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Chapter 2

The Emerging World: Who Serves All the New Customers?

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Solving the Asia Mobile Puzzle (00:03:24)

In the 1990s, the typical emerging-market bank expected its customers to look and act like people who used banks in the developed world: People and enterprises with significant assets were the source of profit, and these were the customers whom bankers wanted. The business plan was to rise with the tide as the emerging world grew and prospered, creating more of these types of customers.

Today the financial services outlook for the emerging world is very different. In Central and South America, in Asia and the Pacific, and, most strikingly, in Africa, millions of people are now connected to the financial system for the first time, and millions more soon will be, even though a conventional bank would not be interested in their business. These people are poor by developed world standards, and their disposable income is slight, but they have accounts, and they’re using them to pay for products and services (such as supplies for their next season’s planting or just a beer at their local bar), to send money to relatives and friends (within their own nation and across borders), and even to pay off loans (and, in a few places, to obtain them).

Mobile money is what has made this extraordinary change possible. Over the past few years, people who were too poor for traditional banking discovered that they were not too poor for cell phones. Given the opportunity to store money and move money via text message, they leapt at the chance. For the emerging world, then, “a financial revolution is in progress,” wrote economists Michael Klein and Colin Mayer in a working paper for the World Bank in 2011. Mobile phones and text messaging have brought the unbanked and underbanked into the financial system.

Today “we’ve gotten to the point where in some countries more people use phones for banking than use banks,” says Mauro Guillen, a management professor at Wharton and director of Wharton’s Joseph H. Lauder Institute of Management and International Studies, who has examined the use of mobile money throughout the emerging world.

The center of this revolution is Africa—“in the slums of Nairobi and in the markets of Kisumu,” as the World Bank working paper puts it. According to the Bank’s Global Financial Inclusion Database, there are 20 nations in the world where more than 10% of the population has used mobile money in the past year. As The Economist noted in analyzing this data, 15 of those countries are in Africa.

The good news for banks is that potential customers for mobile money—the 1.8 billion people who, according to the World Bank, have a mobile phone but no bank account—represent a vast new market. Millions of these people will be linked for the first time to the financial system by mobile-money applications. Some types of companies (for example, telecoms that offer basic money-transfer services with text messages) will be able to make money on these entry-level customers right away. Other organizations may see a long-term play, figuring that a substantial percentage of these new customers will become more prosperous and need more sophisticated mobile-money products and services in the future.

For banks that decide to take that road, the abiding question will be: How and when can these new customers be profitable? In some countries, particularly in Africa, banks may have missed out. Mobile money there has been created and run by telecoms and, as first-movers, they are reaping the rewards (in the form of the commissions they take on each transaction). Kenya, for example, now has one of the most famous and successful mobile-money systems in the world, run entirely by a telecom operator, because banks did not see the opportunities in a market consisting of 90% poor, unbanked people. Yet, huge markets in the developed and emerging worlds remain up for grabs, including those throughout Asia and Latin America.

The Rise of M-PESA

In 2007, Safaricom, Kenya’s largest mobile operator, stepped into that vacuum. With assistance from the British government’s Department for International Development (DID), the company developed an app for its phones that permitted users to send money by text message. It dubbed the service M-PESA. (Pesa is Swahili for “money,” and the M stands for “mobile.”) The company, and DID officials, thought the service would help rural people who lived far from bank branches to make payments on microfinance loans. It did this, and then some: Today more than half the nation’s 22 million adults have M-PESA accounts (twice as many as have bank accounts), and the service is a key part of the country’s economy. Companies accept payments through the service, and some even pay salaries with it.

People appreciate the savings in time and money in their individual lives. Moreover, there is evidence that these personal effects, aggregated over millions of people, have a macroeconomic impact. For example, between 2005 and 2010 the number of bank branches in Kenya doubled (from 500 to 1,000), a growth that many attribute to pressure from M-PESA. Another study, published by the National Bureau of Economic Research and authored by economists Isaac Mbiti and David N. Weil, found that the use of M-PESA caused a drop in fees charged by moneylenders and remittance services such as Western Union.

Then, too, Guillen says, Kenya has seen “a huge outburst of entrepreneurship,” thanks to “a thriving ecosystem of entrepreneurial ventures, ranging from B2C and B2B services to platform providers, integrators, and software developers.” A growing array of suppliers in Kenya, for instance, now receives payments from business customers via M-PESA, saving time and reducing vulnerability to crime and human error in the supply chain. “I visited Kenya,” said Guillen, “and all of these farmers that had to travel for two or three hours to make a payment for new seeds or to collect a payment for whatever they were selling now can just do it over the phone. So, their productivity and their income have multiplied many times over, thanks to mobile payments.”

The Experience Outside Kenya

Unsurprisingly, M-PESA is often cited as a model for mobile-money systems throughout the emerging world. In fact, a number of other nations have thriving mobile-money systems not unlike Kenya’s. However, “the emerging world” is a very general category, and conditions differ from nation to nation. And Kenya, as it happens, has a combination of drivers that were unusually favorable to a phone-based financial service.

