Many developing countries are harnessing the
benefits of electronic payments. However, there are a number of key
indicators payment industry players must consider before entering a
developing market, explains Ramsey El-Assal, senior managing
consult ant for MasterCard Advisors.
benefits of electronic payments. However, there are a number of key
indicators payment industry players must consider before entering a
developing market, explains Ramsey El-Assal, senior managing
consult ant for MasterCard Advisors.
While the volume of electronic payments is
increasing rapidly in industrialised nations, cash still rules in
developing countries where the infrastructure and regulatory
framework required to support electronic payments are often
lacking.
increasing rapidly in industrialised nations, cash still rules in
developing countries where the infrastructure and regulatory
framework required to support electronic payments are often
lacking.
Things are starting to change, however. Recent
advances in wireless telecommunications (telecoms), coupled with
new regulatory initiatives, are beginning to lower the barriers to
creating national payments industries in parts of the world where
this was previously almost impossible.
advances in wireless telecommunications (telecoms), coupled with
new regulatory initiatives, are beginning to lower the barriers to
creating national payments industries in parts of the world where
this was previously almost impossible.
How can you predict whether a country is on the
verge of developing a payments industry? Two national benchmarks
are good indicators of progress: significant wireless telecoms
penetration and a strong set of payments-related legal and
regulatory initiatives. Taken together, these leading indicators
point to which developing economies deserve prime attention from
payments industry players searching for new opportunities.
verge of developing a payments industry? Two national benchmarks
are good indicators of progress: significant wireless telecoms
penetration and a strong set of payments-related legal and
regulatory initiatives. Taken together, these leading indicators
point to which developing economies deserve prime attention from
payments industry players searching for new opportunities.
One caveat is in order: These two indicators
alone are not sufficient causes of payments industry growth in
developing nations. Other economic trends are critically important
as well, none more so than the rate at which a country’s middle
class population is expanding.
alone are not sufficient causes of payments industry growth in
developing nations. Other economic trends are critically important
as well, none more so than the rate at which a country’s middle
class population is expanding.
Many large developing economies simply do not
have affluent enough populations to underpin payments growth,
especially where credit cards are concerned.
have affluent enough populations to underpin payments growth,
especially where credit cards are concerned.
Recent positive payments trends in countries
such as South Africa and The Philippines, however, are good
examples of what happens when the middle class swells alongside
regulatory and infrastructure improvements.
such as South Africa and The Philippines, however, are good
examples of what happens when the middle class swells alongside
regulatory and infrastructure improvements.
Organic network evolution
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The degree to which electronic payments are dependent on widespread
and reliable telecoms networks is usually taken for granted. It is
no surprise that in many developing economies, the lack of an
efficient telecom infrastructure has rendered electronic payments
unfeasible.
Fortunately, new wireless technologies – such
as internet telephony, mobile data networks, far-field
microwave-based broadband (WiMAX), and wireless POS terminals – are
being used in combination to build data networks capable of
sustaining electronic payments in new territories.
as internet telephony, mobile data networks, far-field
microwave-based broadband (WiMAX), and wireless POS terminals – are
being used in combination to build data networks capable of
sustaining electronic payments in new territories.
To discern where payments are headed, it helps
to take a close look at how other industries have come to rely on
small, improvised micro-networks. The best example is found in the
retail telecom industry. In any number of developing countries
where mobile phones utilising prepaid airtime have rapidly
outnumbered wire-line phones, it is not unusual to find
entrepreneurs selling recharge cards on street corners and from
kiosks. But even this simple transaction has recently evolved into
something more complex.
to take a close look at how other industries have come to rely on
small, improvised micro-networks. The best example is found in the
retail telecom industry. In any number of developing countries
where mobile phones utilising prepaid airtime have rapidly
outnumbered wire-line phones, it is not unusual to find
entrepreneurs selling recharge cards on street corners and from
kiosks. But even this simple transaction has recently evolved into
something more complex.
In the past, a distributor of wireless airtime
would purchase live, activated card inventory at wholesale, and
extend unsecured credit to street-corner vendors by supplying them
with cards. The vendors would pay their distributor as the cards
sold.
would purchase live, activated card inventory at wholesale, and
extend unsecured credit to street-corner vendors by supplying them
with cards. The vendors would pay their distributor as the cards
sold.
This informal system had significant drawbacks:
Even in the best circumstances, some live inventory – which was,
practically speaking, a type of cash – would disappear, leaving the
distributor liable for losses. Additionally, if a consumer claimed
a card was defective, verifying the claim was difficult. This
shrinkage, and the other complexities of managing a large number of
sub-distributors with live inventory, constrained the overall
growth of the distribution network.
