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A calibrated approach to mobile payments

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[Dave Birch] There’s an article in The Economist this week about the regulation of mobile payments. I liked it a lot, largely because it supports a prejudice of mine (that has been regurgitated with tedious regularity here for the last six or so years) about mobile payments. This is that it is the regulatory framework that determines the success of mobile payment schemes and that frameworks that incentivise competition deliver innovation and growth.

In Kenya the government took the enlightened approach of allowing M-PESA to go ahead, rather than tying Safaricom in red tape. Many of the poor countries that would most benefit from mobile money seem intent on keeping its suppliers out—mainly by insisting they should be regulated like banks.

[From Mobile-money services: Let us in | The Economist]

Indeed. It is very important to understand the essence of this proposition: regulate mobile payments lightly and allow non-banks to provide them, regulate mobile banking tightly and restrict it the activity to banks.

In many countries, phone companies are not allowed to operate as banks. In Kenya, M-Pesa was able to dodge this problem because it offered a service that no bank could or would provide.

[From Mobile money: Kenya good, India bad | beyondbrics]

Well, that was certainly part of the story. The banks didn’t want to provide these kinds of money transfer services to the mass market: they could have provided them, but they didn’t. They are other kinds of services that they don’t want to provide either, but mobile operators shouldn’t not be allowed to provide them. 

Kenya represents something of an anomaly – “the perfect coalescence of latent demand, a dominant mobile operator and a progressive regulator,” according to a report written on behalf of the GSMA, an industry association representing some 800 mobile operators. In most of the rest of the world, building global mobile money services is much more difficult.

[From Mobile Money Will Change The Way We Bank And Shop | Informilo]

Well, the latent demand is there in other countries. Many countries have a dominant operator (although there’s no reason why operators could not co-operate on this anyway). What they don’t have is progressive regulators, so it is really important that people in our industry engage regulators in continuous and constructive debate about mobile payments and learn the correct and appropriate lessons from the case studies that we have to date. A rather obvious place to use as a case study on the relationship between innovation and regulation is India. India provides a near-perfect mobile payment sandbox. In a country with billion or so mobile devices (there were 919m mobile subscribers at the end of 1Q12), there are half a million villages (out of a total of 600,000) with no banking services. There is a firm government policy toward financial inclusion (based on savings, insurance, remittance and “entrepreneurial credit”) and a clear vision of mobile as a major contributor (some might say the key contributor) to any strategies set to meet the financial inclusions goals. So it’s fertile ground for mobile payments.

By happy coincidence, the Summer 2012 edition of SPEED magazine has a long and thorough article on the short history of India’s regulation of mobile payments. Gynedi Srinivas, from the Department of Payment and Settlement Systems at the Reserve Bank of India (RBI), provides a super insight into the central bank’s thought processes, the regulations themselves and the market’s feedback. He explains in detail why the RBI opted for a bank-led model (subsequently tempered slightly as mobile operators can now act as bank correspondents and also offer prepaid accounts), saying that India chose a “calibrated approach”. This began with the initial April 2009 regulations that limited mobile payments to banks with a physical presence in India providing the service to their own customers. The following year, the National Payments Corporation of India (NPCI) set up the Interbank Mobile Payment Service (IMPS) to route the transactions. I said at the time that

The first step on the ladder of financial inclusion for this group as for many others is not banking, but payments.

[From Digital Money: The first rung]

I was making this point (in a discussion on financial inclusion) to make the point that non-bank payment accounts might be a better base for building financial inclusion than bank accounts, because I thought that the RBI rules were too restrictive. This did turn out to be the case and the framework did not unleash the tigers of the nascent sector, so the RBI subsequently revised their position to allow non-bans in general (and mobile operators in particular) to provide prepaid wallets. The rules on domestic transfer were relaxed later, easing the security requirements for transactions under 5,000 Rupees (a bit over fifty quid).

In 2009, [the RBI] mandated that a bank account is needed to send money but in 2010, it allowed ‘Other Persons’ (non-banks/NBFCs) to issue m-based semi-closed instruments with certain conditions and caps on transfer amounts. As a result, banks started offering mobile banking services. Further in 2010, it allowed semi-closed instruments to be used for bill payments and ticketing services, also, and permitted issue of co-branded instruments.

[From IBM Center for Applied Insights]

The upshot of this calibrated approach is that in India, as Mr. Srinivas concludes, “the potential of mobile payments is yet to be fully exploited”. To date, 65 banks have received approval to launch mobile services and 17 non-banks have been authorised to offer prepaid wallets, and while the volumes are displaying a “healthy upward trend”, they’re not where they should be. I’m not sure that I understand all of the reasons for this, but I think I have some insight into the poor uptake amongst the unbanked.Earlier this year, Nokia sold its Indian mobile payments company to Fino (the largest business correspondent banking business in India, with some 50 million customers). Nokia apparently decided to get out of this business because it had only attracted a million or so customers in its first couple of years.

Finnish handset maker Nokia has decided to exit mobile money business, two years after it launched the service in India… Nokia had launched mobile money in 2010 through a partnership with YES Bank. Subsequently, it signed up with Union Bank to offer services such as bill payments and money transfer. It had also launched the service independently under the Nokia Money brand which has about 2 lakh subscribers. In total, there are about 1.2 million subscribers using the Nokia service across all three platforms. Apart from India, Nokia had launched the service, based on Obopay’s mobile payment platform, in other countries, including Pakistan.

