Mobile Money: Issue 2

Although mobile money has been very successful in some countries (for example, by the end of 2014 in Kenya, 96% of households outside Nairobi used M-PESA), and is expanding in a number of other economies, its use remains mostly limited. For example, in Europe and Central Asia, 20% of adults use mobile money to pay for utilities. In Latin America and Caribbean, this number stands at 18%, and in Sub- Saharan Africa at 11% (Demirguc-Kunt et al. 2022). Additionally, in Sub-Saharan Africa, 15% of adults report saving in mobile money accounts – however, this trend is region-specific and was not observed in other regions where saving through mobile money accounts has been minimal (GSMA 2022a). Outside of these applications, mobile money use has been limited to very specific P2P transactions: those that take place over long distances and those that are in places where holding cash is risky. Outside these applications, there has been less success, and the innovation ecosystem around mobile money is still in its early stages.[1]1. Mas & Mayer (2011) hypothesise that households need to manage their budgets, savings, and payments in order to better manage their livelihoods, and the services available to the poor rarely combine these needs. They suggest how mobile money may provide an avenue and set of products to do this.  Even in Kenya, less than a third of households use the system for paying bills,[2]2. For the Safaricom product timeline, the reader is referred to http://www.safaricom.co.ke/mpesa_timeline/ timeline.html. In April 2009, Safaricom partnered with Kenya Power to enable customers to pay electricity bills through M-PESA. Starting in October 2010, customers could pay at supermarkets using M-PESA. Similar bill payment services are now provided by many mobile money providers.   for receiving payments or wages from an organisation, or for paying for other goods or services – only 5% use it to repay loans. As a result, few P2B, B2B, or G2P interactions take place over mobile money.[3]3. One nongovernmental organisation, Give Directly, operates in East Africa using mobile money to distribute cash transfers, though they do not yet reach anywhere near the scale of a G2P programme.  Although often referred to as a payment system, mobile money cannot fulfil its promise as a genuine payment system unless it can provide these other services at a sensible fee structure.

In the case of G2P transactions, it is important to mention innovations that are working toward delivering such services. In India, along with the universal ID, there has been a rollout of smartcards using a biometrically authenticated payments infrastructure through which government payments can be made to households. Muralidharan et al. (2016) evaluate the impact of these smartcards on beneficiaries of the government’s rural employment guarantee and pension programmes in Andhra Pradesh. They find that payments made using smartcards were faster, more predictable, and involved less leakage than the existing system, especially for the employment programme. These effects resulted mostly from a reduction in over-reporting and quasi-ghost workers. The reductions in leakages as well as reduced costs to beneficiaries of collecting payments make smartcards highly cost effective. In an accompanying study, Muralidharan et al. (2018) look at the general equilibrium effects of the smartcards being used in the employment programme. They find an increase in income, 90% of which came from private sector earnings (the remainder came from increases from the programme itself).

Although the literature on mobile money is growing, research on the innovations that are already building on mobile money has been lagging. In the spirit of spurring new research ideas, I outline some of the more recent product innovations that have built on existing mobile money systems and encourage researchers to catch up with the innovations. Whether these innovations ultimately deliver improvements in livelihoods to households is still an open question.[4]4. Kendall et al. (2011) look at how some other market players use M-PESA as a platform to integrate more financial services using results from phone and Internet surveys.

In 2013, Safaricom launched Lipa-na-M-PESA, a product that encourages retail payments over the M-PESA platform. Before this, the transaction fees on M-PESA, as on all other mobile money systems (see Figure 4), were too high for basic retail payments, especially because the incidence of those fees falls on the end consumer and not on the retailer. Lipa was an attempt to lower these transaction fees to 1% of the transaction size, which was then further lowered to 0.5% in March 2017 for transactions above KShs 200 ($2) and 0% for transactions less than KShs 200. The retailer can choose to pay it or pass on the fee to the consumer.[5]5. This is in contrast to Visa and Mastercard, where the incidence of the fee is always entirely on the retailer.  In practice, there has been a mix of retailers choosing to pay it and choosing to pass it on. Regardless, given the size of many retail transactions, this fee was too high for both consumers and retailers, though the changes in March 2017 may make a marked difference.

In March 2017, the Kenyan Treasury launched a pilot version of a digital government bond called M-Akiba. It is a 3-year infrastructure bond that is purchased over mobile phones. The backend system is built to allow individuals to use the KYC behind their mobile money accounts to open a Central Depository System (CDS) account through their mobile phone in a few keystrokes. Individuals can then actively purchase and trade these bonds on the underlying digital platform (which links to the bond exchange). These bonds come with a coupon rate payout of 10% per annum, paid every 6 months. To make this happen, Kenya passed legislation that lowered the minimum investment in treasury bonds to KShs 3,000 ($30) from KShs 100,000. The government also allowed for a CDS account to be opened via a mobile phone and allowed individuals to use mobile money to purchase and trade treasury bonds over a mobile phone. M-Akiba will serve as a positive real return savings instrument for low-income households, hence the name: M for mobile and akiba meaning savings in Swahili. There have been a couple of small bond launches over this platform, but nothing more recently and nothing significant, relative to the government’s revenues.

