*The author wishes to acknowledge the support of Ec. Andrés Arauz, General Director of Banking, and Ec. Wagner

Fierro, National Banking Services Director, as well as the collaboration of the Mobile Payment System staff of the

Central Bank of Ecuador; in particular, Fernanda Pinta and Rubén León, who helped in translating the original

English text and updating the data for this study.

Economic White Paper

Office of Economic Statistics

THE TRANSFORMATIONAL POTENTIAL OF MOBILE MONEY:

SUCCESSFUL MODELS OF MOBILE MONEY IN DEVELOPING

COUNTRIES*

Economic White Paper No. 60

Prepared by:

Santiago Vásquez Cazar

Authorized by:

Eugenio Paladines C.

Director of the Office of Economic Statistics

October, 2011

Abstract

Mobile technology has a potential transformational effect on emerging economies.

Widespread use of mobile devices has made this technology the closest-to-home and

most accessible for the poor in emerging economies. Thus, the general availability of m-

payment solutions is a mainspring of economic inclusion that has transformed the lives

of millions worldwide.

Due to its socio-economic conditions, Ecuador is an ideal scenario for implementing a

system of money circulation based on mobile technology. This Economic White Paper

summarizes the studies done by the Central Bank of Ecuador to determine the feasibility

of implementing a National Mobile Money System in Ecuador, based on the analysis of

theoretical models of m-payment systems and international experiences in their

implementation.

TABLE OF CONTENTS

INTRODUCTION

1. Characteristics of Mobile Payment Systems

1.1 Critical Success Factors

1.1.1 Costs

1.1.2 Security

1.1.3 Ease of Use

1.1.4 Customer Base and Volume of Transactions

1.2 Mobile Payment Models

1.2.1 Walled Garden and Buy Direct Models

1.2.2 Key Stakeholders

2. Mobile Transactions in Developing Countries

2.1 A Real Market Need

2.1.1 Exclusion from Access to Financial Services

2.1.2 The Importance of Remittances

2.2 Best Practices in the Application of Mobile Payment Systems

2.3 Main Hindrances to the Adoption of Mobile Payment Systems in Poor Sectors

2.3.1 Integrity in Mobile Payment Systems

3. Success Stories

Background

3.1 WIZZIT – South Africa

3.2 M-PESA – Kenya

3.2.1 The M-PESA System

3.3 G-CASH – The Philippines

4. An Ecuador-Oriented Conceptualization of Mobile Money

5. Conclusions

6. Recommendations

REFERENCES CITED

LITERATURE REVIEWED

WEBSITES CONSULTED

LIST OF FIGURES

Figure 1 Potential Applications for Mobile Payments

Figure 2 Walled Garden Model

Figure 3 High-Value Garden Model

Figure 4 Buy Direct Model

Figure 5 Number of Bank Branches and ATMs per 100,000 Population; Mobile

Penetration in Various Countries

Figure 6 Loan Interest Rates (%) in Various Countries

Figure 7 Microfinance Customers as a Percentage of the Population in Various

Countries

Figure 8 Financial Flows to Emerging Economies 1990-2006

Figure 9: WIZZIT's Mobile Banking System

Figure 10: The M-PESA System

Figure 11: The Role of M-PESA Agents

Figure 12: M-PESA Growth

Figure 13: M-PESA Agent Participation

Figure 14: Methods of Sending Money: Before and After M-PESA

Figure 15: Comparison of M-PESA with Alternatives

Figure 16: What Would Be the Effects of Losing M-PESA Service?

Figure 17: G-CASH Model

LIST OF TABLES

Table 1 Mobile Payment Procedures: Characteristics

Table 2 Observations on the Performance of Mobile Payment Procedures in

Developing Countries

Table 3 Predictions on the Performance of Mobile Payment Procedures in

Developing Countries

Table 4 Risks Associated with Mobile Payment Systems

Table 5 Key Issues and Recommendations for MPS Regulation

Table 6 Measures Taken to Combat Asset Laundering and Financing of Terrorism

Table 7 Best Practices: Know Your Customer

Table 8 Description of the Needs of Customers at the Base of the Pyramid

Table 9 Comparison of Functions and Features of the Three M-Payment Models

Discussed

LIST OF ABBREVIATIONS

AML/CFT Anti-money laundering/combating the financing of terrorism

ATM Automatic teller machine

BOP Bottom of the pyramid

CBE Central Bank of Ecuador

CGAP Consultative Group to Assist the Poor

EMI Electronic money issuer

E-accounts Electronic accounts

E-commerce Electronic commerce

E-finance Electronic finance

E-money Electronic money

FATF Financial Action Task Force

FSD Foundation for Sustainable Development

FSP Financial service provider

GSMA Global System for Mobile Communications Association

IFI International Financial Institution

KYC Know Your Customer

M-banking Mobile banking

M-commerce Mobile commerce

MFS Mobile financial services

M-money Mobile money

M-payment Mobile payment

MPS Mobile payment system

M-transactions Mobile transactions

NMPTS National Mobile Payment and Transaction System

NFC Near Field Communication

ODA Official development assistance

P2P Person-to-person

SIM Secure Identification Module

SMS Short Message Service

USSD Unstructured Supplementary Services Data

THE TRANSFORMATIONAL POTENTIAL OF MOBILE MONEY: SUCCESSFUL

MODELS OF MOBILE MONEY IN DEVELOPING COUNTRIES

INTRODUCTION

The relatively high costs of accessing money for the country‟s low-income sector impel

a large segment of the population to make day-to-day money transactions outside the

financial system, a situation that discourages saving and impacts on the economic

dynamics of the popular and socially supportive sectors of the economy.

The growing use of mobile technology in Ecuador offers the Central Bank of Ecuador

an opportunity to put this alternative means of access to use by providing a money

transaction solution through basic mobile technology that will turn mobile devices into

tools for sending and receiving money at low cost from anywhere in the country.

Moreover, this system complements and strengthens efforts being made by institutions

in the popular and socially supportive financial system to facilitate access to basic

financial services for those in the lower strata of the economy.

M-money is an innovative economic-policy concept that gives rise to the creation of

virtuous circles of transaction, encourages saving and promotes production, provided

that the criteria of accessibility, security and appropriateness of cost are met.

In this regard, a central bank-managed m-money system ensures that the

abovementioned criteria are satisfactorily met and enables the availability of m-money

services to the entire population, especially to sectors having no access to financial

services.

Finally, m-money (flows of dematerialized currency circulating in the economy) must

be aimed at bolstering local savings structures that promote recirculation of liquidity in

the social and productive sectors historically neglected by the traditional financial

system.

1. CHARACTERISTICS OF MOBILE PAYMENT SYSTEMS

Kreyer (2002) identifies three types of m-payment procedures: m-commerce; e-

commerce, which includes m-commerce and a number of other alternatives; and m-

payment, which includes the two aforementioned applications. This classification

introduces the notion of the relevance of m-payment as a tool whose use is not limited

to e-commerce but goes well beyond it.1

Eastwood (2008) defines m-payment as “a payment for goods or services made between

two parties, with settlement effected from a mobile device, such as a mobile phone or

personal digital assistant.” Jacob (2007) identified two ways of understanding m-

payments: the first involving telephone devices equipped with NFC technology and the

second involving the incorporation of m-payment options in mobile-phone software to

transform cellular devices into digital wallets.

1.1 CRITICAL SUCCESS FACTORS

Success in the implementation of such systems depends on three basic factors: cost,

security and ease of use. Further, a broad customer base and high transaction volumes

need to be developed, thus the importance of developing successful penetration

strategies for m-money use among the general public.

