Mobile Money

Presented by Ingrid Sturgis, SNCR Fellow, Howard University

8th Annual SNCR Research Symposium

Thomson Reuters

Boston, Mass.

11/7/13 www.sncr.org

Brief history

• Precursor to M-Pesa: Smart Money launched in 2001 in the Philippines.

• But M-Pesa growth in rural Kenya unprecedented.

• The M-Pesa instigated wave of interest in mobile money.

• Nearly 120 mobile money deployments.

• Forecasts: 615M mobile wallets in use by 2011

Brief history

• In 2007, a mobile money pilot co-funded by Vodafone and the International Development Challenge Fund launched M-PESA through Safaricom (the Kenyan Vodafone affiliate)

• Year One: 111,000 people registered.

• Year Two: 1.6 million registered users and a network of 1,200 agents

• By 2010: M-PESA had 20,000 agents and nearly 13 million subscribers – larger than Western Union

How money was sent pre-M-Pesa • In Kenya, to transfer money from bank, customers had to travel long distances,

stand in line with a fistful of cash, fill out paperwork.

• Informal deliveries by bus companies.

• Parcel transfer deliveries at bus terminal

• Money disguised in packages for delivery via bus terminals.

• Post office offered money transfer products and money orders delivered to nearest post office.

• Western Union and Moneygram offered transfer services.

Features of mobile money • Kenyan households use M-PESA for person-to-person transfers, school fees,

mobile phone credit, electricity bills

• M-PESA faster, more reliable, and convenient than a traditional bank

• 25,000 M-PESA agents vs. 850 bank branches

• M-PESA agents at gas stations and grocery stores, and some open 24-hours a day

• Although M-PESA balances do not earn interest, the service has some of the functions of a bank account but is much easier to access, and much easier to manage

How does mobile money work?

Works on basic cell phone

Customer deposit funds by giving cash to agent who credit the account using a special text-messaging system.

Subscribers can make payments from their accounts to retailers or transfer money to others.

Subscribers can withdraw cash from any agent in the system, for a fee.

Mobile money’s impact

Revolutionized local economies in Africa and Asia

Alternative methods to buy and sell, send remittances

Use inexpensive, low-tech cell phones

Still relatively inexpensive

Definitions Diniz, E. H., de Albuquerque, J. P., & Cernev, A. K. (2011). Mobile Money and Payment: a literature review based on academic and practitioner-oriented publications (2001-2011). In Proceedings of SIG Global Development Fourth Annual Workshop, Shanghai, China (pp. 1-27).

Mobile transactions

This refers to transactions carried out through mobile technologies and devices.

Includes mobile payments, and other mobile transaction offered by technology, whether it involves financial values or not.

Mobile payments

Includes payments made with handheld devices with or without mobile telecommunications networks.

Transactions not necessarily linked to financial institutions or banks.

Mobile banking

Mobile banking services conducted via telecommunications networks that provide access to banking and other financial services linked to customer accounts with or without direct participation of traditional banking institutions.

Mobile money

• Electronic money with attributes related to mobility and portability. Equivalent to mobile-money or mobile-cash.

• Replicates attributes of traditional money, such as: liquidity, acceptability and anonymity.

• AKA mobile wallet, a digital repository of electronic money that allows peer-to-peer transactions and mobile devices

• Wallet services can use a mobile money wallet which is a virtual wallet to store eMoney.

Other terms

• Depositing money into a mobile money account is called a cash-in. A cash-out is withdrawing money. Both of these are normally agent assisted.

• MNO – Mobile Network Operator (Safaricom, Verizon, Sprint)

Other terms

• P2P Person-to-person money transfer.

• Bill Payment Payment of a utility or other bill using your mobile money account.

• Airtime Top-Up Topping up airtime for recharging a GSM account through a mobile money account.

• Merchant Payment Payment for good or services at a store using a mobile money account.

• Bulk Payment One-to-many transfers such as salary disbursal is a bulk payment.

Mobile trends .

Shrinking digital divide?

• Low- and moderate-income consumers are still less likely to have home internet access.

• View phones as a necessity, and use them in greater numbers than Americans as a whole to manage their money.

Mobile phone use

• 2.7 billion people worldwide have no access to financial services.

• 1 billion of these people have a mobile phone.

• Trust and dependence on MNOs is already very high in these markets making them viable for launching such a service

Mobile money adoption

Nearly 400 million mobile phone users worldwide are expected to use mobile money transfer by 2018.

Up from just under 150 million this year.

Remittances

Airtime top-up is the primary mobile international remittance opportunity

Money transfer platforms are becoming increasingly modular

Latin America and the Caribbean received $61.3 billion in remittances in 2011

Unbanked in U.S.

