The economic benefits of mobile phones

In a recent report published by McKinsey's the value of mobile phones in developing markets is quantified. It is shown that the economic impact of mobile phones is significantly higher than the direct value to the mobile operators. This is because of a number of factors, but predominantly because of the productivity gains generated by users of mobile phones. The report then concludes that governments and regulatory bodies could amplify these gains by simplifying rules and deploying strategies to smooth the roll-out of mobile phones.

This report emphasise experiences that we have in developing economies where regulatory hurdles (and lack of capital) are the two most important factor that delay the roll-out of financial services on mobile phones in developing countries. Some of the regulatory questions that we often get confronted with are the following:

• How does financial products relate to Know Your Client requirements?
• Are special reporting and documentation required?
• What are the responsibilities of the Mobile Operator? and
• Can a Mobile Operator elect to block specific services on their (regulated) network?

Resolution of some of these questions have taken so long in the past that projects sometimes stop or turn into marginal projects. It is the interest of all (including governments) that regulatory dispensations are made lighter and the deployment of mobile based solutions are made easier.

In this regard the work that CGAP and the Worldbank is doing to make recommendations to streamline the regulatory dispensations should be commended. We at Fundamo are in full support of their efforts and contribute as best we can to help establish a facilitating environment for mobile banking and services.

Co-operation or Exclusivity

Two totally different initiatives in the US this quarter related to mobile banking is of special interest. Two companies have launched (or rather announced) two initiatives that is diametrically apposed in terms of the underlying strategy.

Firethorn announced an agreement with Cingular where the Firethorn Java application will ship with every Cingular mobile phone. Revenue generated via mobile banking and payment transactions will be shared with Cingular and in turn, Cingular will effectively block (or at least make it difficult) for other suppliers downloading their own proprietary Java applications onto Cingular handsets. Firethorn is confident that they will conclude similar agreements with other mobile operators soon. This is a totally closed and proprietary approach. Will it work?

Obopay is a service provided to any person with a mobile phone. A subscriber to Obopay is able to download a Java application to any mobile phone. This enables a subscriber to transfer money from any Obopay customer to another, do some rudimentary payment and enquiry services and withdraw cash or pay (using the obopay pre-paid (debit) card) at ATM's or POS's. The importance of this approach is that it is totally "open" in the sense that it is suppose to run on any mobile operator and work on any ATM. This is of course the most logical way given what happened in the past with the Internet economy... but is it the logical way in payments and banking?

It would be interesting to be able to roll forward in time to understand which of the two approaches win, as it will tell us a lot about the power balance in mobile banking. Consumers are of course very important. It is their decisions and preferences that have catapulted small companies into the limelight in the Internet economy. But, then, the Internet is much more open than is the case with mobile (at least at this stage). Mobile operators have much more control over what happens on their handsets and their network. As a matter of fact, Cingular have indicated that they do not see their network as an "open network".

So what will happen? I believe that the role of banks, their ability to take their own decisions and stay in touch with their own clients will play a mega-role in which model wins. Not only banks per se, but also other organisations and bodies in the banking domain. It would be interesting to track what VISA, Mastercard and clearing switches (like Swift) do, as these organisations will ultimately influence who will win.

Content and Mobile Payments

Today content on mobile (ringtones, pictures, etc) are mostly paid for by utilising the billing systems of the mobile operators. This approach is probably the only mechanism that allows content providers and mobile operators to effectively collect the millions that is spent on this industry every month. Unfortunately, utilising the billing system to collect for non-telecommunications (and especially ad hoc) services leads to many problems:

• The billing systems are not effective mechanisms to collect payments. In other words it costs a lot of money to collect what is often small amounts. This is because of many factors, but primarily because of built-in distribution costs in the collection of the value in the mobile phone accounts (independant if it is pre- or pos-paid). It is expensive to collect the money in these accounts because of the established commission structures.
• Billing systems are not geared to cater for effective management of disputes. This also means that it is expensive to deal with complaints for content services that consumers lodge.
• Payment activation by the consumer is also often cumbersome and often different from one service to another. (For instance, send the following code via SMS to the following number, or enter the code that we sent you via SMS on a WAP session or the Internet, etc etc.)

This situation will get more complex and problematic in future as more sophisticated content services are being invented and delivered to subscribers. Mobile TV and other services based on broadband is a case in point.

Mobile payment schema's offer elegant solutions to solve the problems listed above. This is because it is possible to provide much more cost-effective payment solutions as well as proven rigid and intuitive support for disputes and complaints. The ability to give immediate feedback on payment activity also adds to cost-reduction and customer satisfaction.

GCash in other Markets?

I have absolute respect for the results that have been achieved by dedicated people in the Philippines to deploy excellent solutions. In many ways the solutions deployed by Smart Communications (Smartmoney) and Globe (GCash) have set benchmarks for other organisations to follow. Recently, GCash started a concerted drive to bring GCash in the same or similar format to other markets. I believe that the implications and challenges associated with this should be highlighted.

GCash is a Structured SMS, predominantly closed payment solution, focused on a large under, or un-banked population in the Philipines. It provides for the creation of an electronic wallet that some-one can access with their cellphone by sending "code-words" in open SMS commands. The solutions security is based on a "M-PIN" (that is often stored on the cellphone in the open), limits in terms of transactions and the local Philippine Identity document. The operation in the Philippines is connected via participating banks in many other countries. These banks provide a mechanism for people in these countries to send money to electronic wallets in the Philippines. It must be noted that these banks do not operate e-wallets, nor are the G-cash functionality available in these countries.