1.1.1 COSTS

Transaction costs and costs that users must assume in switching to a higher-end mobile

phone for access to m-payment services are two very sensitive variables from the

consumer‟s point of view. Moreover, there are costs involved in adopting a particular

m-payment technology for other social agents like retailers, business owners and public

and private companies. For such agents to be able to make decisions based on current

costs, the commission and profit margins need to be clearly established for each

stakeholder participating in the system.

1.1.2 SECURITY

The most important factor to consider is giving the customer a sense of security.2 In this

respect, Eastwood (2008) points out that although the vast majority of suppliers are

interested in creating a wide service network, very few are willing to take the risk

involved in creating m-payment systems.3 Thus, Jacob (2007) states that while agents

have two-way authentication methods and other technical security measures at their

disposal, users and agents of m-money networks face the risk of payment methods

where data is transmitted over the air and therefore susceptible to potential

interception. Consequently, security is fundamental to generating the perception of the

1 Cf. Kreyer (2002), pg. 10-23. 2 Including integrity, authorization, authentication, confidentiality and non-repudiation of

transactions. More in Kreyer (2002), pg. 12. 3 Cf. Eastwood (2008), pg. 92.

service‟s effectiveness, which is critical for developing acceptance on the part of users

and m-money distribution agents.

1.1.3 EASE OF USE

User and network-agent perception is essential to the success of these initiatives.

Consequently, developing easily accessible, user-friendly systems is indispensable for

achieving a broad user base and high transaction volumes. In addition, users must be

aware of concrete benefits in using these services, such as lower transaction costs for

P2P payments or money transfers.

1.1.4 CUSTOMER BASE AND VOLUME OF TRANSACTIONS

Most failures in deploying MPSs have been the result of not developing strong links

between m-money service providers and distribution agents.4 From the standpoint of

agents (retailers, business owners and collection centers), adopting a system of m-

payment solutions should mean reducing operating costs and increasing sales of their

products and services.5 MPSs should generate more customer contact by offering new

products and services through the network.

Moreover, the service should generate a critical mass of users that results in positive

externalities6 for those users.

7 Thus, it is essential to create technical solutions in terms

of customer needs – determined by fieldwork with potential users –rather than

attempting to make the user’s reality conform to narrow technology packages. Dahlberg

and Mallat (2002) recommend expending major efforts on public awareness procedures

and changing customer mentality to help people overcome possible psychological and

cultural barriers to using new technologies.

Hence, MPSs should create incentives, pilot usage programs, and field and training

programs in MPS use. Mallat (2008) notes that consumers should be instructed and

otherwise made aware as to “what a mobile payment solution is, what benefits it

provides and how to use it.” This process requires broad communication with users in

easily understandable language.8

1.2 MOBILE PAYMENT MODELS

Eastwood (2008) classifies potential MPS applications on the basis of two variables: the

transaction value and the location of the transaction.9

4 Cf. Mallat (2008), pg. 24-57. 5 Cf. Ibid. pg. 26. 6 Positive externalities are produced when an agent‟s actions increase the well-being of other

economic agents. For the case in point, the more people who use m-money in their daily

activities, the greater the number of transactions made through this medium, thus

increasing the widespread use of m-money in the economy. 7 Cf. Dahlberg and Mallat (2002), pg. 650. 8 Cf. Mallat and Rossi (2004), pg. 42-46. 9 Cf. Eastwood (2008), pg. 111.

Figure 1

Potential Applications for Mobile Payments

SOURCE: Eastwood (2008) and author

As indicated in Figure 1, potential MPS transactions range from small payments to

remittance and salary payments for people far from a financial service center. MPSs can

also reduce the need to carry cash for face-to-face situations such as purchasing at a

store or paying transportation fares, besides facilitating remote purchase or payment of

goods and services like digital content, utility bills or mobile phone airtime.

Cheong (2001) shows that MPS payment procedures will depend on the source of

payment. Thus, they may be token based or account based systems. In the former case,

system administrators become EMIs, crediting e-money (tokens) to customers‟ e-

accounts, which are backed by funds deposited in IFI accounts that underpin the

system‟s operations.

P2P payments

Transportation,

vending

machines

Macro

Micro

Tra

nsa

ctio

n V

alu

e

Local Remote

Location of the Transaction

Remittances,

salary

payments

Digital content

Table 1

Mobile Payment Procedures: Characteristics

Table 1 provides an overview of most of the current MPS models. Kreyer (2002) takes

into account three basic variables: strategy, participants and operation.

In the first sphere, she indicates the difference between the various payment scenarios,

which include m-commerce, e-commerce, point-of-sale business and P2P payments.

She also analyzes the possibility of making tiny payments, such as a piece of candy or a

soft drink; small payments like transportation fares; and more substantial payments like

a grocery cart full of food or a salary payment.

Regarding the members of the system, Kreyer (2002) discusses a broad range of

participants, including individuals, merchants, public institutions, private service

organizations, financial entities, mobile operators and specialized m-payment providers.

Another important consideration is who has access to customer information according

to the business model to be implemented. This is a major concern, since it establishes

which player is responsible for handling sensitive customer information, both in

business and regulatory terms.

Finally, the author deals with important aspects of various types of MPS operation from

the standpoint of the technology applied, whether the operation is backed by an actual

or a virtual money account, whether access to the service is unrestricted or by

subscription, and the various channels available to pay for the service or for the e-

money obtained.

SOURCE: Kreyer (2002) and autor

Payment

Merchant Customer Mobile

Operator FSP Specialized

Company

Utility

Company

Direct

Debit

Str

ateg

ic

Merchant Mobile

Operator FSP Specialized

Company None

YES NO

SMS WAP Dual SIM Phone SIM or Phone

Software Download

Instances

M-Commerce E-Commerce Point-of-Service

Merchant

Customer-to-

Customer

Picopayments Micropayments Macropayments

Op

erat

ion

al

Par

tici

pan

ts

Characteristics

Payment Scenarios

Parties Involved

Customer Data

Receiver

Pre-registration

Required

Technology

Required

Payment Basis

Payment Mode

Minute Deduction

Method of

Settlement

Account-based Token-based/Virtual Accounts

Pay per Time Unit

Payment per Product Unit Subscription

Prepaid Instant Prepaid Postpaid

Smart

Cards/Prepaid

E-Cash/ Digital

Wallet

Offline

Payment Credit Card Phone Bill

1.2.1 WALLED GARDEN AND BUY DIRECT MODELS

In this model, the mobile operator is the sole service provider. Nevertheless, other

providers may add their services, though under the supervision of the mobile operator.

Vodafone and Orange have worked in this manner with their Vodafone Live and

Orange World platforms.10

These systems offer a portfolio of services under the

operators‟ brand names.11

Normally, expenditures are either debited directly from

accounts maintained with the operator or covered by the prepaid services procedure. In

any case, the operating platform, billing and accounts management are the mobile

operator‟s responsibility.

Figure 2

Walled Garden Model

SOURCE: Van Bossuyt, Van Hove (2007) and author

.

Another alternative is for mobile operators to enter into partnerships with m-payment

solution providers. This is called the “High-Value Garden Model”, which also entails

alliances with financial institutions so that risk and credit management are handled more

efficiently by entities with greater experience.

Figure 3

High-Value Garden Model

SOURCE: Van Bossuyt, Van Hove (2007) and author

Another modus operandi is the “Buy Direct Model”, which is based on specialized

providers. In this model, operators are data-transport service providers that enable

10 Cf. Van Bossuyt and Van Hove (2007), pg. 34. 11 Cf. Eastwood (2008), pg. 112.

CUSTOMER/End User Mobile Service

Providers/Platforms

Merchants/Service Providers

Financial Networks CUSTOMER/End User Mobile Service

Providers/Platforms

Businesses/Service Providers

information transfer among users and a portfolio of services offered by independent

companies.

