Does mobile banking require a card?
This may seem like a strange question. Mobile banking was always going to be the alternative to cards, a cheaper and easier to manage product/channel combination that would remove the straightjacket of pricing and regulations associated with the card industry. This would allow microfinance institutions to avoid the costs associated with issuing and managing cards and the expensive infrastructure on which they can be used. A growing number of practitioners and providers believe this is a simplistic view. However, it now seems likely that realizing the full potential of mobile banking will most likely come from the integration of mobile and card solutions, products and channels.
So what changed? The first factor to consider is that in many markets the mobile payments revolution is “slow”. Ten years after the first mobile payment platforms appeared, in most places they have not transformed the payment landscape.2 However, in that time, the number of conventional cards issued and the places where they can be used has increased. Figure 1 shows the experience in Nigeria, which is no different from most markets in Africa and Asia.
The number of retail banking customers with access to a core card product has doubled in most emerging markets over the past five years. This first wave of card adoption is now expected to face another wave with the role of even cheaper “prepaid” card products that will reach further down the pyramid.
While it’s true that in most low-income markets there are still probably four times as many mobile subscribers as bank customers, an increasing number of those customers will carry some form of payment card. Governments often drive this process – requiring civil servants to receive their wages in a low-cost account, or employers to pay workers into something like an account, or to make welfare payments directly into bank accounts. Such payments are particularly difficult for agent networks to sustain, as they are often faced with large requests for cash at the end of the month before customers have “spent” their money to allow the merchant to accumulate cash.
If a mobile payment service provider is to meet all of its customers’ convenience needs and prevent them from having both a mobile payment product and a conventional bank account, the best way to achieve this is to give them access to an ATM and/or debit card. One of the most interesting innovations in Kenya in the last year was when M-PESA introduced non-card-based ATM withdrawals to support its mobile payments service. Likewise, if MFIs are looking to lend through m-banking channels, borrowers’ requirements for agent liquidity are likely to be huge – and thus ATMs are the obvious solution. Customers will likely be willing to travel further to access a larger amount. In fact, they will often necessarily be in the local market town (where there are ATMs) to buy the goods or raw materials financed by their loan.
Smart Money in the Philippines, one of the earliest innovators in mobile payments, now issues a co-branded Maestro debit card when customers sign up for the service. While this adds cost and complexity to the business model, the benefits to the customer are significant. They have access to around 8,000 ATMs operating in the country, as well as the rapidly growing POS network. Despite the progress made by Smart Money in building an agent network, access to this infrastructure brings significant benefits to the client.
The second factor to consider is what we now know about how people will use mobile payments. Many early innovators in mobile payments envisioned a world where there would be a constant and ubiquitous flow of electronic payments between individuals for all payments, replacing the need for cash and ATM withdrawals. This has not happened. Mobile payments are successful in environments where face-to-face transactions are not possible (long-distance domestic remittances), for low-volume, high-value transactions, and where large “network effects” exist. Success stories in mobile payments have made it clear that many low-income people who support families and friends in the country can and will accept a convenient, low-cost solution when there are enough points to deposit and withdraw. Making a one-off large payment once a month – for example for rent – may be a good example of a low-volume, high-value payment, but your landlord is unlikely to be happy if they have to register a new account in order to receive the rent. Kenya, where the hugely successful M-PESA platform has by some accounts signed up 1 in 3 adults, is starting to experience a network effect (there is now a 1 in 3 chance that the landlord in our previous example has an M-PESA account!).
The reason mobile payments haven’t broken out of these categories is that current mobile payment technologies may simply be too “clumsy” for many face-to-face interactions. Try fiddling with your phone while typing and responding to a stream of confirmation texts and waiting for the merchant to do the same when there are three other people waiting to be served. (This is not the case with near-field, touch-and-go technology, but this has not been implemented anywhere in low-income markets). However, swiping a card and entering a PIN or signing takes much less time for all concerned where there are POS systems.
The third factor is to rethink what “map” means. More valuable than the piece of plastic may be the ecosystem of the card industry typified by the card associations (Visa and Mastercard). The easiest way to achieve a network effect for any player is by choosing an interoperable environment. Any Visa or Mastercard product issued by any payment service provider or bank can be “accepted” or used in any infrastructure provided by any other member of the association, enabling even small niche players such as MFIs, to attract investment from much larger players in ATM/ POS infrastructure and rapidly achieve scale in distribution. Being part of the ecosystem of card collaborators brings other benefits. Mobile payments are particularly subject to dispute or dispute, for example “I didn’t want to press the payment button” or “I didn’t receive the payment” are common complaints or calls received in the call center of mobile payment providers. With mobile payments and unlike an ATM or POS transaction, there is no piece of paper to make dispute resolution difficult.
Payment instruments issued under card association rules have well-established policies and procedures to deal with overcharging and fraud, which most financial institutions in a country will have signed up to and which are supported by a vast body of legal experience and precedent. This makes dispute resolution much cheaper for individuals and institutions.
Bottom Line: Implications for MFIs Combining a card with a mobile solution will undoubtedly increase the complexity of launching a mobile payment solution. But enabling consumers to take advantage of existing card infrastructure can significantly reduce the risk of customer adoption of mobile payment solutions in all but the most remote locations, as it will remove customer concerns about where to cash in on the value and risk that the local agent doesn’t have enough money to meet their needs. A combined card and mobile solution also faces much less risk of becoming irrelevant as more and more banks refine their mobile payment channels.
Cards can actually be the last mile in mobile payments – if anyone with a mobile phone can receive funds from anyone with a card, this could dramatically expand small business demand for mobile payment services. Getting a point of sale in each organ’s pocket could be the next milestone. There is no doubt that now that 50% of the world’s population has a mobile phone, this will eventually change payments, but a combined offering may be necessary over the next ten years to optimize the customer experience. While many small businesses resent the discounts they pay banks for the right to acquire a card transaction, history shows that they resent losing a potential sale even more.
Note for prepaid cards: Prepaid cards come in different formats in different markets and can be single-use or reusable; card association or cardless association; and can be reloaded with a value. They differ from traditional debit products in that they are pre-loaded with value, usually not requiring a bank to open an account (the account and card amount information is stored in a database, usually provided by the card company). They are increasingly used for government welfare payments and can be issued by banks or retailers. They are generally much cheaper to issue and host than conventional card products.
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