- Federal Deposit Insurance Corporation

Financial trend

• More than 64 percent of Americans do not have $1,000 cash on hand to meet unplanned emergencies.

• These consumers often turn to more expensive forms of credit like bank overdraft or payday loans

Who are the unbanked in the U.S.

• Nearly 17 million adults have no bank account

• 7.3 percent of all adults in the United States.

• The largest number in the South.

• Least number in the Midwest or Northeast.

Who are unbanked? People impacted by severe recession

One in four U.S. households, or 28.3%, are either unbanked or underbanked

8.2% of U.S. households, or nearly 10 million, lack a bank account

Up from 7.7%, or about 9 million households, in 2009.

- Federal Deposit Insurance Corporation

Who are unbanked?

8.2% of all households don't have a checking account or a primary banking relationship

Minority (Black, Latino)

Unemployed

Young

Lower-income households

- Federal Deposit Insurance Corporation

21% of blacks are unbanked

22% of foreign-born non-citizens

23% of households with unemployed members

28% of households earning less than $15,000.

Unbanked worldwide

• More than half the world's population, some 2.5 billion adults do not use formal financial services,

• Asia, Africa, Latin America and the Middle East account for nearly 90 percent of those without bank accounts

• In many of these regions, banking institutions are not readily accessible, and people have to travel great distances to use them.

- Federal Deposit Insurance Corporation

Unbanked vs. underbanked

• There are 51 million underbanked adults with basic checking or savings account.

• Underbanked also use alternative financial services, such as nonbank money orders, check-cashing services, payday loans, rent-to-own agreements, pawn shops, refund-anticipation loans, or nonbank remittances.

• May have a salary of as much as $50,000 and nearly 29 percent of them are more likely to make use of mobile banking.

Underbanked

Recent college grads in debt from student loans and underemployed.

Use alternate services for quick access to cash to avoid extra charges

Less likely to own computers and broadband connections

More likely to own smartphones

Have bank accounts but use alternative financial services

20.1%, or 24 million, U.S. households

Up from 18.2% in 2009

18-24, young, first-time workers

Black, Latino

Underbanked

91% of those identified as underbanked have mobile phones

57% have smartphones

87% of U.S. consumers have mobile phones

44% have smartphones.

Underbanked consumers • Driven by convenience.

• 29% percent have used mobile banking in the past 12 months, compared to 21% all consumers.

• Are heavier users of mobile payments (17% vs. 12%).

Underbanked consumers

May require several manual steps or trips to multiple locations to cash checks, pay bills or transfer money using products and providers

Alternative: Conduct transactions via phone to reduce time and cost for consumers

Why do this research?

• Investigate the phenomenon of the mobile economy, which may alter the trajectory of digital divide and financial services.

• Add to information about factors that contribute to the adoption of new technology by African Americans

• Build information about how new communications technology contributes to local entrepreneurship

Why do this research?

• Look at technology adoption and transfer mobile banking to the United States using similar technology used in Africa and India.

• Potential for disruption to established financial industries opens many avenues for additional research.

Why do the research?

How low income people can use new tech to support families, communities and institutions

Models of sustainable development. Useful to policy makers and funding sources

Monetizing content, developments in mobile news platforms

Bank accounts .

Why don’t some people in the U.S. have bank accounts?

• The economic downturn has thrown some middle-class families into poverty.

• In addition, banks historically have not viewed low-income groups as a profitable revenue source

• Other reasons: Lack of trust in the institution

• High banking fees or high minimum-balance requirements.

• Poor credit

Why don’t people have bank accounts?

• Cannot meet ID requirements

• Concern about immigration status or language barriers

• Accustomed to cash-based societies

• No neighborhood banks

• Less liquidity

• Better, more efficient services from nontraditional financial alternatives

Why no bank account?

Didn’t need or want an account

Didn't trust banks

High bounced check fees

High minimum balance requirements

Denied accounts because of ID issues or bad bank track records

Subprime alternatives

• Subprime credit cards (39.4% of the market)

• Prepaid cards (21.8% of the market)

• Payday loans (32.4% of the market)

• Pawnshops

• Check-cashing services (Wells Fargo invested in MoneyMart)

• Check-cashing fees =$1,000 a year

• Interest rates for payday loans as high as 425%

Cost of being unbanked

• Cannot rent a car

• Cannot buy plane tickets online

• Cannot get a mortgage

• Vulnerable to theft and losses

• Cannot build credit history

• Cannot access credit

• Cannot save for emergency and long-term security needs

Mobile money impact

Some studies say that mobile money has the potential to lift low-income

people out of poverty.