Figure 4

Buy Direct Model

SOURCE: Van Bossuyt (2007) and author

One example of this model is the solution offered by NTT DoCoMo,12

which provides a

broad range of services managed by different participants but carried on the NTT

technology platform for operating and billing purposes.13

While mobile operator-managed models require a highly verticalized process in which

the mobile operator must reorient the activity of its airtime purchasing networks to be

able to provide m-money services, MPSs by specialized providers must create scalable

models and develop agent/user networks. Thus, existing legal restrictions are important

factors to consider in the former scenario, while in the latter, creation of agent networks

entails more complex negotiations regarding commission and revenue distribution

throughout the value chain.

1.2.2 KEY STAKEHOLDERS

Users and such network agents as retailers and small businesses are key players in the

MPS implementation process. Mobile operators, specialized providers and technology-

solution providers enable the technical operation of these services. Further, financial

institutions provide support in the reconciliation and clearing of payments as well as

through their own m-banking services. Finally, the State can create the necessary

conditions for these services to function on a national scale with a view to social and

economic inclusion.14

12 Cf. Eastwood (2008), pg. 120. 13 Alternative m-payment systems may be such Internet payment models as Paypal

(www.paypal.com), OboPay (www.obopay) and ClickandBuy (www.clickandbuy.com).

However, given the poor coverage of Internet in Ecuador, these models are not very viable

options. 14 In the M-PESA case, an m-money service offered by SAFARICOM in Kenya, some public

companies have opted to become M-PESA agents, thus enabling consumers to make

monthly payments through m-transactions.

Financial Network

Specialized Provider

CUSTOMER/End

User

Merchant/Service Provider

2. MOBILE TRANSACTIONS IN DEVELOPING COUNTRIES

Hughes and Lonie (2007) state that mobile technology has a potential transformational

effect on emerging economies.15

Indeed, m-payment solutions produce new paradigms

in financial services expansion for those at the bottom of the pyramid.16

Developing countries can thus take advantage of basic mobile technologies such as

SMS, USSD and SIM cards to create m-payment solutions intended to rectify

conditions of financial-service exclusion that plague such countries.17

However, the worlds of finance and telecommunications are sectors with dissimilar

corporate cultures.18

While financial institutions are known for conservative practices

based on large transactions among few participants, the telecommunications industry is

based on handling small payments for a wide range of people.19

Implementing mobile payment systems in developing countries requires a fairly

straightforward strategy: keep it simple. Hughes and Lonie (2007) point out that

“Challenges will come from managing issues such as customer registration, fraud,

money laundering and finding viable, scalable commercial models that work where the

customer‟s disposable income is low.”20

M-payment solutions tend to blur the limits between the financial and

telecommunications industries. Consequently, the role that regulators of both sectors

play is fundamental. These systems require a regulatory framework that enables their

development under appropriate control. Expansion of access to financial services with

the aim of social and economic inclusion is a common goal among the governments of

developing countries. Thus, m-money systems that improve the economic dynamics of

the lower echelon of these countries must be put in place.

2.1 A REAL MARKET NEED

MPSs in developed countries are a solution looking for a problem to solve, rather than

an answer to a genuine consumer need.21

By contrast, such solutions are most likely to

succeed in developing countries, where the low-income sector primarily uses cash.22

Hughes and Lonie (2007) explain that in developed economies there are so many

15 Cf. Hughes and Lonie (2007), pg. 63-81. 16 Cf. Prahalad (2006), pg., 6- 20, 99-109, 113-187. 17 SMS is a method of text messaging for mobile phones, while USSD is a service for sending

data through mobile phones. The main difference is that the USSD system lacks forwarding

and storage capabilities; thus, if such messages are not delivered immediately, they are

discarded. The SIM is a removable smart card used in mobile phones that provides greater

security for user authentication with the mobile operator. 18 Cf. Hughes and Lonie (2007), pg. 5. 19 Cf. Ibid, pg. 5. 20 Hughes and Lonie (2007), pg. 7. 21 Eastwood (2008), pg., 115. 22 Eastwood (2008), pg. 120.

options for accessing payment services that there is no market motivation to induce

users to migrate in large numbers to mobile payment systems.

Developing countries have three characteristics that evidence a real market need for

mobile financial services: i) Large-scale access to mobile phone service; ii) Exclusion

from access to financial services; and iii) Rapid growth of remittances from abroad.23

2.1.1 EXCLUSION FROM ACCESS TO FINANCIAL SERVICES

Poor access to basic financial services in developing countries causes structural socio-

economic weaknesses. Thus, the poor go about their everyday lives creating invisible

economies that discourage saving and hinder the economic dynamics of these sectors.24

Figure 5

Number of Bank Branches and ATMs

per 100,000 Population; Mobile Penetration in

Various Countries

It is obvious from the above chart that there are substantial differences in access to

financial service points between developed and developing countries, yet there is a high

degree of mobile technology penetration in both kinds of economies. Donner (2008)

reports that mobile services are part of the daily life of billions of poor people around

the world, who have shown great ability in the use of this technology, which has

enabled them to efficiently see to their needs.25

23 Cf. Coyle (2007), pg. 25. 24 In most African economies, the informal sector makes up as much as 40% of GNP. See

DONNER, J., and TELLEZ, (2008), “Mobile banking and economic development: Linking

adoption, impact, and use”, LSE, U.K., in Asian Journal of Communication, 18(4), pp. 318-

322. 25 “People at the bottom of the pyramid easily accept technology”, Prahalad (2006), pg. 15.

SOURCE AND PREPARATION: Coyle (2007), pg. 15

Coyle (2007) stresses that access to financial services is critical in the furtherance of

entrepreneurship and microbusiness policies. Most cases observed in developing

countries show that a large proportion of microbusinesses regularly use informal and

costly sources of funding.26

This sort of hindrance impedes adequate economic growth

in these countries.

Figure 6

Loan Interest Rates (%)

in Various Countries

As Figure 6 shows, despite large differences between formal microfinance channels and

informal moneylenders in the cost of accessing credit, unavailability of these services

makes it necessary for people to resort to local moneylenders as their only possible

option for obtaining credit. Coyle (2007) specifies in this respect that “inclusive

financial services for the unbanked are seen as essential for poverty reduction.”27

Popular and socially supportive finance systems are an effective option for

counteracting these problems in poor countries. In this regard, use of mobile technology

offers low-cost alternatives for expanding such services, giving MPSs a

transformational role in the lives of the people who use them.

26 MAS and KUMAR (2008), pg. 43. 27 Coyle (2007), pg. 16.

SOURCE AND PREPARATION: Coyle (2007), pg. 15

Figure 7

Microfinance Customers as a Percentage of the Population

in Various Countries

2.1.2 THE IMPORTANCE OF REMITTANCES

Ratha (2009) reports that official statistics in developing countries show that over 50%

of remittances from abroad are sent through informal channels.28

Moreover, such

remittances are subject to high commission costs (8% to 17%) charged by financial

institutions and money remittance services.29

Informal channels also involve a high risk

of loss or theft of money sent.

Figure 8

Financial Flows to Emerging Economies 1990-2006

(In thousands of dollars)

28 Ratha (2009), pg. 6. 29 Coyle (2007), pg. 22.

SOURCE AND PREPARATION: Coyle (2007), pg. 18

SOURCE: ODA

PREPARED BY: Coyle (2007), pg. 21

In some developing countries, the amounts received in remittances from abroad are

comparable to income from foreign direct investment, thus contributing to energizing

their economies.30

It is important to note that those receiving these flows use them

primarily to pay for rent, education costs and microbusiness activities.31

The average remittance from abroad is not high. In Ecuador, the mean amount of a

remittance from Spain was US$115 in 2010, with an average commission payment of

US$13.50.32

Under these circumstances, introduction of an international m-payment

service would lead to a substantial reduction of such costs.33

To properly attend to the needs of social sectors that use cash as their main medium of

transaction, an m-money system must be based on an understanding of their dynamics.

