On 7 October 2014, humanity reached an impressive milestone. On that day, there were more active mobile connections than there were humans on the planet. The spread of mobile devices has been unprecedented in human history- no other product has been adopted so quickly. As someone who travels the world extensively, I can say that mobiles are truly everywhere- from wealthy city centres to rural communities to the poorest shantytowns.
For the first time in history, the prevalence of mobile devices are providing low-cost access to billions of people, most of whom lack access to basic services, including financial products. Not ones to be left behind, financial institutions and telecommunications companies the world over concluded that with a lower cost of delivery, previously unreachable customers would flock to using financial services. Development organizations revelled in the idea that the poorest of the poor would have access to the foundations of formalization – savings, credit, and insurance. Together they set off on efforts to build mobile money systems in almost every country in the world.
Today, with over 270 mobile money programs in operation, many would assume that there are huge levels of adoption. And, many would assume that there exists clear business case prime for replication. And, of course, that there are clear best practices for transaction types, usability, and pricing. Many would assume that, thanks to the availability of these services, the poorest of the poor would dive into using them- and once and for all join the formal financial system.
I’m taking a stand and telling the truth- it’s just not happening. Outside the very few success cases – in Kenya, in Pakistan, in Bangladesh – most mobile money programs are struggling to stay alive. Many are being subsidized heavily by international organizations in an unsustainable manner. Most have low registration, and those that do not have low usage. Most will never reach profitability. But this doesn’t have to be the case.
I’m taking a stand and telling the truth- it’s just not happening. Outside the very few success cases – in Kenya, in Pakistan, in Bangladesh – most mobile money programs are struggling to stay alive.
So why aren’t the poor flocking to digital financial services? I have a number of theories. Among others, I believe:
The technology just isn’t there yet
Transactions between a buyer and a seller are meant to be quick. The buyer wants to have their good or service as quickly as possible, and the seller wants to complete the transaction to be able to attend their next customer.
Since most of the poor still use basic feature phones with no data, current mobile money programs can use the best technology at their disposal – most often a mixture of USSD and SMS. Completing a mobile money transaction with these messaging systems, even for the most comfortable user, often takes less than a minute- quick in relative terms but slow compared to cash transactions. Data entry is cumbersome and prone to user error. In many countries, it is commonplace for customers give their phones to merchants to complete transactions – and in doing so, they provide not just their numbers but also their security validation codes.
Why make twenty clicks when paying in cash is just simpler?
The systems are too expensive
Mobile money programs have significantly lowered the cost to make payments. In many cases, fees for transferring funds have lowered from a few dollars to often half that. On a $100 purchase, where the transaction fee is $0.50, a user can clearly see the value. But the poor rarely do $100 transactions. In low income and poor communities, the average transaction value is often $2-3 dollars. Suddenly a fee of $0.50 seems hugely expensive.
The vast majority of these fees simply cover messaging costs from the telecommunication companies. SMS and USSD transactions are a huge revenue source for telcos – and these costs are passed directly to users.
Costs need to go down if digital payments are going to interest the poor.
The poor don’t see the value of formalization
The poor are called poor not due to their lack of intelligence, but due to a lack of money. As a result, they are acutely aware to the costs they must bear- often decisions are made out of immediate need, rather than through a consideration of suitability or cost. For the money they do have, they want to keep as much of it as possible. One of the main virtues of money is that it leaves no trace- transactions exchange hands with no record.
What mobile money offers in terms of convenience – it gives up in anonymity. Transactions are documented. While this is done in the interest of the user- to develop a credit history, for example- the poor fear the taxman coming to collect.
Until the value of formalization can be clearly demonstrated to outweigh the costs, the poor will remain hesitant to participate in formal finance.
The right partnerships don’t exist
Often, mobile money programs are seen as attempts to create competitive advantages for individual institutions. Telecommunication companies, banks, third party providers and the like all actively compete with each other to acquire customers and draw them into to closed-loop platforms. Some markets have dozens of competing platforms- up to 10 or more- making it difficult for customers to understand the value of digital payments.
If a customer has to ask “Does my money work here?” or “Do you accept the kind of money I have” then you fundamentally have a problem. Why? Because they already have a product that’s accepted anywhere- it’s called cash.
So What Can Be Done?
Technology and cost are problems that only time will solve. Already, more than 40% of new phones being sold are ‘smart’, and the cost of smartphones are dropping to just a few dollars. As customers migrate to data plans, the cost of messaging will shift from the service to the user. This means that transactions fees can drop to pennies (or less). Furthermore, app experiences are significantly better than those offered by SMS and USSD, allowing users to complete transactions in less clicks. The sooner the poor have access to smart devices and data, the better. Telecommunications companies could enable this, but, for obvious reasons, are choosing not to.
Issuers and governments need to collaborate to better explain the costs of cash and the benefits of formalization. Paying $10 in tax but saving $15 in costs while gaining access to credit and insurance, and not to mention recovering the time it takes to complete these transactions, is a win-win. However, most poor don’t see it that way. They see cash as being free- when clearly studies show this is far from the case. By working together, institutions can increase the knowledge of what is to be gained from participating in digital payments, instead of letting the poor fear the consequences of their actions.
On the value proposition side, issuers of mobile money need to face reality. Closed loops, outside of specific circumstances, just aren’t working. To create the opportunity to compete, fierce competitors – banks, telcos and other providers – must learn to collaborate in the development of a common payment program. Broad based partnerships are necessary to increase the value proposition of mobile money to customers.
A program like Bim in Peru – the result of Modelo Perú, a 34+ institution multistakeholder partnership between issuers along with the telecommunication companies and the government- was designed specifically to address many of the problems identified. By bringing together 34 financial institutions to build a shared platform that works across the country’s major telecommunication companies, Bim is able enable payments that really can be made by anyone to anyone, anywhere, at any time. Collaborating allowed institutions to lower development costs, negotiate lower messaging fees, and collaborate on marketing and messaging – resulting in more affordable fees and a clearer value proposition for customers.
For corporations and governments interested in increasing adoption and use, heavy consideration should be made towards developing a truly a collaborative approach – multi-stakeholder, multi-network, multi-user.
The poor serve to benefit the most from digital payments – but for now, substantial obstacles remain to mass adoption. For corporations and governments interested in increasing adoption and use, heavy consideration should be made towards developing a truly a collaborative approach – multi-stakeholder, multi-network, multi-user. This is the only way that financial inclusion will stand a chance of engaging the poor.