According to the National Bureau of Economic Research, the M-Pesa

phenomenon has improved economic activity among families by making money

transfer safe, easy and inexpensive.

People are able to manage cash flow and manage risks, as well as build family

funds for major life events.

As a result, small businesses are revitalized, and more money circulates in the

community.

Mobile money impact

Even people who exist on less than $5 a day have a need for financial services.

Mobile-money technology has the potential to revolutionize financial services

Can offer low-income and immigrant families’ access to capital and an opportunity to save for the future.

Mobile money impact

Prediction: Mobile technology will be as disruptive as the Internet.

In many countries, mobile phone allows poor to park money in a safe place and to send money to family members.

No need to rely on a bank for financial services.

Mobile impact

In the U.S., African-Americans have leapfrogged from the desktop computer to mobile phones for news, information and entertainment.

327 million people use mobile phones in the U.S.

Mobile use now exceeds PC Internet access.

Mobile phones outnumber ATMs, giving cell phone operators a greater reach than banks.

In Haiti, nearly 90 percent of the population has mobile phones, but only 10 percent have bank accounts.

Mobile banking -- “killer app” for next generation of

mobile technology -- German mobile operator Mobilcom

Alternatives to banks?

Harvard Business Review:

• Do you have a bank account may not be the right question to ask low-income financial consumers

• Instead: Is there access to low-cost, predictable, reliable services?

Focus of research

• In U.S., number of foreign-born blacks tripled from 125,000 to 2.8M over three decades

• About two-thirds from the Caribbean (Jamaica, Haiti) and Latin America

• One-third from Africa

• Haitians—the second-largest Caribbean group

• 85 percent have mobile phones

• Few hold bank accounts

• 2010 earthquake: Red Cross received $5 million in $10 text messages

Focus of research

Young blacks as early adapters (use technology in unintended ways)

African-Americans use cell phones at a greater rate (Pew)

Minorities send more text messages

Research questions

What are the challenges and likely effects of implementing mobile banking among low-income African Americans without bank accounts in the United State?

• R1: Has the U.S. banking crisis created a level of consumer distrust that opens the door to alternative means of transactions such as mobile banking among those without current services?

• R2: Does the high cost of maintaining a bank account create an opportunity for low-cost alternatives like mobile money?

Research questions

R3: What regulatory issues need to be resolved to implement mobile money?

R4: What investment incentives could lead to development of mobile banking?

Survey link: http://sncr.us.qualtrics.com/SE/?SID=SV_cIx5yYkYBVCDY32

Preliminary findings .

Respondents

Mostly African-American

Most college graduates, 40% college degree

More than half 34 or younger

Mostly female

Almost half employed full time

20% earn less than $15,000

Most earn $25,000 to $75,000

Respondents

More than half single

82% had bank accounts

Most likely to sign up for mobile money services

Respondents

98% had a working mobile phone

More than half familiar with mobile money

Most didn’t use cell phones to send donations

Those who did sent $5-$25 through their cell phone company

Half sent money via their phone to someone in U.S.

Potential mobile money users

Wanted inexpensive, easy-to-use service with strong security that had fewer fees than banks

Most concerned about security in use of mobile money

More help for consumers

Treasury Dept. to help low-income consumers

•MyMoneyAppUp Challenge by the Treasury Dept. in partnership with the D2D Fund and Center for Financial Services Innovation,

• Help Americans control and shape their financial futures. Challenge calls for mobile app ideas (IdeaBank) and designs (App Design),

•Incorporate data to empower consumers, as part of Treasury’s initiative to promote Smart Disclosure.

More attention to issue

Debt free movement by black churches

Entrepreneurs offer less expensive borrowing schemes

More entrepreneurs to address the unbanked and underbanked

More attention

Gates Foundation partnered with the International Finance Corporation, the UN Capital Development Fund, and the financial inclusion consultancy, MicroSave, to launch Agent Network Accelerator.

To increase global understanding of how to build and manage sustainable CICO agent networks in poor communities.

More attention

• Biggest players: Paypal; Obopay, Western Union, Google Wallet, Finserv

• MasterCard: Suite of options include: SMS/pay by text, mobile compatible payment sites and eBills

• Merchant Customer Exchange = Wal-Mart, Target, 7-11 and Best Buy

• Bluebird = Wal-Mart and American Express

• Mopay – charged to phone bill

• Cell phone providers

Disruptive trends .

Entrepreneurial Trends

• Sociogramics Founded by Gary Kremen, Match.com founder. Mines social media data to help banks authenticate, underwrite and engage customers – particularly those with little credit.

• Verifying employment through social media data can be cheaper and more effective than traditional methods.