Hughes (2008) specifies that issues of transaction security, convenience of use, low

cost, and the means of deposit, transfer and withdrawal of money are essential to

ensuring the success of these initiatives.

Emerging economies will, for the most part, continue to be based on the use of cash.34

Accordingly, MPSs in such economies must offer means of depositing and withdrawing

money as core services in their business model.35

Furthermore, such systems require

innovative approaches to marketing. The value chain of these services has a complex

logic, since it involves corporate arrangements between mobile operators and financial

service providers as well as the development and reinforcement of agent networks to

achieve a critical user mass.36

Finally, regulatory considerations are critical for implementing such systems. Hence,

the main issues to consider are: i) restrictions on deposit-taking; ii) restrictions on

money withdrawal; and iii) consumer protection regulations.

2.2 BEST PRACTICES IN THE APPLICATION OF MOBILE PAYMENT SYSTEMS

According to telecom industry statistics,37

364 million of the world‟s poor will be using

mobile financial services by 2012. In addition, the number of people who do not have a

bank account but do have a mobile phone will reach 1.7 billion worldwide. The CGAP

(2008) estimates that 140 million low-income individuals receive regular payments

30 For example, in 2003 remittances from Mexican workers abroad amounted to 124% of Mexican

FDI income. More information at World Bank<http://remittanceprices.worldbank.org/>. 31 Coyle (2007), pg. 23. 32 Available at <http://remittanceprices-espanol.worldbank.org/Country-Corridors/Spain/Ecuador/> 33 Cf. Eastwood (2008), pg. xxx. 34 See World Bank Blog <http://psdblog.worldbank.org/psdblog/2008/10/vodafone-keep-i.html>. 35 See World Bank Blog <http://psdblog.worldbank.org/psdblog/2008/10/vodafone-keep-i.html>. 36 Hughes and Lonie (2007), pg. 9, point out that service rates are a major factor in the user‟s

adoption of the network. This ensures a critical mass of users for system operation; in Coyle

(2007), pg. xxx. 37 The GSM Association of mobile operators represents the global interests of the telecom industry.

It comprises 219 countries and has nearly 800 mobile operators worldwide.

from their governments that can be channeled through MPSs from government agencies

to beneficiaries.

The Latin American market is expected to grow to around 30 million people with no

access to financial services who will become MFS users by 2015. In Africa and South

Asia the figures will be 100 and 140 million users, respectively.38

There is still a general perception of insecurity in the use of remote payment

alternatives, however. This is a critical factor to be overcome for the acceptance of such

services. Similarly, aspects of service quality regulation and user training in handling

m-money are major hurdles to be faced when implementing these services in developing

countries.39

From the standpoint of regulatory agencies, the World Bank (2009) and CGAP (2009)

have made a series of empirical observations40

indicating that state regulators are

increasingly and ever more promptly facilitating m-money project development to serve

user populations whose needs cannot be tended to cost-effectively through traditional

private-sector financial models.41

Table 2

Observations on the Performance of Mobile Payment Procedures in Developing

Countries

Observations Comments

1) Branchless banking models can significantly

reduce the cost of offering financial services to

people below the poverty line.

By making it possible to perform real-time

electronic transactions, m-banking services provide

the greatest savings in financial costs. In the

Philippines, a teller transaction costs the bank

US$2.50. The same transaction by m-money costs

only US$0.50 (Asian Banker, 2007).

2) Branchless financial channels are primarily

used for making payments, not for savings or

credit.

Customers use payment and transfer services

more than financial services basically because their

day-to-day needs are oriented to such services. M-

PESA, for example, advertises their service as “an

accessible, fast and safe SMS money transfer to

anywhere in Kenya.” WIZZIT promotes its service

with the slogan “The easy way to pay.” Mobile

operators, in particular, prefer to position these

products as payment services rather than as

depository services, because the former are more

38 Dunn and Company Forecasts (2009). Presentation at the Mobile Money Summit in

Barcelona in 2009 39 Dunn and Company Forecasts (2009). Presentation at the Mobile Money Summit in

Barcelona in 2009 40 Lyman et al. (2008), pg. 16. 41 Ibid., pg. 2. : “Branchless banking can be either additive or transformational (DFID, 2006).

It is additive when it merely adds to the range of choices or enhances the convenience of

existing customers of mainstream financial institutions”. DFID, (2006), “MOBILE BANKING:

Knowledge map & possible donor support strategies”, DFID, U.K.

attuned to income generating models that

operators are accustomed to handling (for

example, airtime or messaging package

purchases). Some mobile operators say that if they

position their services as deposit-taking, regulators

will not give them permits as m-money service

providers.

3) Only small segments of the low-income

population without access to financial

institutions are using branchless financial

institutions to access financial services.

In Colombia, the average transaction through an

agent is in the US$100–$200 range, showing that

these services are not being used by the poorest

sector. By 2008, Globe Telecom’s GXI Inc., which

offers the G-CASH m-wallet service in the

Philippines, had only managed to establish 100

agents for its service in rural areas, compared to

the 3,000 direct airtime vendors that the company

had enrolled throughout the country, which yielded

a network of 700,000 airtime resellers.

4) Financial service providers consider

distribution-agent network models a key factor

for the success of their business strategies.

Mobile operators manage some of the largest

agent networks for prepaid card sales in every

country, making them a key force in leading m-

banking processes. For example, five banks

partnered with SMART COM in the Philippines to

implement m-banking. In South Africa, the

Standard Bank partnered with MTN. Most financial

service providers consider it strategically

advantageous to partner with businesses that have

solid, locally established distribution chains.

5) Most m-banking projects have been carried

out by mobile operators.

None of the pioneering branchless banking projects

has been spearheaded by a financial institution.

GXI in the Philippines and Safaricom in Kenya

designed m-banking initiatives without participation

by any financial institution. In the case of WIZZIT in

South Africa, an independent provider designed a

branchless banking service model using the South

African Bank of Athens as a depository for user

accounts. Although this was not a model headed

by operators, it was not led by a financial

institution, either. Mobile operators in developing

countries, including Kenya, normally strive to

achieve rapid and widespread coverage so as to

secure high user volumes as a core strategy of

their business model. Thus, a large percentage of

the poor and unbanked already belong to their

customer portfolios. Traditional financial

institutions, on the other hand, focus on serving the

wealthiest 10% to 20% of the population in these

countries.

6) M-banking providers have stressed ease of

implementation and adoption over broad

functionality.

The implementation of m-banking through agents is

based on a very pragmatic, low-risk approach, but

this strategic option limits the possibility of

broadening service coverage to the benefit of the

user.

7) Microfinance institutions have been largely

ignored in such services.

Microfinance institutions are looking to branchless

financial institution programs as an option for

overcoming inherent limitations. In Ecuador, for

example, the Central Bank has joined with savings-

and-loan cooperative networks to commission

technological solutions for creating and maintaining

core banking systems and branchless financial

institutions to reduce implementation costs for

small cooperatives and strengthen their operations

in the community. Such models, where technology

and know-how are shared downward from central

bodies to network heads and other cooperatives,

have the most potential for including microfinance

institutions under current payment systems, thus

exploiting the advantages of belonging to

technological information channels that would

otherwise be impossible for them to access on their

own. SOURCE: Ivatury and Mas (2008), pg. 26. and author

The above table shows that the m-money concept has not been understood from the

standpoint of a medium of payment that adequately responds to the transaction needs of

people below the poverty line. In this regard, m-money can be employed as an

alternative for countries to facilitate financial transactions for the poor with a view to

their economic integration, access to financial services and the strengthening of the

production base of local economies.

