regulators and banks in Malaysia, I asked about the penetration of cards. The response from a lead banker was “Cash is King”. This response is a great summary for the key issues facing MNOs, FSIs and Regulators attempting to improve electronic payment penetration in emerging markets. Adoption of new payment mechanisms in developed countries has historically taken 20-30yrs. Emerging markets will surely proceed at a faster pace, but the work to be done is greater given the absence of: regulations, consumer protections, and electronic/physical infrastructure (among both banks and MNOs).

    “Cash is King” may be too much of a generalization to extend to all markets, but in Malaysia consumer research indicates there are substantial consumer hurdles for FSIs trying to capture the unbanked population (trust, access points and overall committed to cash chief among them).  For domestic FSIs in SE Asia,  the consumer data shows that  MNOs are better positioned (reputation/brand/service/efficiency) to deliver on the mobile money proposition.  MNO’s position stems from the value that they deliver, with mobile money serving as the principle mechanism to retain access to MNOs services AND move from “informal” communication to money centered “business” communication. MNOs in emerging markets therefore have a unique opportunity to attract consumers to mobile centered “value store”.

    Software providers (ISVs) attempting to address the “unbanked” world will face the following challenges:

    1. MNOs are adept at software development. Look at MPESA, GCASH, ZAP, …
    2. Business case separate from MNO is very, very challenging. Payments is a difficult business for banks.. it may be an impossible business separate from either bank or MNO.
    3. No private investment capital. NGO and micro-finance organizations I have spoken with are highly skeptical of technology use for unbanked (even for loan officers). Further, their involvement suppresses margins as government resources are allocated to achieve goals that are not following a profit motive. ISVs will need to make difficult decisions on whether to focus in the “For Profit: of “Not for Profit” areas.
    4. Many willing to listen to your idea, or let you prove out your value.. without much commitment for revenue.

    This is not to say that there are no ISV opportunities in emerging markets. Once value is stored in the network businesses will certainly attempt to connect in order to attract and service customers. This is where developed country ISVs have excelled (HK, SG, AU, Korea, Japan, EMEA, …). However, the developed countries had a well established banking infrastructure PRIOR to channels like internet and mobile (with a commensurate evolution in the respective regulatory regime). Within emerging markets the “starting point”  is different (BOTH telecommunications AND banking services are immature) which may result in a different evolutionary path for mobile, banking, payments and regulations. Message to VCs: question your assumptions and adjust your paradigms.

    A number of ISVs are attempting to establish a turn key payments system (the mobile money “switch”). However, Banks and MNOs business models are historically centered switching, and hence these established entities are highly motivated to continue control of both the infrastucture and all IP around it (opportunities for ISVs in this space may be limited). Fertile markets for ISVs may tend to be in areas which support either businesses or consumers in mobile commerce. Examples:

    • Hosted service that allows African governments to send pensions to multiple mobile banking plans
    • Text based “comparison” services for consumers,
    • Mobile banking infrastructure (ex: open new account, credit score using social networking data)
    • Mobile “bill pay” services for utilities

    Regarding technology use in unbanked… Perhaps “unbanked” is too large of a segment.. perhaps we should separate out sub-groups like  “unphoned”… and consumers that own a phone but are committed to cash only (?traditional unbanked?). Given that some readers of this article may represent NGOs and governments that are focused on use of technology in microfinance, it is important to deliniate segments served by MNOs and MFIs. Perhaps creation of a segment such as “micro finance unphoned” MFU segment is necessary (I would love to see consumer demographic data here). The MFU segment is being successfully served without technology in lending models firmly established (See Grameen model).  Given this “success without technology” NGOs are particularly skeptical of the use of any additional costs (or intermediaries) to serve these consumers. Established (for profit ISVs) vendors will be challenged to create a sustainable low margin business in the MFU space given the influence of NGOs, and subsequent margin compression.

    Focusing on “unbanked”, exclusive of the segments above, the entities most capable of tackling the range of issues here are: MNOs, large banks, large retailers, and state agencies. “Trust” is something earned over many years… In emerging markets, I would expect to see very simple services that can have very broad impact, with very little assistance from external vendors for following reasons:

    • 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.
    • 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.
    • Consumer education…. Simple ( SMS). Side note: Did you know that there is a 20% failure rate on SMS in India? Perhaps this is old data.

