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THE POWER OF M - Nowa Bank in Your Shirt Pocket?

Summary: Mobile payment systems were invented in Africa, by Africans. Today what started spontaneously in a handful of African countries is now the fastest-growing financial innovation in the world. But can mobile money replace the banks themselves? Could it be that the humble mobile phone has the capacity to outgun the world's financial giants and put the control of banking into the hands of ordinary people? Richard Walker ponders a fascinating conundrum.

While the idea that mobile money can replace banks sounds far-fetched, only a few years ago the notion that Africa would be the fastest-growing fastest-adopter of new technology also sounded far-fetched. Today it sounds like fact.

Let's remember how it all started. Back in 2002, some research on emerging economy telecommunications funded by the British government came up with a surprising result: in Uganda, Botswana and Ghana, people were using their mobile phones not just to talk or send texts, but as an informal banking system. What they were doing was to use bought mobile airtime as a 'proxy' for money, something which they could transfer to anyone they liked, and which could easily be bought and easily sold on.

In short, people had discovered for themselves that mobile airtime fulfilled several of the criteria for real money. It was widely recognised, easy to value, and easy to transfer. This was something that caught the mobile phone operators and the banks by surprise - but then the use of mobile phones in Africa was still a new phenomenon, and things were evolving fast.

As it happened some mobile phone companies had already been experimenting with primitive forms of mobile payment systems - for example, the mobile operator Vodafone had been exploring the idea of using the mobile network as a low-cost way of facilitating microfinance lending and payments.

As the mobile operators caught on to what their customers were doing, they tried to capitalise on the trend. In 2004, MCel in Mozambique created an authorised airtime swapping service, while Vodafone started a pilot mobile payment system in Kenya in 2005.

Soon the running was taken over by Safaricom with its M-Pesa service, which did away with airtime trading by allowing users to deposit money into their cellphone accounts through a network of mobile payment agents.

Although the idea was still that mobile payment would suppor t microfinance payments, the users had different ideas and it quickly became a standard way of transferring money within Africa as well as a low-cost way of sending remittances from abroad.

Increasingly it also became a way of saving, despite the fact that the mobile operator was legally prevented from offering interest on money held in mobile accounts.

That much is well known. Mobile payment is easy, quick, and relatively cheap. It is an alternative to traditional banking, although whether it can break free entirely of the traditional sector is another matter. Certainly it is growing astonishingly fast, and not just in Africa. Forrester, a new-technology research company, forecasts that in the US alone mobile payments will be worth $90bn a year by 2017, compared to a little over $12bn last year.

The World Payments Report from Royal Bank of Scotland forecasts the total of global M-payments to be $223bn in 2013 - a growth rate of a little over 50% a year over the last three years. But it is important to remember that this is growth from a low base: $223bn is a very tiny slice of the world total of non-cash t ransactions, which Boston Consulting Group estimates to have been $331 trillion in 2010. But do mobile payments or 'M-payments' mean the banks we all recognise are finished? Actually, that is not very likely. Mobile payments still depend on the existence of traditional banks that trade in traditional currencies to support the M-payment world. Even though services like M-Pesa in Kenya rely primarily on a network of mobile payment agents rather than on traditional banks, those agents themselves do rely on the traditional banking sector. What i s more important, mobile payment has helped the traditional banks wake up to the fact that there is a huge and profitable market for banking services among Africa's large population of people who are relatively poor but rapidly emerging from poverty. The data on banking service penetration in Africa tell the story. In 2010 there were 163 bank accounts for every 1,000 people in sub-Saharan Africa. The average for all developing countries was 635 accounts per thousand of population. And in developed economies, there were on average two bank accounts for every person. In other words, African retail banking has the potential to grow almost 20 times in the foreseeable future - and the advent of mobile payment has shown that that growth could be profitable growth.

Changing the way money works

The problem for Africa's banks to now has been that the costs of establishing branches is high relative to turnover, with the typical cost of establishing any new branch somewhere between $200,000 and $1m, according to Renaissance Capital.

The advent of mobile payments systems has shown that banking can be extended throughout rural Africa without incurring such costs. And that means that it is highly unlikely that the traditional banks are going to let alternative providers (not just mobile phone networks, but also online ser v ice-providers and computermakers) to take mass-market banking with its enormous profit potential away from them. It is no surprise that the first significant extension of the M-Pesa service came in the form of a collaboration between mobile operator Safaricom and Kenya's leading rural banking innovator, Equity Bank, when the two launched their hybrid bankingmobile service M-Kesho in 2010.