Table 3

Predictions on the Performance of Mobile Payment Procedures in Developing

Countries

1) People below the poverty line will use m-

banking much more than the rest of the

population.

For many customers in developing countries, the

mobile channel offers more advantages than other

alternatives. It is thus possible to say that m-

banking can become the main channel for financial

services to large segments of the population,

creating products and services to meet their needs.

2) Service providers will manage the operating

risk of using agents, and customers will

tolerate the liquidity problems of these agents.

M-PESA customers continued to frequent agents

that on previous occasions had not had enough

cash to serve them. The evidence indicates that

customers have considerable confidence in

Safaricom, the service provider, which ultimately

holds the real funds of the customers and thus

enables them to continue using the agent network.

3) Use of shared agent networks will be

essential to massively expanding access to

financial services through branchless banking

models.

This frees financial service providers from the

limitations of geographical location and allows them

to compete for customers based on the quality,

marketing and positioning of their products.

Further, agent liquidity could be arranged for use in

responding to any customer in any given area, and

there would thus be less need for credit on the

agent’s part.

4) By 2012, m-banking will be used by a great

number of currently neglected users as the

result of competitive market entry by providers.

With higher levels of competition, new entrants will

focus on expanding the market to avoid a direct

face-off with already positioned participants.

SOURCE: Ivatury and Mas (2008), pg. 16, and author

Table 3 shows that the need for basic financial services fosters the development of

alternative strategies that facilitate their access by the poor. In this regard, facilitating

access to m-money by sectors of the population having no financial services is the first

step toward getting local financial institutions to serve them through MFS.

2.3 MAIN HINDRANCES TO THE ADOPTION OF MOBILE PAYMENT SYSTEMS IN

POOR SECTORS

According to Lyman et al. (2008), there are two critical factors for the successful

development of m-money initiatives in developing countries: i) creating successful

business models that demonstrate the feasibility of profitably serving low-income

customers through technology services; and ii) developing a clear understanding of the

factors that affect customer adoption of such services.42

2.3.1 INTEGRITY IN MOBILE PAYMENT SYSTEMS

Chatain et al. (2008) propose a series of measures to reduce the risks associated with

money laundering and terrorist financing through MPSs.43

Development of policies to

prevent asset laundering and financing of terrorism is essential to the sustainable

development of such systems. In this regard, the FATF has established a series of

procedures that minimize the perpetration of these crimes.

Among the main conclusions of their field study in various countries around the world,

Chatain and Zerzan (2009) state that companies offering m-payment services need

regulators to be absolutely clear concerning their legal obligations.

Nonetheless, they observed that regulatory agents had no clear policy regarding the

risks these systems involve or as to the appropriate application of international risk-

management standards for such transactions without affecting the proper development

of these activities among low-income users, whose conditions require proportional

regulations that enable them to become part of economic dynamics under appropriate

conditions.

Chatain and Zerzan (2009) did an analysis of the real risks to which these MPSs could

be exposed in developing countries, based on research on seven major markets in

emerging economies and the measures implemented to minimize unlawful financial

practices.

Table 4

Risks Associated with Mobile Payment Systems Risks Perceived

By Regulators

Reliability of the Technology, Consumer Protection, AML/CFT

By the Industry Over-Regulation Hinders Business Development SOURCE: 2009 Mobile Money Summit

Four risk factors have been identified as being of major importance in developing

regulatory frameworks for these systems: i) anonymity; ii) evasion; iii) velocity of

money; and iv) poor oversight. Anonymity refers to false or unknown identification and

money laundering practices (“smurfing”); evasion is the risk of alteration and collusion;

42 Cf. CGAP (2008), pg. 45. 43 Cf. Chatain et al. (2008), pg. 12.

velocity of money means the number of daily or monthly transactions allowed per

person; and poor oversight refers to the lack of open regulatory frameworks that can

create the necessary assurance to produce a healthy operating ecosystem for these

services.44

In turn, Lyman et al. (2008) look for conditions for creating a regulatory framework that

would lay down the rules for so-called branchless financial institutions. They suggest

putting forth proportional regulatory policies to encourage innovation and achieve

large-scale dynamics. They also establish a two-tier classification for these regulatory

conditions: i) necessary but not sufficient; and ii) ensuring sustainability. In this regard,

the basic conditions for developing MPSs are:45

Authorization to use technology-equipped agent networks to serve as cash deposit

and withdrawal points as well as the main customer-service centers.

Development of AML/CFT rules based on risk assessments and fitting for small,

remote transactions conducted through agent networks.

In addition, there are four other considerations that will assure the sustainability and

appropriate development of these systems:

Broad, sufficient regulation to allow e-money issuance.

Effective consumer protection.

Regulations promoting social inclusion in payment systems and appropriate

supervision of such systems.

Policies promoting provider competition and interoperability.

These concerns will guide the creation of regulatory frameworks for MPSs. Table 5

elaborates on these points.

Table 5

Key Issues and Recommendations for MPS Regulation

Key Issues and Recommendations for the Contents of M-Payment System Regulations

1) Allow nonbank retail outlets to serve as distribution agents, and carefully consider the best model for implementing such

networks.

2) Evolve a risk-based AML/CFT approach adapted to the realities of small, remote transactions conducted through small

businesses or agents.

3) Clarify the legal boundaries between retail payments, e-money and other stored-value instruments.

4) Create a regulatory category for electronically stored money that allows nonbank participation under defined conditions.

5) Create robust but simple mechanisms for consumer protection, solution of agent-related issues, price transparency and

data privacy.

6) Foster interoperability.

SOURCE: Lyman, et al. (2006), pg. xxx and Lyman et al. (2008), pg. xxx

44 Cf. Lyman et al. (2008), pg. 2. 45 Cf. Lyman et al. (2006), pg. 5 and Lyman et al. (2008), pg. 16.

Chatain and Zerzan (2009) also discuss the main safeguards put in place by countries to

control illicit activities conducted through mobile-based services. The following table

provides a summary of the best practices for controlling illegal operations.

Table 6

Measures Taken to Combat

Asset Laundering and Financing of Terrorism

Type of Risk Potential Risks Key Control Measures

Anonymity

Transactions are remote (not performed face

to face)

Innovative KYC practices and identity verification.

Example: MTN Banking – South Africa

Unauthorized use of mobile phones to make

money transactions

Advanced identification mechanisms

•Bradesco – Brazil

•First National Bank – South Africa

Evasion

Mobile phone use for money laundering

activities (large transactions split into small

ones)

Use of multiple mobile accounts

Limits on transactions

•Korea FSS

Customer behavior monitoring

•Bank of China – Macao

Reporting systems

•Korea FIU

Mobile-to-mobile remittances

Field advice for risk assessment • Hong Kong FIU

Sender identification

• Maxis – Malaysia

Velocity of

money

Lack of real-time ability to monitor/stop

messages and settlements

Integrated internal control system

• Itau – Brazil

Risk management of third parties involved as service

providers

• WIZZIT – South Africa

Poor

oversight

Legal loopholes for providers Guidelines for m-banking services and risk management

• The Philippines, Korea

Lack of regulation, supervision of new

providers

Unregulated MFS companies

Regulator-provider collaboration

• (The Philippines, Malaysia)

New e-finance laws and rules for MFS providers

• (Korea)

Clear licensing of MFS for nonbanking companies

• (Malaysia, Korea)

IT and AML oversight capability

• (The Philippines)

AML/CFT training

• (South Africa)

SOURCE: 2009 Mobile Money Summit and author

Moreover, as explained in Table 7, Chatain and Zerzan (2009) list the best practices to

prevent the risk of failure in due diligence when enrolling a customer into the m-money

system.

