Mobile Money: Emerging Markets/Emerging Models

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 (

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…