Even in the best circumstances, some live inventory – which was,
practically speaking, a type of cash – would disappear, leaving the
distributor liable for losses. Additionally, if a consumer claimed
a card was defective, verifying the claim was difficult. This
shrinkage, and the other complexities of managing a large number of
sub-distributors with live inventory, constrained the overall
growth of the distribution network.
An informal process has evolved to address this
problem. In many places, each airtime card is now sold to a
customer as inactive. Instead of using magnetic-stripe technology
and a POS terminal to activate it, the vendor now sends an SMS text
message to his distributor that gives the specific card number to
be activated. This way the distributor can track exactly what has
been sold, and vendors now pay only for inventory they actually
sell, reducing the risk of theft and other losses. Most important,
overall sales have increased, because vendors now never run out of
inventory; the new system allows them to be supplied with large
amounts of inactive cards.
problem. In many places, each airtime card is now sold to a
customer as inactive. Instead of using magnetic-stripe technology
and a POS terminal to activate it, the vendor now sends an SMS text
message to his distributor that gives the specific card number to
be activated. This way the distributor can track exactly what has
been sold, and vendors now pay only for inventory they actually
sell, reducing the risk of theft and other losses. Most important,
overall sales have increased, because vendors now never run out of
inventory; the new system allows them to be supplied with large
amounts of inactive cards.
What does this have to do with payments?
Largely without government oversight or planning, the participants
in the prepaid mobile phone business have created an authorisation
network for their products. It is not a great leap to imagine a
similar process evolving to handle electronic payments.
Largely without government oversight or planning, the participants
in the prepaid mobile phone business have created an authorisation
network for their products. It is not a great leap to imagine a
similar process evolving to handle electronic payments.
The promise of a wireless point of sale
The need for electronic payments to travel on expensive fibre
cables is fading. In the mobile phone example, mobile phones serve
as POS authorisation devices. Add to the mix WiMax – the wide-area,
microwave broadcast of a broadband signal – and the expense and
difficulty of building the front end of a payments network is
reduced even more. WiMax has the potential to “light up” large
areas with a wireless broadband signal. This is key, as processing
a transaction over a secure internet protocol (IP) connection is
faster and cheaper than over a mobile phone.
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By GlobalDataHandheld, IP-enabled authorisation devices
using WiMax could become the interface that converts large slices
of cash transactions in places such as India, Lebanon, the
Dominican Republic, Sierra Leone, Pakistan, and Egypt. All of these
countries are aggressively piloting WiMax technologies for
electronic payments.
using WiMax could become the interface that converts large slices
of cash transactions in places such as India, Lebanon, the
Dominican Republic, Sierra Leone, Pakistan, and Egypt. All of these
countries are aggressively piloting WiMax technologies for
electronic payments.
Many POS hardware manufacturers currently offer
wireless models that communicate via cellular or wireless IP (WiFi
or WiMax) technology. Though these devices may play a meaningful
role in emerging economies, they will be joined at retail by less
expensive modified mobile phones (IP-enabled if possible), used as
authorisation devices.
wireless models that communicate via cellular or wireless IP (WiFi
or WiMax) technology. Though these devices may play a meaningful
role in emerging economies, they will be joined at retail by less
expensive modified mobile phones (IP-enabled if possible), used as
authorisation devices.
Note that WiMax is by no means fully evolved.
Some industry participants predict that the entrenched mobile phone
providers in many developing countries will try to limit official
efforts to roll out WiMax solutions, as has happened in more
industrialised economies.
Some industry participants predict that the entrenched mobile phone
providers in many developing countries will try to limit official
efforts to roll out WiMax solutions, as has happened in more
industrialised economies.
Even if WiMax is shelved, however, wireless POS
hardware that relies on cellular technology will provide comparable
benefits, though it is more expensive on a per-transaction
basis.
hardware that relies on cellular technology will provide comparable
benefits, though it is more expensive on a per-transaction
basis.
Along with a lack of wireless telecom
penetration, there is a second, equally important obstacle to be
faced: Cash remains dominant in developing economies. Many
consumers and businesses are unbanked, unaddressed or otherwise
unaccounted for – leaving any evolving payments system without a
means to settle transactions on the back end. Getting a bill in the
mail, paying by cheque, or debiting an account via automated
clearing houses are rarely viable options in the developing
world.
penetration, there is a second, equally important obstacle to be
faced: Cash remains dominant in developing economies. Many
consumers and businesses are unbanked, unaddressed or otherwise
unaccounted for – leaving any evolving payments system without a
means to settle transactions on the back end. Getting a bill in the
mail, paying by cheque, or debiting an account via automated
clearing houses are rarely viable options in the developing
world.