Table 7

Best Practices: Know Your Customer Innovative KYC and Due Diligence Practices

The

Philippines

Customers using G-CASH (a mobile financial service) have to register via their mobile

phones or the Internet. They may not, however, deposit or withdraw funds until undergoing

face-to-face customer due diligence, which can take place at a retail shop, an accredited

business partner or a partner bank.

Hong Kong

Customers needing to use the mobile remittance service must personally register their SIM

card with their mobile phone operator.

Subscribers are required to present their identification card, which is equipped with security

features and a chip with biometric information.

Mobile financial service providers keep customer activity records similar to those used by

financial institutions.

Malaysia Maxis, an MFS, keeps records of transactions by active customers. This information is

archived for seven years subsequent to termination of the relationship.

Hong Kong Mobile operators are required to report to the regulatory agency responsible for AML/CFT

compliance.

Korea Mobile financial service providers are required to report to the Korean Financial

Intelligence Unit (KoFIU).

Macao Providers are required to report suspicious transactions to the government, including the

channel used and whether they were made by mobile phone.

SOURCE: Chatain and Zerzan (2009), pg. xxx

Current international financial standards address MFS vulnerabilities. Thus, Chatain and

Zerzan (2009), Lyman et al. (2008) and Porteous (2006) all agree that there is no need

to create new international frameworks for MPSs.

Chatain and Zerzan (2009) also conclude that in developing countries there is a need for

guidelines to properly apply flexibility in the AML/CFT frameworks for MFS

providers.46

The authors thus propose a series of policy recommendations for regulators

and providers:47

Decision-makers:

All MFS providers should be subject to anti-money laundering regulations.

Before setting up legal controls, risk assessments should be carried out.

Financial Intelligence Authorities

Develop clear rules and guidelines for providers.

Require reports on suspicious transactions, including the type of channel used, to

establish risk levels per transaction channel.

Sector Regulators

Establish clear rules for granting operating licenses and proportional monitoring

rules for risk management.

46 These conclusions were taken from their presentation at the 2009 Mobile Money Summit.

Available in video at <http://www.mobilemoneysummit.com/speakers_bio.shtml#41>. 47 Chatain and Zerzan (2009), pg. 26.

Define transaction limits, allowing each provider to exploit market

opportunities.

Private Sector:

Work with regulators on developing new services.

Introduce strong internal controls and risk-management practices.

3. SUCCESS STORIES

Background

Lack of access to financial services is a common problem in developing countries,

forcing the poor to use costly, informal means to access such services. Low-income

sectors have nevertheless evidenced great demand for financial services, despite having

to pay relatively high costs for the services they receive. Financial institutions and

existing business models are generally not designed to serve the needs of the poor, who,

as a rule, make up most of the population in these countries.48

Prahalad (2006) explains that the power of the dominant logic traps the poor in a vicious

circle where the negative perception of their risk situation and low purchasing power,

combined with high banking costs and the lack of financial products aimed at serving

these sectors, means that only very few have access to financial services. Research has

shown that the poor prove to be relatively cost-insensitive: they are willing to pay

relatively high prices, accept onerous loan conditions, and strain their savings with risk

and insurance costs in order to access financial services.49

This can be understood as a process where economically stronger domains with access

to financial services extract income from consumers who have no other options.50

M-

payment systems have therefore become an alternative for developing countries to

facilitate access to financial services for low-income citizens.

This section will discuss three successful m-money initiatives: WIZZIT, a formal

division of the South African Bank of Athens in South Africa; the M-PESA product of

Safaricom, a subsidiary of Vodafone UK in Kenya; and the G-CASH offering of Globe

Telecom, a Philippine subsidiary of the Singapore Telecommunications Group.

Each of the abovementioned companies has launched m-payment services that facilitate

financial inclusion. The following is a common set of features offered by these

services:51

Information: These systems provide information as to balances on hand and deposit

and withdrawal history

48 Cf. Williams and Torma (2007), pg. 29. 49 Cf. Prahalad (2006), pg. 57. 50 Cf. Hughes and Lonie (2007), pg. 46. 51 Cf. Williams and Torma (2007), pg. 31.

Transactions: The systems allow funds transfers between accounts

Money deposit and withdrawal services

Payments: A variety of m-payment applications are offered

Table 8

Description of the Needs of Customers at the Base of the Pyramid

Savings Ability to make small and sporadic payments into savings accounts

Security Ability to keep small amounts of money in a safe place (the mobile

application)

P2P transfers An important aspect for people who do not have a regular job and depend

on local or international remittances

Accessibility Easy and low cost

Convenient, easy-to-

understand procedures Send money, make payments, deposits and cash withdrawals

Low, transparent prices In many countries, banking costs are too high for the common people to

maintain an account

SOURCE: Williams and Torma (2007), pg. 31

3.1 WIZZIT – SOUTH AFRICA

A third of the population of South Africa and Botswana is unbanked but has access to a

mobile phone.52

In 2004, the WIZZIT MFS provider took advantage of this state of

affairs to launch its services, which are 33% less expensive than those of the country‟s

financial institutions. A poll taken in 2006 showed that while the cost of financial

services for the poor amounted to 3% of their annual income, a WIZZIT account cost

them just 2% per year, or around US$6.00 per month.53

WIZZIT, despite being a commercial bank division, describes its business as “virtual

banking”,54

enabling financial transactions from its bank accounts through mobile

phones and debit cards.55

Consumers can make P2P payments, transfer money and

purchase services through their mobile phones.56

In 2009, new subscribers were paying

a service activation fee of US$6.00. WIZZIT applies a pay-as-you-go collection system

52 Cf. Ivatury and Pickens (2006), pg. 43. and WIZZIT, <www.wizzit.co.za>. 53 Cf. Ivatury and Pickens (2006), Appendix A. 54 Cf. CGAP (2006), pg. 29. 55 Cf. Ivatury and Pickens (2006), pg. xxx; „Mobile Phone Banking and Low-Income

Customers: Evidence from South Africa‟, CGAP, U.N., VGF, Washington, D.C.; Williams, H.,

Torma, M., 2007, “Trust and Fidelity: From „under the mattress‟ to the mobile phone”. In

The Transformational Potential of Mobile Transactions, The Policy Paper Series, Vodafone,

U.K. Also, Ivatury, G., Mas, I., 2008, “The Early Experience with Branchless Banking”,

CGAP, Focus Note No. 46. Also, Lyman, 2008, “Regulating Transformational Branchless

Banking: Mobile Phones and Other Technology to Increase Access to Finance”, CGAP Focus

Note No. 43. 56 WIZZIT also offers its customers a master debit card for transactions at any ATM in the

country. Users can also make deposits at other banks and post offices. More in Ivatury and

Mas (2008), pg. 23.

that charges from US$0.13 to US$0.66 per transaction. This company requires no

minimum balance and charges no monthly account-maintenance fee.

WIZZIT‟s main marketing force is a robust agent network consisting of “Wizzkids”,

who are previously unemployed youths who handle P2P service promotion and make

commissions for each new subscriber they sign up. This strategy saves the company

money on user training, since the Wizzkids have an important incentive to properly

instruct their new customers. They also perform certain administrative tasks of opening

WIZZIT accounts.57

The WIZZIT service is not run by a mobile operator or banking institution,58

but rather

by an independent provider who packaged a mobile-based branchless banking service

that uses the South African Bank of Athens as the holder of customer accounts.59

The

following figure illustrates its operation.

Figure 9

WIZZIT's Mobile Banking System

SOURCE: Richardson (2006), pg. 15

Banks usually charge a fixed account fee of 50 to 100 rand a month.60

On top of this,

ATM costs are nearly 4% of the amount withdrawn. WIZZIT, on the other hand,

charges 3 rand for most transactions. Furthermore, the service works on any handset or

SIM card from any operator in the country.61

Finally, because it is part of South Africa‟s

57 The South African Minister of Finance issued Exemption 17 to South African FICA

regulations, allowing WIZZIT to take advantage of flexibility in KYC/AML regulations. An

upper balance limit of 25,000 rand and a transaction limit of 5,000 rand were also set.

