Bill & Melinda Gates Foundation

Digital Dollars

February 03, 2014

Originally published by Philanthropy Age.

Queuing at the bank is a familiar gripe, but for teachers at Aisha-i-Durani high school in Kabul, Afghanistan, it was the cost of getting paid. Each month they would wait for up to four hours to collect their salaries. If they didn’t reach the cashier’s desk by 1:30 pm, they would return the next day to queue again.

Now they receive their wages at the ping of an SMS. They are part of a pilot project through which 500 teachers in Kabul use their mobile phones to receive salary payments. The scheme also provides them with a bank account, allowing access to other financial tools.

 Banking services reach just 22 percent of working adults in South Asia and 12 percent in sub-Saharan Africa. Such limited inclusion is a primary obstacle to economic development.The group is part of a global digital payment, or m-money, revolution. In just six years, the industry has swelled to 82 million subscribers worldwide, with sub-Saharan Africa, South Asia and Latin America leading the charge. It has been hailed as an example of how technology can be harnessed for the poor, to bring financial services within reach of the unbanked.

The concept is simple, but the impact significant. Mobile phones are used to perform banking functions quickly and cheaply, including paying bills, transferring cash to other users, and receiving funds. The idea is compatible with any phone: an agent deposits cash into a virtual wallet, and the recipient is sent an SMS alert and security pin, allowing them to cash in the value.

The issue of financial inclusion is an acute one. One in two adults globally do not have a bank account, according to the World Bank. The Washington-based International Finance Corporation (IFC), a member of the World Bank Group, estimates that banking services reach just 22 percent of working adults in South Asia and 12 percent in sub-Saharan Africa. Such limited inclusion is seen as a primary obstacle to economic development.

The world’s 2.5 billion unbanked are reliant on cash, which is easily lost or stolen, and can prove expensive to use for small transactions. Up to a quarter of savings are lost a year when cash is stockpiled at home, claims Tillman Bruett, manager of the mobile money for the poor program at the UN’s Capital Development Fund (UNCDF). Paying bills by mobile phone can be up to 40 percent cheaper than a bank visit, says Michael Wakileh, CEO of software company ProgressSoft, which specializes in digital payment systems. 

And these problems are if you can get money at all. “Putting a bank branch in a rural area where you don’t have a dense population is expensive. The beauty of mobile money is that it’s a lighter touch way to reach people,” says Greta Bull, program manager for the IFC’s Partnership for Financial Inclusion. 

Among the most successful digital payment models is Kenya’s M-Pesa service. Conceived for microfinance loan repayments, M-Pesa launched in 2007 and has enjoyed phenomenal growth. Some 70 percent of Kenyan adults use it today, helping to drive financial inclusion levels in the African country from 41 percent in 2009 to nearly 67 percent today. 

With similar underlying trends, poorer Arab countries are ripe for m-money. A European Investment Bank study in 2012 of six Arab states, including Tunisia, Jordan and Egypt, found mobile penetration at 105 percent. Access to finance, by comparison, was a meager 36 percent. For these large, young and unbanked populations, mobile money could be used to transfer remittances and pay bills. 

In such a new industry, the need to keep transaction fees affordable can be lost as private operators scrap for a slice of what some have called a mobile money gold rush. The data is tempting: more than $4.5 billion was transacted globally over mobiles in the month of June 2012 alone. Operators also face eye-watering set-up costs for digital payment systems of between $7 million to $10 million over three years. But keeping user fees low is critical if these systems are to attract the low-income households that comprise much of their target market, and scale up.

“If I pay my electricity bill, but you charge me $1.50 to $2.00 per transaction, I would rather take the bus and stand in line for four to five hours to pay $0.50 or $1.00,” explains Joey Mendoza, mobile money result leader for USAID’s financial access program in Afghanistan, FAIDA. 

In Afghanistan, less than 5 percent of the population is banked but mobile penetration stands at 45 percent. Mobile operator Roshan launched its M-Paisa service in the country in 2008, and began disbursing civil servants’ salaries a year later. The network charges $3.50 for each salary transfer, a cost that the US military has been forced to subsidize. Until users see the added benefits of mobile money, they will not accept being charged to use the service, says Malalai Wassil, chief legal officer at Roshan. 

 Balancing profit and access is a delicate act, but income is key to mobile money’s long-term future. Of more than 200 digital payment systems worldwide, just 14 are currently in the black. “Until, say, a farmer starts to see he can use the system to increase quality, or even barter, I can’t get him to see that he should be charged 1 to 2 percent for each transaction,” she says. “When you have 1.2 million registered users and a lot of them are poor people our aim is not to charge an arm and a leg.”