[From Business Line : Industry & Economy / Info-tech : Nokia to exit mobile money business globally]

This decision attracted considerable comment in my tiny corner of the blogosphere at the time, with sentiment dividing fairly evenly between people who thought that Nokia should stick with a successful volume business and people who thought that they should get rid of non-core businesses to focus on the challenges at hand. Many of the comments referenced M-PESA. I don’t want to go over old ground yet again, but let me make two points relevant to the discussion of Nokia Money in the specifically Indian/nerd context of this post. First of all, M-PESA uses SIM Toolkit to provide transactional security. Generally speaking, you need to be an operator to do this. Secondly, a significant component of M-PESA’s Kenyan success was, as the The Economist notes above, because of regulatory space. M-PESA in Tanzania and South Africa isn’t the same business as M-PESA in Kenya because in those countries it had to be launched as a bank partnership. Which is why it couldn’t be launched in India in its original form either.

To the first point, siince Nokia didn’t have access to the SIM and didn’t have an alternative “secure element” in the feature-phone handsets, Nokia was no different from any other non-operator trying to get into that business (they had retail outlets, but then the operators have agents). To the second point, the slow pace of development in mobile payments in countries that should have been mobile money powerhouses — such as India and Nigeria — had a lot to do with regulatory constraints that they cannot affect. Now that non-banks are allowed into that space, we should new vigour downstream. In fact. Just as Nokia Money was closing, Bharti Airtel was launching. The equivalent of a Kenyan M-PESA users might be an Indian Airtel user. It’s easy to become a mobile money user, all they have to do is…

visit nearest airtel money retailer to fill the application form and submit KYC documents (2 copies of identity proof, 1 copy of address proof, 1 passport size photo)

[From Airtel Money : Make Payments and Transfer Money Across India. How does it work ? – WirelessDuniya]

Sounds simple. And there are plenty of other choices too. There’s the SMS-based service offered across IMPS (based on the use of the “Mobile Money ID”, distinct from the mobile number and the account number), there are applications for buying train tickets on the handset, there are combination barcode/SMS solutions for retail and so forth. Yet in a country where mobile phone penetration will reach 100% in around three years’  time, we don’t seeming to be seeing “Kenyan” scale.

IMPS Reports 34.94M Mobile Money IDs, 43 Banks; Just 31,553 Transactions In May 2012

[From IMPS Reports 34.94M Mobile Money IDs, 43 Banks; Just 31,553 Transactions In May 2012 – MediaNama]

There are now 50 banks on board (and I’m pretty sure that transaction statistic is wrong: it should be 31 lakh (i.e., 3.1m) as last month the figure was 34 lakh. Still low for a country with 919m mobile subscribers, but growing. A March 2012 study says that three quarters of Indian mobile phone users use their device for mobile banking and two-thirds of them have made a payment in the last six months. That’s a few hundred million payments. Yet IMPS carries (I think – a quick Google couldn’t find the statistic) around a million payments per month, most of these payments must be digital downloads going direct to bill (I hope one of our Indian readers can comment on this).

…consumer frustration with the sucky e-commerce technology is not helping e-commerce to grow in India. Even though mobile payment is different from e-commerce, I still feel the problems plaguing the e-commerce growth will apply to m-payments at some levels and hence disappoint the existing expectations from mobile payments.

[From Mobile Payments potential huge in India, but will it really take off?]

OK, so messing around with SMS and barcodes didn’t take off in Finland or the UK either, but the technology is getting better all the time, lots of smartphones are being sold in India and the operators could go with STK/USSD if they want to. Is this just a matter of time, as the non-banks invigorate the market? Juniper (in 2011) estimated 400m Indian mobile payment users in 2015 and the current MasterCard mobile payments readiness index scores India (and Nigeria) above France and South Africa.

In 2012, 10 percent of Indian consumers are familiar with mobile payments at the point of sale and 8 percent are willing to try them.

[From • India: readiness to use mobile payments | Survey 2012]

So Indians are buying lots of music and wallpaper and games with their phones, but they’re not going to be any kind of cash replacement for the foreseeable future. (Their may be another cash replacement path in India and I will blog about that soon.) Since there won’t be cash replacement, people won’t carry mobile payment balances unless they are confident that they can get cash when necessary. Handling cash is the most expensive part of a mobile payment operation in a developing country. Shipping trucks of cash from Nairobi out to regional super-agents has proved workable in Kenya — and the super-agents skills in cash management have improved with time — so using mobile operators to organise super agent hierarchies and turning all of the little shops and micro enterprises that sell top up into cash-out points might be a way forward.

Reserve Bank of India deputy governor H R Khan on Wednesday said mobile telephone operators cannot be permitted to provide a cash-out facility from virtual wallets to customers, as such an activity would amount to ‘bypass banking’. However, they could do so if they acted as a business correspondent (BC) to a bank, he added.

[From RBI cold to mobile wallet]

I have no idea how much Indian banks charge their BCs for a cash-out transaction, but I think it would be useful to know. Anyone?

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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