Wizzkids are allowed to handle account opening and transaction processes for customers.

More in Lyman (2008), pg. 31. 58 Ivatury and Mas (2008), pg. 43. 59 Ivatury and Pickens (2006), pg. 7. 60 The rand is the legal tender of South Africa. 61 Cf. Williams (2007), pg. 68.

interbank clearing house system, the service enables operations with other banks in the

financial system.

3.2 M-PESA – KENYA62

M-PESA is the most successful m-payment system worldwide. Launched as a pilot

project in 2005 and nationwide since 2007, it had 13 million users by August 2011.63

While banking institutions have 876 branches and 1,424 ATMs in Kenya, M-PESA has

a system of 20,000 agents throughout the country and is therefore the most accessible

means of financial services for the people. It is important to point out that only 5 million

of the country‟s 31 million inhabitants have a banking account.

M-PESA system is reliable, secure and easy to operate. Transactions are done in real

time and SMS confirmations are received by both the issuer and the receiver of a

transfer or payment. There is also a back-office system that tracks and stores each

transaction. The M-PESA platform is equipped with all the security measures inherent

in AML/CFT practices. Furthermore, the creation of an agent network has not only

facilitated people‟s access to this service but has also fostered the development of

enterprises related to this business.

Nevertheless, the most important attribute of the service is that M-PESA has improved

the quality of life of Kenyans. In this case, the success factor was not the technology

itself but rather the adoption of the technology by users, especially the poor sectors of

society.64

62 Cfr: Hughes, N, Lonie, S, 2007, “M-PESA: Mobile Money for the „Unbanked‟: Turning

Cellphones into 24-Hour Tellers in Kenya”, MIT, Innovations: Technology, Governance,

Globalization, Vol. 2, No. 1-2, pp. 63-81. Also, Vodafone, 2007, “The Transformational

Potential of M-Transactions.” Also, Pulver, C., 2009, „The Performance and Impact of M-

PESA: Preliminary Evidence from a Household Survey”. Available at

<http://www.mobilemoneysummit.com/presentations.shtml>. Also in Rosenberg, 2008,

“Why has M-PESA become so popular in Kenya?” Available at

<http://technology.cgap.org/2008/06/17/why-has-m-pesa-become-so-popular-in-kenya/>.

Also in Rotman, S., 2008, “M-PESA: a very simple and secure customer proposition”.

Available at <http://technology.cgap.org/2008/11/05/m-pesa-a-very-simple-and-secure-

customer-proposition/>. Also in Rosenberg, J., 2008, “Lessons from M-PESA – a

conversation with Nick Hughes, Vodafone Head of International Mobile Payment Solutions”.

Available at

<mms://wbmswebcast1.worldbank.org/CGAP/10675199/BBLTechnologyTeam_20081029.w

mv>. Also, Rosenberg, J., 2009, “An M-PESA pioneer: Nick Hughes”. Available at

<http://technology.cgap.org/2009/06/10/an-m-pesa-pioneer-nick-hughes/>. Also,

Alexandre, C., 2009, “The Regulatory Landscape for Mobile Money: A Practitioner‟s View”.

Available at <http://www.mobilemoneysummit.com/thanks.shtml> . Also at

<http://www.safaricom.co.ke/index.php?id=745>. 63 Cf. Pulver (2009), pg. 16. 64 Cf.: Pulver (2009), pg. 16; Rosenberg (2008), pg. 2; Williams (2007), pg. 35.

3.2.1 THE M- PESA SYSTEM

The M-PESA platform has a central float where customers have a unique account

administered by a holding company set up by Vodafone and Safaricom. The float thus

remains the property of the customers at all times.

Vodafone cannot invest customer funds placed in M-PESA e-wallets. Similarly,

Safaricom has not become a deposit-taking institution.65

The M-PESA float is banked

with the Commercial Bank of Africa, which manages the fund directly for the holding

company, and not for each M-PESA customer. 66

To open a new M-PESA account, customers must present their ID card and the agent

must issue them a new SIM card with the M-PESA e-wallet application that enables m-

transactions.

Figure 10

The M-PESA System

SOURCE: M-PESA brochures

The agent network is divided into several levels ranging from “super agents” to “sub-

agents”. As illustrated in Figure 11, the role of M-PESA agents is to facilitate access to

cash for customers lacking financial services. The different ranks for agents also enable

cash flow from large agents to small ones located near their customers. Thus, a small

agent need not go to a bank to make a deposit but can do so directly with a higher

ranking agent, and so purchase m-money.

65 CF. Rotman (2008), pg. 15. 66 Cf. Williams (2007), pg. 43.

Figure 11

The Role of M-PESA Agents

SOURCE: M-PESA brochures

Figure 12

M-PESA Growth

SOURCE: Safaricom Statistics (2011), www.safaricom.co.ke

As seen in the figure above, the M-PESA user base continues to show strong growth,

with 13.8 customers in March 2011. The service‟s distribution network also expanded to

26,948 agents nationwide in 2011.

M-PESA has helped to alleviate the effects of poverty in Kenya. Between 2006 and

2009, there was a 6% increase in the number of people with access to financial services.

Likewise, the number of those now using M-PESA services rather than resorting to

informal moneylenders has risen by 9%.

Figure 13

M-PESA Agent Participation

SOURCE: FSD (2009), pg. 6

The performance and social impact of M-PESA were evaluated in a study by Financial

Sector Deepening Kenya in 2009.67

Prior to M-PESA, money transfers were mostly

made through “hand-to-hand” means (58%) or public transportation services (27%).

The risks and costs involved in these methods caused people serious problems. It was

clear that in a cash-based society, a P2P payment service would be a huge generation of

value for its users and would substantially reduce the cost of sending money within the

country.

67 The results were presented in June 2009 at the Mobile Money Summit. Available at

<http://www.mobilemoneysummit.com/thanks.shtml>.

Figure 14

Methods of Sending Money: Before and After M-PESA

SOURCE: FSD (2009)

Aside from its accessibility, the M-PESA service was described as being very easy to

use by 81% of survey respondents. Moreover, 66% said they understood the fee system

applied. Agent liquidity problems are a major drawback of the system, however.

Figure 15

Comparison of M-PESA with Alternatives

SOURCE: FSD (2009)

Finally, the populace of Kenya has obviously embraced the service wholeheartedly,

since statistics show that 84% of the population would consider the loss of M-PESA

service in the country to be largely detrimental.

Before After

Figure 16

What Would Be the Effect of Losing M-PESA Service?

SOURCE: FSD (2009)

3.3 G – CASH – The PHILIPPINES

G-CASH is an open platform that enables MFS implementation and facilitates

interaction between banks, retailers, the government and other participants.68

All

transactions are carried out by SMS and there is no need to change the SIM card.

Figure 17

G-CASH Model

SOURCE: Williams (2007), pg. 68

To meet AML requirements, the customer must fill out a form via SMS that enables

tracing transactions. This system sets limits for money transmittal.

68 This section is based on Mendes et al. (2007). Also, Porteous (2006).

G-CASH alliances also enable international remittances. There is a single-transaction

limit of US$200 and a monthly limit of US$2,000. G-CASH endeavors to serve not only

the unbanked but also to enhance customer experience for those who already have a

bank account.

The following table sums up the features of the three services:

Table 9

Comparison of Functions and Features

of the Three M-Payment Models Discussed

FUNCTIONS

WIZZIT M-PESA G-CASH

Information YES YES YES

Transaction YES YES YES

Payment NO YES YES

STRUCTURAL FEATURES

WIZZIT M-PESA G-CASH

Open or closed

system

Open Closed Open

Interoperability YES NO YES

Who holds the

customers’

deposits?