The country has a high rate of money transfer (many workers in cities send money home to rural areas), a large rural population (African banks tend to be concentrated in urban areas), and a dominant and highly committed mobile carrier in Safaricom. It has some 65% of Kenya’s cell phone market (the brand was trusted, and users knew they would not have to deal with incompatible platforms) and it carefully tends its agent network. Moreover, the introduction of M-PESA coincided with a period of rioting and violence after Kenya’s 2007 general election. People were fearful, and thus unusually keen to have a way to move money without leaving the safety of their homes, and this helped M-PESA take off, says Leon J. Perlman, chairman of the Wireless Application Service Providers’ Association of South Africa and an expert on regulatory issues involving mobile money.

Perhaps most crucially, the market was lightly regulated. Kenya’s bank regulators did not intervene to stop a mobile operator from offering financial services. In nations where conditions are different from these, mobile money has not taken off.

For example, Indian regulators think that they cannot keep the banking system safe unless financial transactions remain the sole purview of banks. “Once you authorize a mobile company to accept deposits or be a part of the payment system, you should have control over its activities,” says G. Gopalakrishna, a director of the Reserve Bank of India. “You should have access to its database, which as a regulator, I will not be able to get. Whereas, if it is part of the bank-led model, all the transactions will be through the core banking system, and regulators can have control.”

Hence, the Reserve Bank of India’s rules confine mobile money to banks. So M-paisa, M-PESA’s offering in India, reaches not that nation’s unbanked millions but rather people who already have bank accounts and are interested in other services.

In any event, the Kenyan model is not the only one that works. Other emerging-market mobile-money systems have concentrated on international remittances, where relatively high fees charged by Western Union and other companies have provided an opening for telecoms. An example is Airtel Money, which is available in 11 countries in Africa and the Middle East. Airtel Money lets its 15 million users send and receive minutes of airtime, and trade those minutes for money. The cash backup for the service is handled by Airtel’s partner in the venture, Citigroup.

Though it may sound odd to people in developed countries, the model works, notes Wharton management professor Keith Weigelt, because Africans have become used to storing and exchanging value in the form of minutes on cell phones. “In many developing nations, minutes are a form of currency already,” he says. “If you have minutes, typically that you have purchased on a prepaid card, then you can give them to someone else in exchange for something. People are used to doing this and so they trust telecoms.”

The remittance market, meanwhile, has huge potential. “Most people don’t realize it, but the remittance market is about $400 billion a year globally through formal channels and, it’s been estimated, about $1 trillion through formal and informal channels,” Weigelt says.

Looking for a Profit

For bankers thinking about trying to move into the developing world, it is important to realize how different it is from the landscape in developed nations. “It requires a different approach from other big markets,” says Ernst & Young’s Pilorge. Bankers’ traditional products are oriented toward middle-class and wealthy consumers as well as businesses. The unbanked require a business plan for very small deposits in high volume.

For telecoms, banks, and other potential providers of mobile money, the key question is how to make a profit on that high volume. This is also an issue for the thousands of merchants they engage as their agents. It is these shopkeepers who provide the essential service of transforming digital money into hard cash. In the case of M-PESA, for example, users must be in the presence of one of the system’s agents to send or receive money. It’s the agent who verifies the user’s identity, makes a record of the transaction, and holds the cash involved. Most M-PESA outlets (an agent may have more than one) handle 50 to 100 transactions a day.

In many nations, however, methods to create profits at scale have not been worked out. Instead, providers have rushed to sign up agents without paying enough attention to the skills needed for success or to the business case for local stores and traders to participate.

At the level of the individual customer, banks and other businesses must adjust their strategies for a different kind of consumer: Used to luring middle-class and prosperous clients, they must figure out what value proposition would drive large numbers of poor people to adopt services beyond the payment schemes that now dominate mobile money in emerging markets. What business model will create a profitable, sustainable operation out of offering money-handling services to large numbers of people, each of whom has a very small amount of money in the system?

These issues can be addressed in multiple ways, and many real-world experiments are going on around the world. So far, though, only a few services have found a way to ramp up their efforts to any large scale.

Still, the allure of those 1.8 billion potential customers, fully one-fourth of the world’s total population, is great. After all, notes Steven Lewis, lead analyst for Ernst & Young’s Global Banking and Capital Markets team, many millions of people in the emerging world are expected to join the middle class in the next few decades. The company—bank or telecom or partnership—that brings them to banking today stands to gain a long-term payoff in the future. About those 1.8 billion people who have mobile phones but not bank accounts, Lewis says, “I would bet money that many will be upgrading to a smartphone before they get a bank account.”

So, he says, the key strategy for mobile money in the emerging world is to bring people into a banking relationship with the simplest services and “then move them from mobile payments or money transfers to other services.”

Banks could capture that opportunity, Lewis notes, but so could telecoms or other kinds of firms. As matters stand now, “there is as much opportunity for PayPal to develop a relationship with the unbanked as there is for a bank.”