In late 2015, Safaricom made available an application programming interface (API) to allow for programmatic access to the M-PESA platform over the web, with a second generation launched a few years later.[6]6. For more on APIs and M-PESA's initial API, the reader is referred to the Bankable Frontiers Association (Bank. Front. Assoc. 2016) and Morawczynski (2015). For more on the operational aspects of M-PESA's API from Safaricom, the reader is referred to http://www.safaricom.co.ke/business/corporate/m-pesa-payments- services/m-pesa-api.  APIs are a convenient approach for businesses to expose some of their core assets and to enable the emergence of a developer community around these assets. APIs come with instructions for developers on how to access them, but also with terms and conditions, a pricing model, and other business contractual agreements. Exposing APIs has become a standard approach to creating B2B interactions over the Internet without tedious human business development transactions in the way.[7]7. For more information on APIs and their standardization, the reader is referred to http://oldwww.acm.org/tsc/ apis.html; Meyer (2016) provides more information on APIs in telcos.  Such APIs are now common use amongst mobile money companies, especially when integrating with bank accounts and credit wallets.

The universal access to M-PESA presents a tremendous opportunity for an API model and could accelerate the fintech market in East Africa rapidly. The value of global fintech investment in 2015 was $22.3 billion (Skan et al. 2016), with the United States having the largest sector, receiving $4.5 billion in new funding in 2015. China had nearly $2 billion, India $1.65 billion, and Germany $770 million. Whereas the growth in investments in Asia-Pacific have been dramatic (a fourfold growth between 2014 and 2015), there has been little investment in Sub-Saharan Africa, where mobile money systems have no doubt been the most popular (Skan et al. 2016). Given that Sub-Saharan Africa has some of the poorest economies in the world, it may also have the economies where the returns to fintech investments are the highest, as illustrated by the case of mobile money.

Democratising access to a payment system such as M-PESA might well be the missing link between the current situation and potential significant increases in investments in fintech in the region. The big question is: what can we learn from these nascent innovations that can change the gestalt of payments and financial markets in developing economies? Although mobile money may seem revolutionary, aside from the dramatic adoption, it is far from revolutionising the role of financial markets or cash in these economies. Mobile money has been, in most cases, a cash-in cash-out system, with the majority of transactions being the purchase of airtime and small P2P remittances, generally once a month. In the success cases, cash has come into the financial system, and the flow through the system has often amounted to a sizeable fraction of GDP. However, these economies are not to be mistaken for cashless when compared, for example, to Sweden, where cash makes up only 2% of transactions (see Bank Int. Settl. 2015). Similarly, their financial flows are tiny when compared to the US financial system, which trades more than 60 times its GDP a day just through stocks, bonds, and derivatives. The benefits of cashless economies, especially in low-resource environments, remain an open question. Should these economies become cashless or close to cashless, and, if so, how will that be accomplished? Will the banking system be the primary venue for this transformation, and, if so, what sets of products and services will be needed to accomplish this? What will encourage financial market transformation in these economies? Will mobile money be the first stepping stone toward new financial markets and transactions in these economies? Will it encourage broader, better-integrated, secure platforms for transactions? There is a lot still to learn.

References

Bankable Frontiers Association (2016), “Implications, insights and guidance on use of Open Application Programming Interfaces (APIs) by financial services providers in emerging economies”, FSD Kenya.

Bank for International Settlements (2015), “Statistics on Payment, Clearing and Settlement Systems in CPMI Countries - Figures for 2014.”

Demirgüç-Kunt, A, L Klapper, D Singer, and S Ansar (2022), “The global findex database 2021: Financial inclusion, digital payments, and resilience in the Age of COVID-19.” World Bank Publications.

GSMA (Groupe Spec. Mob. Assoc.) (2022a), “State of the Industry Report on Mobile Money 2022”, Groupe Spec. Mob. Assoc., London.

Kendall, J, B Maurer, P Machoka and C Veniard (2011), “An emerging platform: From money transfer system to mobile money ecosystem”, Innovations: Technology, Governance, Globalization, 6(4), 49-64.

Mas, I and D Mayer (2011), “Savings as Forward Payments: Innovations on Mobile Money Platforms”, in Financial inclusion for poverty alleviation: Banking on the unbanked, London: Routledge.

Meyer, D (2016), “API design opening new opportunities for the telecom space”, RCR Wireless News.

Morawczynski O (2015), “Just how open is Safaricom’s open API?” CGAP blog.

Muralidharan, K, P Niehaus and S Sukhtankar (2016), “Building state capacity: Evidence from biometric smartcards in India”, American Economic Review, 106(10), 2895-2929.

Muralidharan, K, P Niehaus and S Sukhtankar (2017), “General equilibrium effects of (improving) public employment programs: Experimental evidence from India” (No. w23838), National Bureau of Economic Research.

Skan J, J Dickerson and L Gagliardi (2016), “Fintech and the evolving landscape: landing points for the industry”, Accenture, Dublin.

Weil, D, I Mbiti and F Mwega (2012), “The implications of innovations in the financial sector on the conduct of monetary policy in East Africa”, Report submitted to the International Growth Centre Tanzania Country Programme.