M-payments are still a small part of the financial universe, but they are growing. In terms of the number of transactions, they are growing fastest in emerging economies, a lthough inevitably there is more growth in the value of transactions in developed e conomies. But t he g row t h i n transactions is not getting the banks worried just yet: the market is new, but too small to dent traditional profits. It is something quite different that is worrying the traditional banking sector, and that is the potential that mobile money has for changing the way that money works.

The reason for that is that mobile communications are an alternative infrastructure, controlled not by private financial companies, or central banks, or governments, but to a large extent by the people who use them.

Governments have already learned that information will flow through mobile communications whether they like it or not, instantaneously and globally - just look at the way that mobile has helped bring government to account in countries across Africa and beyond. The political impact of this is already immense. The financial impact may only just be starting. The question that the private and government banks are asking themselves is this: could it be that mobile communications will become the medium for new forms of unregulated money, beyond the reach of regulation?

If that were to happen, the way the world uses and thinks about money would change out of all recognition. Bank regulation would become an irrelevance. Capital controls would disappear entirely. There would be no more offshore banking havens - because everything financial would effectively be offshore.

Both risk and profit would be in the hands of individuals, along with whichever companies manage to grab a piece of the new commercial action.

Far-fetched? In fact there are many who would welcome such a zero-regulation financial world, in which there are no safety nets and no taxpayer-funded bank bailouts. But there are plenty of reasons to think it won't happen. First, for M-payment to become truly independent of traditional banking, it would need its own purely digital currency. When the f irst airtimeswapping M-payment systems began to emerge, airtime was a form of money, but it was also a form of barter. A barter currency is not a true currency (because in the end you can only sell airtime to someone who happens to want airtime). A true currency must be independent of the goods it can purchase.

Enter the digital currency - a currency that is independent of central banks and traditional banking systems, a currency that looks like it could be perfectly suited to the alternative world of mobile exchange.

The best-k nown pure digital currency is Bitcoin, although there are others - Litecoin, Namecoin, and PPcoin among others. For some, a currency like Bitcoin opens the door to a financial future of total deregulation. That means no more central banks, no more monetary policy, and no more tax. But autonomous digital currencies are in their infancy, and have some rather large disadvantages. The biggest disadvantage is that they tend to be very unstable. One Bitcoin was worth around $14 at the beginning of 2013. A few months later it was trading at over $250. By mid-June it was back to around half that. In other words, as a trading currency it is immensely risky.

As it happens, one thing that all M-payment users are very keen on is reducing risk. As African users know, the great advantage of mobile payment is that it reduces the risk of carrying physical currency, money which can be stolen by physical thieves. But when users want to reduce risk, they are likely to prefer currencies that do not fluctuate as much as African currencies have done in the recent past (and many leading African currencies have depreciated fairly sharply over the last year). For that reason, the chances are that mobile will actually increase the use of traditional trading currencies like the US dollar and the euro.

Stability wins out

Some digital payment systems like PayPal already offer the choice of currency for t ransactions: i f an M-payment user remitting money across borders has the choice of stable US dollar or a depreciating South African rand, for example, it is easy to see which currency will win out.

Traditional banking may gain from M-payment too. The question of who will reap the transaction fees from mobile systems remains open - will it be existing payments processors like banks or Visa or MasterCard, or mobile operators themselves, or computing companies like Apple building on their huge account databases through services like iTunes? Whoever it is, there is still likely to be a need for a traditional bank account at either end of the transaction.

As M-payment reaches more of the 'unbanked' poor, those users or their agents will need traditional bank services to complete the transaction chain. Already, emerging economy banks l ike Equity Bank in Kenya and MTN Uganda are exploiting M-payment to increase their stock of traditional banking customers.

So the chances are that i f you haven't made a mobile payment yet, then you will do so quite soon - but it is likely to be in a global currency like the dollar or the euro, or even the Chinese yuan, and it will rely in part on a bank that already exists. The traditional banking industry has taken plenty of knocks over the last few years - but it isn't out of the running just yet. ua


The World Payments Report from Royal Bank of Scotland forecasts the total of global M-payments to be $223bn in 2013 - a growth rate of a little over 50% a year over the last three years

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Publication:African Banker
Geographic Code:60SUB
Date:Feb 17, 2014
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