The problem with proposals to deploy GCash in other countries (as it was done in the Philippines) are the following, and prospective clients/partners, should consider these carefully prior to engaging with Globe:

Regulatory complexities
The GCash deployment as is currently deployed operates under a special Central Bank dispensation (resolution 116 of 2005). Although the Central Bank of the Philippines should be applauded in giving the regulatory backing for a very good solution, this is not a given in other countries. As a matter of fact, it is most likely that this dispensation would not be given in many countries as the situation is totally different from one country to another. In regulating banking type solutions, a Central Bank should consider specific market realities, the potential risk, impact on other players etc. To assume that, because the Central Bank of the Philippines have allowed a GCash solution, other Central Banks would do the same, is a big folly. One should also take cognisance of the role, strength and maturity of banks in other markets and their right to objecting in other markets.

The role of banks (and Credit Card Associations)
The relative strengths and ability to innovate of banks in relation to mobile operators differ significantly from one country to another. The Philippine market with two very strong and innovative mobile operators is not a blueprint for every market. As a matter of fact, this is probably quite unique. It is our experience that one should consider a total eco-system of payments when deploying mobile banking. Banks in general will not allow a Mobile Operator to deploy a GCash type solution without a strong (and often effective) reaction. Participation by banks to send money to GCash in the Philippines should however be supported and banks should consider participating and assisting GCash in this way. (This should not be confused with deploying a GCash type solution in country)

Support considerations

It has been shown over and over again that remote support of technology solutions is something totally different to operating a solution in country. The fact that GCash is being operated successfully in the Philippines does not mean that it can be replicated into another country. As a matter of fact this is highly unlikely. The skills required to support and maintain multiple different technology solutions, in different time-zones with different languages, require a totally different organisation, set-up, managed and organised in a totally different way. We at Fundamo for instance, have well defined support roles, service levels measurements and escalation mechanisms in place. The version management of our software is carefully documented and controlled so as to ensure that we know exactly which version of which module is in production with which client. Evaluating operational excellence does not say anything about ability to provide technical support.

Security dispensations
It is unlikely that the security dispensation deployed at GCash will be acceptable to other markets (and specifically to mature banks). The fact that the M-PIN remains resident on the phone after the SMS has been sent, that the M-PIN is often in the clear will not be acceptable to many banks. Security management that is heavily dependant on the availability of a general Identity Document can also not be deployed in many countries where this is not the case.

Consumer behaviour
Philipino’s are famous for their SMS ability. Manila is often referred to as the SMS-capital of the world. The willingness and ease with which Philipino’s adopted a keyword paradigm based on open SMS’s for mobile payments will not necessarily be replicated in other markets. It is our experience that (especially when payments and money are involved) that consumers requires usability one level up from SMS’s. Prompt’s like “Are you sure”, more intuitive inputs and online support (like “invalid account number”) are critical to ensure adequate adoption. Porting a solution that works in the Philippines “as-is” without due consideration of consumer behaviour cannot be recommended.

Even if a client is interested in deploying a GCash like solution (e-Wallet, with an exemption from the Central Bank), a solution provider should be used with a track record in deploying solutions in different countries and time-zones. We at Fundamo have relevant expertise, an understanding of different behaviour in many countries and the ability to deploy legal solutions given different central bank dispensations. It is important to deploy mobile banking solutions with a proper understanding of local realities as well as what is possible with technology.

The Economics of Mobile Banking

The truth of the matter is that mobile banking can only be successful if it makes business sense in the long run, and that means business sense for most (or all) stakeholders. Obviously this is only going to be possible if mobile banking can lead to more efficiencies that can be translated into direct benefits. Fortunately (for people like me working on mobile banking solutions) improvements in efficiencies are easy to demonstrate: replacement of expensive cash systems, improvements in back office processes, removal of the constraints of time and place (meaning people don't have to travel and stand in queues) etc. All of these things lead to direct benefits to participants in the mobile banking eco-system.

The challenge is is two-fold: To demonstrate this to potential investors in mobile banking solutions and to ensure that the ultimate solution does not have an economic barrier to one of the stakeholders:

Demonstrate the benefits
It is important to be able to build suitable business models to demonstrate that a positive business case exists. We at Fundamo have refined our approach to this having worked in many markets and different realities. We have build powerful business modeling tools and have learned that models should take cognisance of the different realities from one country to another. They key is to start with the different sources of revenue to prospective investors. These are typically the following: subscription, transaction fees, treasury benefits, interchange fees, commissions and cost savings. The contribution of each differs significantly from one scenario to another.

Ensure all participants benefit
I have seen other solution providers in this industry making fatal mistakes by deploying solutions with impossible cost barriers. These barriers implies that it is impossible for one of the participants (say for instance the mobile operator) to support the initiative in the long run. In some instances it is assumed that the subscriber would be prepared to pay more for almost the same service. It is therefor important to evaluate the proposed mobile banking solution from the perspective of all participants in the solutions eco-system. Every-one should get a slice of the revenue or benefits, enough so as to entice them to make behaviour changes.