Government’s back-end settlement
Facing this obstacle, there is no substitute for government
planning of, and investment in, a national settlement
infrastructure. The rapidly expanding payments sectors in the few
countries that are not considered ‘developing’ but which are not
yet fully industrialised are testaments to the power of calculated
government planning and investment.
For instance, Brazil’s National Payments
System, launched in 2002, provides National Reserve Bank
clearinghouse settlement services that form the backbone of a
reliable payments system. Debit cards, credits cards, prepaid
cards, and money transfers are now commonplace, and dramatic growth
of electronic payments has followed. For example, the country’s
central bank reported payments made by debit, credit and retailers’
cards increased by 165 percent between 2001 and 2005, from $29.5
billion to $78.1 billion.
System, launched in 2002, provides National Reserve Bank
clearinghouse settlement services that form the backbone of a
reliable payments system. Debit cards, credits cards, prepaid
cards, and money transfers are now commonplace, and dramatic growth
of electronic payments has followed. For example, the country’s
central bank reported payments made by debit, credit and retailers’
cards increased by 165 percent between 2001 and 2005, from $29.5
billion to $78.1 billion.
The story is similar in Turkey where the
central bank played a leading role in constructing an advanced
payments infrastructure. Two settlement mechanisms in particular –
the Real Time Gross Settlement System and Bank Card Centre – came
online in 1992, ushering in a period of rapid growth in electronic
consumer payments. As in Brazil, many flavours of consumer payment
product are now available there, and spending volume is growing
dramatically. For example, Turkey’s central bank reported between
2004 and 2006 the value of debit card purchases increased by 140
percent to $1.2 billion.
central bank played a leading role in constructing an advanced
payments infrastructure. Two settlement mechanisms in particular –
the Real Time Gross Settlement System and Bank Card Centre – came
online in 1992, ushering in a period of rapid growth in electronic
consumer payments. As in Brazil, many flavours of consumer payment
product are now available there, and spending volume is growing
dramatically. For example, Turkey’s central bank reported between
2004 and 2006 the value of debit card purchases increased by 140
percent to $1.2 billion.
China has made similar strides. The government
recently unveiled the China National Advanced Payment System
(CNAPS). CNAPS has two parts: High Value Payment System (HVPS) and
Bulk Electronic Payment System (BEPS). HVPS was designed for
real-time settlement of large amounts greater than CNY500,000
($71,500). BEPS functions more like an automated clearing house
system as it batch-processes credit and debit card payments and
other small transactions nightly, and transactions such as salary
payments and utility charge collections monthly.
recently unveiled the China National Advanced Payment System
(CNAPS). CNAPS has two parts: High Value Payment System (HVPS) and
Bulk Electronic Payment System (BEPS). HVPS was designed for
real-time settlement of large amounts greater than CNY500,000
($71,500). BEPS functions more like an automated clearing house
system as it batch-processes credit and debit card payments and
other small transactions nightly, and transactions such as salary
payments and utility charge collections monthly.
Since then, the amount of consumer credit
extended in China – not just cards but all products – jumped from
$2.2 billion in 1997 to $214.6 billion in 2005. Nationwide, the
number of payment cards issued reached about 1.2 billion at the end
of 2006.
extended in China – not just cards but all products – jumped from
$2.2 billion in 1997 to $214.6 billion in 2005. Nationwide, the
number of payment cards issued reached about 1.2 billion at the end
of 2006.
Debit cards accounted for most of these
instruments, but outdated credit card regulations are falling
quickly, as the government levels the playing filed for
international payments players. Initiatives such as a personal
credit history database launched by the country’s central bank in
2006, and a push for wider acceptance of payment cards in time for
the 2008 Olympic Games in Beijing, should spark further growth in
this potentially huge payments market.
instruments, but outdated credit card regulations are falling
quickly, as the government levels the playing filed for
international payments players. Initiatives such as a personal
credit history database launched by the country’s central bank in
2006, and a push for wider acceptance of payment cards in time for
the 2008 Olympic Games in Beijing, should spark further growth in
this potentially huge payments market.
Prepaid cards: A step in the right direction
Unfortunately, for every Brazil, Turkey or China, there is a
Colombia, Morocco or Indonesia that has the potential to support a
dynamic payments industry, but lacks focused official efforts to
build the required infrastructure.
Even in these markets, however, the back-end
settlement equation is changing. Business models and operational
processes developed in the US and Europe for reloadable prepaid
cards are slowly being introduced in new contexts, with good
results.
settlement equation is changing. Business models and operational
processes developed in the US and Europe for reloadable prepaid
cards are slowly being introduced in new contexts, with good
results.
