Mobile Money and Government
I am honored to be invited to the Mobile Money Executive Seminar in Kabul, Afghanistan and thank you to USAID for organizing such an important event.
Today there are 6.4 billion wireless connections in the world reaching 85% of the total population of 7 billion people. 2.27 billion people have access to the internet, and this is increasing rapidly with the proliferation of smart phones in the developing world. I expect within 5 years, 80% of the world’s population will have internet access – primarily through smart mobile connections.
Technology has never reached or impacted as many people as it does today. Over 900 million monthly active users on Facebook at the end of March 2012. There are 340 million tweets per day. 6.1 trillion SMS text messages a year. And this is changing everything – the way we interact, shop, learn, bank, heal, stay healthy, entertain, and live.
Lately I have been deeply moved seeing how technology is improving people’s lives. In Africa, I saw people for the first time feel truly empowered, and a part of more than just their village, when they used their mobile phones to fight corruption. I saw child soldiers exchanging guns for mobile phones. In the Middle East I met activists using Twitter to fight for equal rights. In India, I met a hard-working father who sacrificed and saved so he could purchase computers to make sure his children had a better education and better life. And I have seen literacy breakthroughs in India using the same language subtitles on Bollywood shows. And most recently, on three continents I have had the privilege of working with many innovators to deliver mobile money that empower people’s life and work.
Mobile money is changing the face of banking globally. But it isn’t just changing the face, everything is changing behind the scenes as well. Traditional banking was built with branches, cards, and large deposits in mind, whereas billions of users are small depositors and businesses located far from a bank branch.
Banking is behind in reaching the masses. So while 85% of people on earth are connected to a mobile phone, only 20% have a bank account.
The good news is that banking can take advantage of the growing number of mobile phones to reach many more people. But to accomplish this we must understand that the mobile-saturated world we live in today happened not only because of one factor, but of several key factors coming together. The same is true when we look to implement mobile money. It is not one thing, but several factors – creating a new “ecosystem” – that transforms the way we deal with money, pay people, get paid, settle business payments, disburse funds, collect taxes.
What are the key components of this new ecosystem? What are the government application possibilities? And what can we learn from a successes around the world?
Let’s talk about the Key components of this new ecosystem
The world needs banking and payments to increase reach like communication’s has. Instead of taking the model inherited from bricks-and-mortar banking, we need to invent new distribution models that are dramatically different and lower cost. We also need to have products with the users in mind, which fit their lifestyle and needs. We need to reach and serve those hard to reach. And we need to create much more efficient ways to enroll people and a much more efficient way to identify people. At the back end we can and will share products and infrastructure between different types of banking. But we will have to design products, business models, and services around very different lifestyles. We can learn a lot from looking at how the mobile industry did this for communications with the development of prepaid mobile.
If you have read about or experienced mobile banking in Kenya, you know it is very widespread, including in rural areas. The most popular system is Safaricom’s M-Pesa, but each mobile phone operator and many banks support M-Pesa or another system just like it. People load money and unload money from many retailers and small businesses throughout Kenya. It is like Western Union or the traditional hawala system, but much more high tech and efficient – also more broadly available since there are so many retailers supporting it. This was done because most of the mobile top up agents were cross trained to be branchless bankers.
It is the best example of financial inclusion to date. Kenya’s population is forty-three million, and there are close to twenty million active users of mobile money in Kenya today.
This in a country that only five years ago had about three million bank accounts. If you go to Kenya you will observe that signup is easy. People can sign up almost anywhere, and all Kenyans have a national ID. This means the signup and the know-your-customer process can take place at a cost of under one dollar.
Kenya worked so well and happened so quickly it mislead the world about the potential challenges. This was due to a “stars aligning” so that the important enabling components were in place. First – there was a national ID so every Kenyan could be easily identified. Second – there was trust for the mobile carrier who was previously a government owned carrier. Third there was a vast distribution network through one mobile carrier that reached everyone. And banks although not serving the average Kenyan yet, had trust. Banking infrastructure, specifically ATMs and interbank settlement were in place and could be scaled. And last but not least, Mobile carrier interoperability was not a key concern because there over 90% of mobile users were using one mobile carrier, Safaricom.
These factors, combined with strong execution has created impressive results. And has set the stage for Kenya to be the Silicon Valley of banking. At least for now. 20+% of GPD flows through Mobile money, all carriers and banks are involved in growing the original implementation to impact all of commerce, banking, public and private sector applications.