    Side note… Food for thought.

    In this CGAP article, is it really access to “cashless payments” that is the issue? or is it the farmer’s inability to find a market for the goat and safely transfer/store the value? The deaths of the SKS workers are truly unfortunate, but if mobile enables value store, won’t thieves then adapt to this opportunity and force a transfer at knife point? Think of the poor farmer with all of his savings locked in his cell phone, overnight the money disappears. What consumer protections are in place so that he gets access to his funds immediately? Indian regulators are tackling these issues today, issues that the developed world has continued to refine over the last 40 years (for electronic payment).

    Challenges for ISVs are many, as MNOs are very adept in software development and any “mobile money” value prop is Asia must be either strongly tied to a bank or MNO. VC is very tight here because compressed margins in payments are further exacerbated by injection of government and NGO money.

    Feedback appreciated.

    Nokia Money/Obopay

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    Oct 13, 2009

    Also See post on 11/12 Obopay India – Another Failure?

    Obopay, Nokia Money, MasterCard Money Send…  all are based on the Obopay platform. In the Valley, nothing invokes a quicker smile and shake of the head then discussion of Nokia’s $35M+ investment ($70M in round).  This shake comes from both VCs and payments executives. The banks are running from the service, just as the Nokia and MC are running in.

    From a Venture perspective… Nokia overpaid and may have significantly alienated banks. Obopay now has $126M in invested capital, with no “value proposition” (hence less then 20k active customers),  no US success, an average team and very little product.  Estimating a Series E pre-money valuation of $200M, you are left w/ post money of around $270M.. My sources tell me Revenue is less than $5M which results in a post money valuation of 54x revenue for a service from which its major customer Citi is walking away from (MasterCard is TBD).

    1. Series B, 9/06 Qualcomm $7M
    2. Series C, 7/07 AllianceBernstein, Citigroup, Qualcomm, Redpoint Ventures, Societe Generale, Richmond Management $29M
    3. Series D, 4/08 Essar Communications Holdings, AllianceBernstein, Onset Ventures, Redpoint Ventures, Olayan, Citigroup, Societe Generale, Qualcomm Ventures, Promethean, Richmond Management $20M
    4. Series E, 3/09, Nokia, TBD $70M

    I must admit to feeling awkward in writing this.. given the names on the list you would assume that there is a sound basis for the investment.. but it seems to be “hedge your bets”  investing at best,  “swarm investing” at worst. The closest way to get to know what is real (and what is not) is to work with the customers. Hence my note.

    I’m not saying that they can’t be successful, with the investors and capital listed here they certainly don’t lack a solid BOD. My point is that they have not had success to date in the US, have an average management team, and very little product. Nokia bought a bridge… lets hope it is to somewhere.  The amount of money going in tells me that Obopay believes they can build a mobile “switch” to create a visa like network. Globally,  financial services companies have learned a very important lesson with Visa/MC: never let someone else own the switch. Telcos I’ve worked with also clearly understand the control issue, not just in the US but in EMEA, and AP. Obopay’s most important network partner is MA, the entity which will drive network fees and transaction revenue. This brings up the question: IF Obopay is successful then what is their revenue POTENTIAL? Answer: a CUT of user fees from a SENDER Pays model.
    It’s rather hard to compare Obopay to its competitors. Obopay is rich on marketing, alliances and user interface… and light on everything else (risk, operations and payment processing). Alternatively companies like Paypal and Cashedge have deep payment expertise, dedicated risk management teams (30-100) and 24×7 redundant operations.

    UNBANKED or UNPHONED?