• Use social networks as forces of positive peer pressure by having friends and family encourage good financial behavior, like making a loan payment on time or making a deposit in a savings account.

Trends

• Juntos Finanzas, a low-tech SMS-based service that helps cash-based Latinos track monthly spending and build savings.

• Santander Consumer USA. Auto equity loan for subprime and near-prime consumers.

Analytics

Technology and analytics platform powers online financial products to bridge the gap between payday loans and credit cards.

Offered directly by Think Finance or through banks and non-bank lenders.

For banks

• �Needs of unbanked and underbanked consumers will deliver change throughout the financial services by creating mutual benefit for customers and companies serving them.

Areas of further research

• Social Networks: The power of the crowd to influence personal financial management, enable opportunities for peer-to-peer lending, and improve the quality and depth of data to identify credit risk.

Areas of research

• Cash In/Out Problem: Digital payment networks can transition funds to cash and back again through secure loading, single-click purchasing, and other real-time touch points for consumers who continue to prefer cash in an increasingly electronic financial world.

• Leveraging Big Data for Risk Management: Advanced analytic tools for credit evaluation, account monitoring, and risk management.

My challenges

Reaching people without bank accounts

May not be able to access online form

Offer survey via mobile device

Hesitance by those with access to population

Works cited Martindale, Suzanne and Hillebrand, Gail (2011, May 15). Pay At Your Own Risk? How to Make Every Way to Pay Safe for Mobile Payments.

Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstractid=1787587

The power of mobile money. The Economist. (2009, Sept. 24) Retrieved: http://www.policyinnovations.org/ideas/innovations/data/mpesa

Hughes, Nick and Lonie, Susie. M-PESA: Mobile Money for the Unbanked: Turning Cellphones into 24-Hour Tellers in Kenya. 2007. Policy Innovations. Winter/Spring 2007. Retrieved from: http://www.policyinnovations.org/ideas/innovations/data/mpesa

Bångens, Lennart and Söderberg, Björn. .2007. Mobile Banking: Financial Services for the Unbanked? Retrieved from: http://www.spidercenter.org/files/m-bankingstudy.pdf

Kabukuru, Wanjohi. Mobile banking: Kenya leading a new revolution. New African. (April 2010) p. 76-77.

Edwards, Ben. Mobile Banking: Will It Transform Haiti's Transactions? Frontlines. (February/March 2011). Retrieved from: http://www.usaid.gov/press/frontlines/flfeb11/FLfeb11HTmobile.html

Patel, Kunur. How mobile technology is changing banking's future. Advertising Age. (2009, Sept. 21) Vol. 80, Issue 31, p. 10.

Mulrow, John. Think Mobile, Act Local. World Watch. May/Jun 2010, Vol. 23 Issue 3, p. 22-27.

Hamilton, Kerry-Ann. The Role of Mobile Phone Technology in Health Interventions in Rural Communities: A Kenyan Exploratory Study

. 2010. Howard University, 203 pages.

Brankin, Andrea McKenna. Worlds of Differences in 'Mobile Money' Strategy. American Banker. (2010, Nov 18.) Retrieved from: http://www.americanbanker.com/issues/175223/mobile-money-strategy-from-haiti-1028902-1.html?zkPrintable=1&nopagination=1

Lenhart, Amanda. Cell Phones and American Adults. (2010, Sept. 2) Retrieved from: http://www.pewinternet.org/Reports/2010/Cell-Phones-and-American-Adults/Overview.aspx

Works cited

Mwaura, Andrew. Mobile Banking in Developing Countries. (A Case Study On Kenya) 2009.

Pontin, Jason. The New Money. Technology Review (March/April 2011). Retrieved from:

http://www.technologyreview.com/computing/32360/

Suri, Tavneet and Jack, William. The Risk Sharing Benefits of Mobile Money. January 2011.

Retrieved from: http://aysps.gsu.edu/seminars/suri-04-13-2011.pdf

Dermish, Ahmed, Kneiding, Christoph, Leishman, Paul and Mas, Ignacio, Branchless and

Mobile Banking Solutions for the Poor: A Survey (January 23, 2011). Innovations, Vol. 6,

No. 4, Fall 2011. Available at SSRN: http://ssrn.com/abstract=1745967 or

http://dx.doi.org/10.2139/ssrn.1745967

(2013, March). Consumers and mobile financial services. website:

http://www.federalreserve.gov/publications/default.htm

Thank you!

For more information, contact me at ingridsturgis@hotmail.com

Twitter: @isturgis http://www.facebook.com/isturgis

Linkedin: ingridsturgis isturgis@howard.edu

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