If we evaluate Kenya success and other countries lessons learned what surfaces is an understanding of critical infrastructure to enable more Mobile Money successes. First is a country wide universal and verifiable identification system. Second is a broad and dependable retail network for services like sign up, cash in, cash out, support. Third is a regulatory environment that identifies clearly roles and rules for mobile money – and enables bank and non-bank participation. Fourth – the importance of a modern interbank settlement system. And Fifth – Key role of an initial use case to drive adoption and trust.
Let’s switch to another country now. India – A country with great growth, but also huge challenges with 700 Million of 1.2 Billion people are poor documentation, average travel time of 8 hours to a bank, primarily a cash economy over 88% of transactions are cash. The vast majority of people in India are NOT “transactional bank customer”; they are cash-only or cash-preferred.
Although traditional banking is well developed in India, it has chronically failed to reach and serve the majority of Indians. But that is all about to change. The revolution in banking that is happening in India is being orchestrated by more than just the banking and telecom sector; it is being created through multiple industries, emerging innovators, regulators, and government agencies working together to make fundamental changes that will transform India.
Two government initiatives are happening that will have a massive impact – UID and National Payment Switch. These will make all the private sector implementations more efficient. I predict that within five years India will be the most banked country in the world.
A little more about those two key government initiatives.
Personal Identity Systems
In many countries, we take for granted a personal identity system that works.
This is critical to banking to support the banking know your customer regulations and to lower fraud in banking and payments for transactions. For the non-bankers in the room, it is worth explaining why this is so important for banks to do. There are all sorts of nefarious activities that bad people can do with money transfers. The banks or non-banks handling transactions are responsible for identifying this bad activity and for preventing it. This could be money laundering or terrorists transferring funds. In a way, one can think of banks as stewards of the economy and financial safety. So all governments rightfully require banks or non-banks performing money transactions to know each and every customer’s identity. It keeps us all safe.
In India, hundreds of millions of people don’t have any form of identification. Others have IDs but it is difficult and expensive to verify who they are.
One of my favorite stories from working in India has to do with signing up customers for mobile bank accounts. We were working hard to drive down the cost of the signup so we could prepare for a national launch. We achieved so much, then one month the reports went in the wrong direction. Sadly we started moving backwards – cost was rising. The explanation was revealing about the identity challenge in many countries. It was monsoon season and the paper driver’s licenses were likely to be wet. So when we copied them or took a picture of them via cell phone, they were more likely to be inadequate. Solely because of this, the cost went from $12 a customer signup to $17 a customer. (By the way, because Kenya already had a modern national ID system – our KYC cost was $.50 or less).
Back to India – The Indian leadership understands the identity challenge and how it is an inhibitor to financial inclusion and has other implications on inclusive growth. So in 2009 they launched the Unique Identification (UID) project. The idea is very simple: Every citizen of India will have a twelve-digit identifying number . These UID numbers are randomly generated and contain no information about race, creed, or gender. The number is stored in a centralized database and linked to the basic demographics and biometric information – photograph, ten fingerprints and iris – of each individual. It is easily verifiable in an online, cost-effective secure way.
UID is extremely secure and provide rapid authentication for banking, healthcare, and government payments. And it includes a biometric component, which will then enable rural authentication through low cost devices. The rollout is in process and already hundreds of millions of Indian have received their new ID.
What India is doing will drive down the cost of signup in India. But it is also an important step further – it is adding a high tech component so each Indian can not only identify themselves initially more quickly, but also can authenticate themselves in a very secure way when they perform transactions. Indian UID will help government disbursements a lot, especially given the large number of poor people currently receiving small subsidies.
Payments and banking must be available everywhere for people to trust it – so interoperability is key. If solutions don’t become broadly available and interoperable they will most likely fail to scale. This interoperability includes collaboration between banks, mobile operators, retailers, and independent companies. That is a huge challenge, from both a technical and business perspective. Companies don’t always want to interoperate even when they know it will create a better and larger market in the long term. The Indian Central bank, or “RBI” anticipated this hurdle and recommended and helped create a national non-profit payments infrastructure organization called National Payments Corporation of India (NPCI), which will enforce interoperability. The core objective of NPCI is to consolidate and integrate existing multiple systems with varying service levels into a nationwide uniform and standard business process for all retail payment systems. The secondary objective is to facilitate an affordable payment mechanism to benefit the common person across the country and help financial inclusion.
So the Indian government is being pro-active in building interoperability infrastructure and ensuring a secure and universal ID. It also, through multiple regulations establishing a framework for banks and non banks to take on roles in mobile money services. This sets the stage not only for financial inclusion on a very large scale but also sets the stage for government applications.