Bank M-PESA float Bank

Cash in and out

mechanism

Bank card – ATMs,

WIZZIT agents

Authorized agents Authorized agents

Transaction limits

(AML)

YES YES YES

User cost Per transaction Per transaction Per transaction

CONSUMER EXPERIENCE

WIZZIT M-PESA G-CASH

Security YES YES YES

P2P payments To any bank account

holder and WIZZIT

account holders

Only to those holding an M-

PESA account

To any bank account

holder and G-CASH

account holder

Convenience of use All transactions may

be made through bank

cards as well as

mobile phones

Only M-PESA-enabled phones

may be used for cash deposits

and remittances, but funds may

be received on any mobile

phone

All transactions may

be made through bank

cards as well as

mobile phones

Transaction-based

pricing

YES YES YES

SOURCE: Mas and Rosenberg (2008), pg. 18

Table 9 illustrates how this type of service is producing value innovation for the world‟s

BOP population. The interaction of the financial and telecommunications industries has

a transformative effect that is enhancing the quality of life of these people. Williams and

Torma (2007) point out that simply reducing the risk of crime by eliminating the need to

carry cash is, in and of itself, a major benefit. If we add to this the lower cost of services

and the reduced time spent in accessing them, these services can indeed transform the

lives of people in emerging economies.69

In conclusion, it has been shown that m-transactions can improve access to financial

services for the poor. While there are unavoidable fixed costs for a financial institution

in opening a new branch, mobile financial services represent an alternative for social

expansion in this area.

Similarly, there should be open dialogue between regulators and providers to delineate

the appropriate set of rules that will enable innovation and growth in this industry

segment. Improved regulation and control systems can protect the consumer and

prevent fraudulent practices, money laundering and terrorist financing. Another major

concern is developing strategic partnerships to maximize interoperability, reinforce

international transactions and foster healthy competition to better serve the traditionally

neglected markets of the economic and social BOP in developing countries.

4. AN ECUADOR-ORIENTED CONCEPTUALIZATION OF MOBILE MONEY

On the basis of the concepts discussed in this document, the Central Bank of Ecuador

considered the issuance of m-money as an exclusive function of the State based on the

following considerations:

From the constitutional standpoint, Article 302 of the Constitution of the

Republic stipulates that the objectives of monetary, credit, exchange and

financial policies shall be, among others, to provide the necessary means of

payment for the economic system to operate efficiently. Moreover, Article 303

of the Constitution of the Republic dictates that monetary, credit, exchange and

financial policymaking is the exclusive faculty of the Executive Branch and

shall be implemented through the Central Bank of Ecuador. Furthermore, the

law shall regulate the circulation of legal tender within Ecuador.

From the standpoint of public policy, it was considered that electronic money

and its issuance should be an exclusive function of the State, thereby ensuring its

ready availability to the users of this means of payment and assuring them of its

debt-discharging power.

From the standpoint of availability, Advanced Mobile Service was deemed to be

the most accessible technology for the popular social sectors in Ecuador, since

there are now as many active cell phone lines as there are Ecuadorians. In

addition, people of low income have, in practice, been excluded from access to

the services of the traditional financial system.

In accord with these considerations, and by virtue of the powers granted by letter b) of

Article 60 of the Monetary System and Central Bank Act, the Central Bank of Ecuador

defined electronic money and m-money as a part of thereof, as follows:

69 Cf. Williams and Torma (2007), pg. 17.

Electronic money is the monetary value equivalent to the value expressed in the nation‟s

legal tender that is:

a) Electronically stored in an electronic instrument or mobile device and

exchanged via electronic or mobile devices;

b) Accepted as having debt-discharging power and as a means of payment

by all economic agents in Ecuador;

c) Convertible to cash at its nominal value with no discount except

whatever charge is strictly necessary to carry out the operation; and,

d) Issued by the Central Bank of Ecuador and thus recorded on the liabilities

side of the Bank‟s balance sheet.

This definition, included in Regulation No-DBCE-017-2011 issued by the Board of

Directors of the Central Bank of Ecuador, further states:

Electronic money does not constitute a deposit or any other type of funding

under the terms stated in Article 51 of the General Law of Financial System

Institutions.

The Central Bank of Ecuador, or the entities duly authorized by the Board of

Directors of the Central Bank of Ecuador to distribute electronic money, may

use correspondents or agents for the purpose of distributing electronic money.

The owner or holder of electronic money may, at any time, request the issuer, or

the correspondents or agents acting on its behalf, for reimbursement of the

money value either in currency or by transfer to an account in the financial

system, at only whatever cost is strictly necessary to carry out the operation.

Electronic money shall be recorded in the System of Operations of the General

Balance Sheet of the Central Bank of Ecuador.

Electronic money transacted via the Mobile Payment and Transaction System of

the Central Bank of Ecuador is called mobile money.

5. CONCLUSIONS

Mobile payment systems are electronic money issuing systems operated by EMIs

and based on different operating models in accordance with existing regulations in

each country.

However, emerging economies still lack strong regulatory frameworks to clarify the

roles of financial entities, mobile operators and specialized companies when they

become EMIs and establish the rules of operation, issuance, control and supervision

for these economic agents.

The fundamental role of central banks is to control and oversee the operations of

EMIs so as to prevent the creation of unregulated money generating systems.

Issuance and widespread use of e-money has a direct impact on the demand for

money and velocity of circulation. This affects national monetary policy decisions.

Therefore, central banks must be equipped with regulatory and operational tools that

enable them to adequately control the overall monetary situation of their countries,

including all existing traditional and e-money payment systems.

Based on a study of the different m-money models around the world, and taking into

account the social and economic characteristics of Ecuador, the Central Bank of

Ecuador has developed a central model of e-money issuance that aims to create a

virtuous system of cash flow that reduces the cost of accessing money, facilitates

financial services access and has a favorable impact on national productivity,

especially in the popular and socially supportive economic sectors.

This proposal, called the National Mobile Payment and Transaction System, is

based on four pillars: i) Creation of the regulatory framework; ii) Implementation of

the Technology Platform at the CBE; iii) Design of m-money agent networks for

Ecuador and its rural zones; and iv) Mainstreaming of m-money use in the country.

The Central Bank of Ecuador must ensure that m-money fulfills the three primary

functions of currency in an economy: as a medium of exchange, a unit of account

and a store of value.

The State of Ecuador, by way of the Central Bank of Ecuador, must assume the

responsibility for the secure use of this electronic payment medium throughout the

nation, assuring that money issuance is recorded in the same way as all other CBE

liabilities.

6. RECOMMENDATIONS

The NMPTS is a strategic project aimed at social sectors without access to financial

services in Ecuador. It is the first time in the world that a State has undertaken to

implement a process of low-value cash payment and transaction solutions through

mobile phone technology with the aim of creating an inclusive service to directly

benefit the needy as a matter of national policy.

The CBE acts as the sole issuer of e-money in the economy, turning mobile money

into a public good with equal levels of access, security and coverage for all

inhabitants of Ecuador.

The formation of transaction agent networks is essential to successful NMPTS

implementation, because these networks will enable the necessary capillarity so that

people do not have to travel large distances to obtain money sent by family,

providers or customers, thus increasing the velocity of circulation and helping to

keep liquidity in the production areas of Ecuador.

The creation of the NMPTS sends a clear message to the financial system, the

telecommunications industry and to society at large that the issuance of electronic

money is an exclusive province of the Ecuadorian State and that its aim is to

dramatically reduce the transaction costs of money access in Ecuador while

facilitating the mainstreaming of m-money use in accord with the criteria of

universal access, ease of use, security of transactions and central bank support on

which it is based.

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