Welcome to the worldwide wallet

Dr Neil Alexander Ford

From mobile money to virtual currencies, the digital revolution is reshaping the way we do business. Mobile banking, in particular, has changed the lives of millions in the developing world where many people have no access to formal banking

Advanced Western technology gave us the worldwide web and the mobile phone. But it took a developing African country to link the two. An innovative leap in Kenya coupled the attractions of the mobile phone to the acute needs of a society in which the majority have no access to banking services. So mobile money was born, spawning a global movement. Welcome to the worldwide wallet.

Millions of people without access to formal banking now transfer money and pay bills by mobile phone. Few people predicted the impact mobile technology would have on access to money, and it is equally difficult to forecast the long-term impact of the virtual currencies now being launched. But the effects are likely to be momentous.

The evolution of mobile money and the digital wallet is an example of what is sometimes described by historians as the advantages of underdevelopment. Although mobile technology developed elsewhere in the world, the sheer lack of communications technology in Sub-Saharan Africa, in particular, was the impetus for products that have subsequently taken off elsewhere. These range from the pay-as-you-go model of financing, to mobile banking and current proposals for a cashless society in Nigeria.

It is difficult to overestimate the effect of the mobile revolution on communications in the poorest parts of the world. The number of mobile phone subscribers in Africa increased from 11 million in 2000 to 475 million by 2012. South Africa recently became the first African country to achieve a penetration rate in excess of 100 per cent. There is still scope for further expansion, however, as many people have two or more mobile handsets in order to delineate different areas of their lives, such as work and private life.

Contrast the 475 million active mobile African handsets with the 12.3 million landline connections that exist in Sub-Saharan Africa outside South Africa. Mobile innovation that enabled many countries to leapfrog communications technologies is now doing the same for banking, particularly in rural areas where facilities are scarce.

Kenya’s M-Pesa, launched in 2007, is the global leader in mobile banking. Money can be transferred from one person in the Indian Ocean city of Mombasa, for instance, to another in Kisumu, in the far west, via a text message. It is then collected in a physical form from one of a network of 28,000 agents. The system is utilised by 15 million Kenyans and Kenyan mobile phone cash transfers totalled a massive US$16.2 billion last year. Over any given period, M-Pesa processes more transactions within Kenya than Western Union – a giant international brand – handles worldwide.

The benefits of mobile banking and money transfers are so great that this meteoric success has been widely repeated. In Uganda, for instance, the number of people using mobile money technology jumped from 2.9 million in 2011 to 8.9 million last year. Following M-Pesa’s success, another 150 mobile money services have launched across Africa in the last six years.

But it is a different story in Nigeria, Africa’s most populous nation. Mobile money systems are generally promoted by the private sector, but the Central Bank of Nigeria launched its Cashless Project last year. The bank is encouraging the use of payment cards and mobile payment to tackle fraud, robbery and counterfeiting, as non-cash transactions create an electronic paper trail that can be traced at a later date.

Using Lagos state as a testing ground, it imposed a huge NGN100 charge on every NGN1,000 withdrawn or deposited in the form of cash above NGN150,000 (US$960). The move, welcomed by the federal government and business organisations, is being rolled out in six more Nigerian states this year. It will take time to assess its effectiveness, but there has been some resistance to changing Nigeria’s cash culture.

The head of mobile payments at eTranzact International, Uwa Uzebu, said: “It has not been simple. The Nigerian market is unique in its own way. The mobile banking/money project has not gained as much traction as everyone had hoped. Even though mobile money is still in its infancy, it represents a key element of our journey towards developing a payment system that is nationally utilised and intentionally recognised.”

One problem in Nigeria – and many other parts of the world – is that digital wallets are largely restricted to a single mobile network. The more players in any given market, the more difficult it is to promote the use of mobile money. M-Pesa was launched by telecoms operators Safaricom and Vodafone, which control the lion’s share of the Kenyan mobile market.

Will the Kenyan experience be replicated in Asia? The signs are promising, in South Asia at least. Only 35 per cent of Indians have bank accounts, partly because only about 30,000 out of India’s 600,000 villages have bank branches.