In the US, prepaid cards have been positioned
as replacements for products and services that already exist. For
example, gift cards replaced gift certificates; travel cards
replaced travellers’ cheques; various prepaid health care
instruments replaced reimbursement cheques, and reloadable, general
purpose bank cards give those previously excluded a way to finally
participate in the credit card economy.
as replacements for products and services that already exist. For
example, gift cards replaced gift certificates; travel cards
replaced travellers’ cheques; various prepaid health care
instruments replaced reimbursement cheques, and reloadable, general
purpose bank cards give those previously excluded a way to finally
participate in the credit card economy.
Likewise, prepaid products are starting to
provide an alternate means for consumers in developing nations to
pay for some services, such as utilities, telecoms, and postal
services. Even in places where government has failed to design and
support a funds settlement infrastructure itself, load and spend
networks are being built by partnerships between government
entities and private companies that possess widely-distributed
retail outposts.
provide an alternate means for consumers in developing nations to
pay for some services, such as utilities, telecoms, and postal
services. Even in places where government has failed to design and
support a funds settlement infrastructure itself, load and spend
networks are being built by partnerships between government
entities and private companies that possess widely-distributed
retail outposts.
These arrangements enable customers to load
funds and make payments at convenient locations – and avoid the
lengthy queues at official payment locations. While these types of
networks provide tangible benefits to users, only large chain
merchants with strong credit can participate, as funds still must
settle manually.
funds and make payments at convenient locations – and avoid the
lengthy queues at official payment locations. While these types of
networks provide tangible benefits to users, only large chain
merchants with strong credit can participate, as funds still must
settle manually.
This is not to suggest there is a viable
substitute for government oversight and sponsorship. Meaningful
transaction volumes can be achieved only when national governments
build standardised payments infrastructures, along with regulatory
frameworks to govern the settlement process. One reason is that in
developing economies, small and independent retailers often handle
a majority of consumer transactions. Only a well-conceived national
settlement system can minimise the credit risk that payments
industry participants face in this tier of the market.
substitute for government oversight and sponsorship. Meaningful
transaction volumes can be achieved only when national governments
build standardised payments infrastructures, along with regulatory
frameworks to govern the settlement process. One reason is that in
developing economies, small and independent retailers often handle
a majority of consumer transactions. Only a well-conceived national
settlement system can minimise the credit risk that payments
industry participants face in this tier of the market.
Case in point: Indonesia
Indonesia is a good example of a market poised to take off.
The country’s central bank, the Bank
Indonesia’s Banking Architecture Plan, launched in 2003 but only
now gathering pace, should drive growth in the sector. Likewise,
centrally planned bank consolidations, improved money laundering
statutes, implementation of a Debtor Information System, and new
consumer credit regulations will also spur expansion, in spite of
rules limiting credit line amounts and the number of cards
customers can hold.
Indonesia’s Banking Architecture Plan, launched in 2003 but only
now gathering pace, should drive growth in the sector. Likewise,
centrally planned bank consolidations, improved money laundering
statutes, implementation of a Debtor Information System, and new
consumer credit regulations will also spur expansion, in spite of
rules limiting credit line amounts and the number of cards
customers can hold.
Couple these initiatives with the projected
growth of Indonesia’s mobile phone base – forecast to grow from
92.4 million subscribers in 2007 to 146.5 million by 2010,
according to Irish data provider Research and Markets – plus the
government-sponsored 2008 launch of a national WiMax service, and
it is not difficult to imagine an electronic payments industry soon
taking hold there.
growth of Indonesia’s mobile phone base – forecast to grow from
92.4 million subscribers in 2007 to 146.5 million by 2010,
according to Irish data provider Research and Markets – plus the
government-sponsored 2008 launch of a national WiMax service, and
it is not difficult to imagine an electronic payments industry soon
taking hold there.
In conclusion, new technologies, regulatory
frameworks, and financial services infrastructures have created a
dynamic environment in which the development of a truly global
payments industry is a realistic goal.
frameworks, and financial services infrastructures have created a
dynamic environment in which the development of a truly global
payments industry is a realistic goal.
There is no lack of opportunities for companies
seeking the payment industry’s next Brazil, Turkey, or China. But
companies should carefully weigh factors such as wireless
penetration rates, the relative sophistication of national wireless
telecom and data networks, and the status of payments-related legal
and regulatory frameworks.
seeking the payment industry’s next Brazil, Turkey, or China. But
companies should carefully weigh factors such as wireless
penetration rates, the relative sophistication of national wireless
telecom and data networks, and the status of payments-related legal
and regulatory frameworks.
These leading indicators will help determine
which national economies are primed for growth in electronic
payments.
which national economies are primed for growth in electronic
payments.
MasterCard Advisors is the professional
services arm of MasterCard Worldwide
services arm of MasterCard Worldwide