    Nokia interest in “Nokia money” is less to do with the altruistic goal of bringing financial services to the “unbanked”, and more to do with growing “unphoned” subscribers. Take the MPESA success in Kenya. Safaricom/Vodafone have 99% of subscribers on pre-paid plans (aka top ups).

    http://www.safaricom.co.ke/index.php?id=655

    The challenge in growing subscribers in the third world is giving them a way to pay (top up) their mobile phone.  Nokia’s selection of Obopay is very curious, given that Obopay is a hosted platform that currently requires online registration.. quite a difficult thing for an “unbanked” customer to do in rural India. We can safely assume that Obopay will invest resources to provide for service and beneficiary registration in a 100% SMS mode (or build a NokiaWallet embedded on the phone), but there are still many holes in the service that are left to be plugged and a big business challenge in incenting remote agents.

    The general consensus among executives seems to be that the challenge in mobile payments is 10% software,  50% risk and regulatory, and 40% qualitative issues surrounding “consumer adoption”.  Within India, regulators have been very involved in all pilots, setting an absolute Rs 5000 (~$100) limit on all providers in order to ensure that another run away “MPESA type” does not occur without a sound regulatory framework. It should also be noted that Vodafone/Safaricom was in a very unique place to address the “customer adoption” issue as it had 80%+ market share in Kenya. Most other markets have highly competitive and fragmented telecoms, each attempting to drive competing heterogeneous payment services.

    M-Banking: Vodafone’s M-Pesa Hits Regulatory Roadblock | MediaNama

    http://www.pluggd.in/mobile/obopay-india-to-launch-mobile-payment-service-1020/

    Assuming Nokia’s objective is to provide this service to carriers, they will likely bundle discounted packages of low cost hand sets w/ service. The MNOs I have spoken with are NOT buying into Nokia’s vision and in fact are quite irritated that they are attempting to end run them through a direct sale to MNO agents.  Hence, most major MNOs are busy formulating their own strategy, and have a host of options.  If I had to bet… my chips are with the MNOs as people only buy a phone every 2 yrs (in emerging markets), they top up frequently. Nokia Money/Obopay will face competition from:

    • Vodafone. Unit led by Nick Hughes is active in Asia and ME. Repeating the Kenya success
    • Monitise. Provides same SMS services and integrates quickly to bank systems through ATM switch (Bank focused sale)
    • hyperWALLET. Software behind Enstream
    • Fundamo.
    • Sybase. Rock solid software play for Telecos
    • Akos Technology. Software/Service for telecos
    • …etc

    Nokia Money and Obopay have a very, very steep hill to climb.

    • Software (No risk engine, Online registration required, hosted model, …etc)
    • People – Few international payments executives in team
    • References – No US success

    As a side note… Citi’s trial of the service had terrible adoption. Less then 20k active users (much less). Obopay could argue this is due to poor Citi marketing (for those that argue marketing.. go use the service today).  I also understand that Obopay is telling prospects that Citi is still involved (which is true from a BOD level). I’ve also been told by 2 banks this week that Obopay is not taking any new US banks as its focus has shifted to India (Yes Bank).

    Related articles

    The Power of Mobile Money..

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    Economist Article

    Telecoms: The power of mobile money | The Economist

     Extending the “network” of financial services into the unbanked is a tremendous challenge. Modern G20 countries have developed significant legal, regulatory, and technology infrastructure over 100 years. Such basic elements as customer identification for KYC, or consumer protections are not in place within many 3rd world countries. Mobile money attempts to leverage the “mobile network” as a financial services network. The telecos (appropriately) are driven to enable mobile money services to provide a way for the “unbanked” to pay their bill. As long as the value stays in the teleco network there are few issues. However, when “cash out” points are established then the same regulatory issues will need to be addressed and decisions made as to whether to “connect” the mobile network to bank networks. 

    Anyone familiar with the subject knows that African regulators are particularly sensitive since the success of MPESA. Any success in mobile money that results in value exchange external to the mobile network will be facing the same regulatory requirements that banks do. In short, the “mobile networks” will not be morphing into banking networks without compliance to the same bank regulations which all financial networks face.

    In speaking with both the FSI and the Network involved in MPESA, I asked them both separately what assistance they were looking for in Kenya, or if they rolled it out in another African market. Both separately said “someone to own the risk” [e.g. payment risk management]. Providers are thus recognizing that Payment authorization will require a new risk models then what are currently in place within other payment networks such as cards (e.g. HNC’s Falcon). Note that banks have significant dedicated risk teams (20-50 people) focused here.