Balancing profit and access is a delicate act, but income is key to mobile money’s long-term future. Industry body GSMA reports that of more than 200 digital payment systems worldwide, just 14 are currently in the black. 

“The only way a service can keep running is if everyone involved makes a profit, however small,” says Paul Makin, head of mobile money for e-transaction agency Consult Hyperion. “We reckon until you get to around the 1 million customer mark, you’re not going to be profitable.”

In Afghanistan, mobile operators are trying new approaches. “You can’t have volume of transactions if you have a barrier to entry that’s very high. Etisalat [which offers digital electricity payments] and Afghan Wireless [which remits teachers’ salaries] have got it right,” says Mendoza at FAIDA. “They’ve said they will only recover their fees, not make money, in the next four to five years. The strategy is to get new customers and have a retention program.” 

 Industry analysts have suggested replacing money with digital payments, turning a mobile phone into a virtual wallet. The next step is to create a cash-lite system. While distance is no barrier between sender and recipient, users are still reliant on mobile money agents to cash in their money transfers. These agents, which are often small businesses or grocery stores, enable customers to convert electronic transfers into currency and back again. Managing this network of agents, however, is expensive.

“They’re using the money in their tills to help finance this cash-in/cash-out system. If they run out of money then their whole business has to shut down. The further you get from densely populated urban areas, the more costly it is to make sure that liquidity is in place,” says Bull at IFC. 

Industry analysts have suggested replacing money with digital payments, turning a mobile phone into a virtual wallet. Rather than cashing in money transfers, users would instead pay for purchases or settle bills with their phones, by waving the handsets over an electronic reader. The value of the bill would be deducted from their electronic balance, without any cash needing to change hands. In Afghanistan M-Paisa is looking at linking its money agents to a virtual payment system, Wassil says, to allow these digital transactions.

Technology can also combat the risk of fraud, ensuring even the most basic of phones can make payments in shops. Consult Hyperion has developed a prototype tag, WinguPay, which uses a radio signal to connect handsets with receivers at cash registers. Each tag costs $0.70 and can be attached to any device. The company is conducting a trial of the tag in Nigeria, using it to send agricultural subsidies to farmers. French-based firm Tagattitude uses a phone’s microphone to emit a burst of sound – similar to a coded chirp – and complete payment transactions. 

The connection between poor, rural communities and financial services remains weak. The cost of setting up a mobile money system, building an agent network and luring customers means digital money remains a largely urban phenomenon. 

“Mobile network operators are not charities. So they go for the low-hanging fruit first: the densely populated urban areas. As those areas get saturated they’ll go further out,” says Bull. 

As a result, mobile money has yet to touch the world’s poorest. Those at the bottom of the pyramid face hurdles including not being able to afford a mobile phone. In some societies, women may not be allowed to own their own handset. In Pakistan, a poll of 4,940 rural households last year found respondents used mobile money between two or five times a month. The study, however, carried out by research consultancy Intermedia, found demand for over-the-counter (OTC) transactions – where agents complete the money transfer for customers using their own handsets – to be significantly higher.

Pakistan’s EasyPaisa system, a tie-up between Tameer Microfinance and telecoms firm Telenor, has 5 million OTC users against 2.4 million mobile wallet customers.

“Is it complete and total financial inclusion? No. But they’re still making a payment. Payment services are a gateway to other services,” says Bull.

Aid agencies, too, are adopting digital payments to reduce costs and distribute help more efficiently. The UN’s World Food Program in October replaced its paper coupon system with electronic cards for 800,000 Syrian refugees in Lebanon and 300,000 in Jordan. The new e-cards, which are automatically recharged each month with $27 per person, allow users to buy food for their families in local shops.

Donor funding has played a crucial role in kick-starting the sector. M-Pesa was born of a partnership between mobile giant Vodafone and UK aid agency DFID. Each put in $1.6 million to develop a pilot project. After six months, DFID exited and left Vodafone to commercialize the service. 

Charitable foundations are being encouraged to engage with mobile money services, in an effort to reach the World Bank’s target of universal financial access by 2020.

“There aren’t a lot of examples of this reaching our target population. There is a role for our organizations to look at more difficult countries, help defray the costs and encourage the private sector,” says Bruett at the UNCDF. “The potential is tremendous. But we’ve got a way to go before we can do what we really want, which is reach the poor.”

 
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