A small, start-up firm, BEA, has gained 15 million customers in India in just two years, while, in neighbouring Bangladesh, bKash has 2.5 million users. Though much bigger companies have launched their own mobile wallets in the region, these two smaller companies, which have a wide range of investors including NGOs, have gained traction because they operate on any network.

Mobile banking and the use of airtime as currency has revolutionised money movement in countries with limited banking infrastructure and poor security. In Afghanistan, for instance, money has long been transported by truck drivers, each of whom takes a small cut of the total. Now, mobile banking is becoming the preferred method of moving money. It is safer, quicker and usually cheaper. The investment opportunities of seeking to provide mobile banking services to the previously unbanked are huge.

Mobile money transfers are equally useful in carrying international remittances. Money sent home by migrant workers to their families is one of the biggest sources of income in many developing countries.

It is believed to be the main source of revenue in unstable states, such as Afghanistan and Somalia, and is even one of the most important components of GDP in more substantial economies, including Egypt (see Harnessing the diaspora dollar, pages 19-21).

In the industrialised world, most new mobile technologies have focused on customer convenience. Near field communication (NFC) is already included in many smartphones, enabling handsets to communicate with other computers with which they come into close proximity. It relies on a simple form of wi-fi and employs more basic technology than Bluetooth but can be used to pay for goods or tickets in shops and on transport systems. Customers merely run their phone over the reading device in question, in much the same way as goods are passed over barcode readers in supermarkets.

However, it remains to be seen whether tying payment services to a single device can compete with the digital wallet, which offers Cloud services that can be accessed from any enabled device. NFC payment is already up and running on a small scale in the UK, with new retailers joining on a regular basis, while the digital wallet has proved more popular in East Asia. It is hoped that the installation of smart meters in homes and businesses will add another element to the mix. The meters, which allow two-way communication between electricity or gas meters and a central system, are being provided in homes across Western Europe, Japan, Australia and Canada. Italian firm Enel was the first company to complete its installation programme in 2005. Currently, smart meters simply provide power or gas companies with accurate real time usage data, removing the need for meter readings. However, it is hoped customers will soon be supplied with enough information to tune their energy use more cost-efficiently.

The next step in the mobile money revolution is the emergence of virtual currencies. At present, mobile wallets use established currencies but parallel digital currencies are now being introduced that can be traded across any digital platform on a peer-to-peer basis. The first – and best known – was Bitcoin, which, unlike alternatives, is not restricted to a single website, nor used solely in gaming. The currency is created by ‘Bitcoin mining’, where rival servers compete to solve maths tests, the complexity of which regulates the supply. The winner gains the virtual money created and it can enter the market, in much the same way that currency created by a central bank is distributed.

Bitcoin has attracted criticism, not least because its founders are unknown, its market value volatile and it has proved attractive to drug dealers. Each Bitcoin was valued at $15 at the start of this year but quickly rose to more than $100 on investor interest. In six hours in April, the exchange rate plummeted from $266 to $76 then rebounded to $160. Other convertible virtual currencies have followed, including Ripple. Developer OpenCoin has created a fixed number of 100 billion Ripples, most of which it will give away for free. It hopes limiting the supply will increase the currency value over time, thus making the Ripples it retains worth a fortune.

The regulatory framework surrounding virtual currencies has not yet been worked out. However, the US government’s Financial Crimes Enforcement Network has announced its intention to regulate Bitcoin exchanges. But it remains to be seen whether virtual currencies will be a flash in the pan or the next big thing. At the other end of the scale, mobile money transfers look set to stay. After the success of M-Pesa in Kenya, many had assumed that mobile money schemes were a sure-fire route to success.

Yet Nigeria’s initial experience with its Cashless Project shows that each market must be judged on its merits because of cultural differences. Many Nigerians object to state oversight of their finances and prefer to deal purely in cash. While the industrialised and developing worlds should both benefit from the emergence of the mobile economy, very different commercial cultures are making very different contributions to its development.

About the author:

Dr Neil Alexander Ford is an independent consultant and journalist, focusing on international affairs, particularly in Africa and Asia


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