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January 22, 2009updated 04 Apr 2017 4:18pm

Getting the bank to the unbanked

The mobile phone holds the promise of providing banking services to the worlds unbanked, and has already proved successful in pioneering services such as Wizzit in South Africa and M-PESA in Kenya Banking the unbanked and under-banked is a challenge developing countries have grappled with for decades

By EPI editorial

The mobile phone holds the promise of providing banking services to the world’s unbanked, and has already proved successful in pioneering services such as Wizzit in South Africa and M-PESA in Kenya. EPI spoke to a number of industry players to get their views on the opportunities and challenges that lie ahead.

Mobile phones: Regional distribution: September 08Banking the unbanked and under-banked is a challenge developing countries have grappled with for decades. By and large results have been disappointing as Lars Thunell, executive vice-president and CEO of World Bank private sector unit the International Finance Corporation (IFC), spelt out at the launch of the 2008 IFC/Financial Times Sustainable Banking Awards.

“There are 4 billion people at the bottom of the economic pyramid. Together they represent a $5 trillion market, but few of them even have a bank account,” said Thunell.

However, what a large and rapidly growing portion of the unbanked does have is a mobile phone in a world where the GSM Association, a body representing 924 mobile network operators (MNO), reported that the total number of mobile phones had reached 3.8 billion in late-2008.

Of this total almost two-thirds were located in what are generally considered to be developing countries and regions.

For good reason it would appear Dave Birch, a director of UK technology consultancy Consult Hyperion and the 2009 Visa/Centre for the Study of Financial Innovation’s research fellow, believes mobile banking and payments in developing markets have the potential to achieve “colossal” growth.

There is already abundant evidence supporting Birch’s confidence, particularly in Africa where some of the world’s most innovative mobile banking ventures have been established. Among the most unique of these is South African bank Wizzit Bank, the brainchild of its three co-founders Brian Richardson, Charles Rowlinson and Pakie Mphahlele who in early-2002 set out to find a solution to provide a low-cost, comprehensive banking service to the country’s then 16 million unbanked adults.

The obvious delivery channel for the service was the mobile phone – of which there are today, according to United Nation’s body the International Telecommunication Union, 39 million in use in South Africa, a country with a total population of 47 million.

“As the only bank focused on the unbanked, we went into uncharted waters,” Brian Richardson, Wizzit’s CEO told EPI. “Our objective was to bring the bank to the unbanked not the unbanked to the bank”, said Richardson. This is not a problem unique to South Africa.

“The single challenge for developing economies is not to get the unbanked to the bank but the bank to the unbanked,” he stressed.

Not only was Wizzit a pioneer in using the mobile phone to bank the unbanked, it was also one of the early-movers in mobile banking in general. Notably, the first mobile banking ventures launched in developed countries such as Paybox in Germany, Sweden, Spain and Austria, date back only to the very late 1990’s.

A key element in Wizzit’s formation was the backing it received from the South African Bank of Athens (SABA), a wholly-owned subsidiary of the National Bank of Greece. Functioning as an autonomous division of SABA, a member of the South African Automated Clearing Bureau, Wizzit gained account interoperability with the rest of the banking system.

The choice of technology was also a major consideration. Clearly wireless application protocol mobile internet browser technology was unsuitable for Wizzit’s target customers, many of who still rely on older mobile phones equipped with 16KB SIM cards.

Java based technology was also found to be inappropriate due to its complexity which includes requiring a mobile phone to be GPRS (general packet radio service) enabled. Opting to shun a Java-based solution was a particularly wise one, it appears.

“I am not aware of a single successful Java mobile banking implementation,” commented Hannes van Rensburg, CEO of South African mobile banking technology developer Fundamo, a company now in its 10th year.

Wizzit also rejected another technology solution, the SIM card-based application.

“The challenge in SIM-based applications is getting the application onto a SIM card that already exists in the market,” explained Gavin Krugel, the director responsible for mobile network operator (MNO) industry body the GSM Association’s (GSMA) Mobile Money Transfer programme.

He explained that the service provider has the option of sending the application over the air, a process requiring delivery of several encrypted SMS messages that self-configure the application on the SIM, or providing a new SIM card with the application already embedded within the SIM.

“The latter has an economic impact on the network operator and the existing consumer in that the consumer would have to obtain a new SIM card in order to use the application, said Krugel.

The SIM card-based solution was initially used in one notable developing market mobile phone-based payments service, GCash, launched in November 2004 in the Philippines by telecommunications company Globe Telecom. This required customers to purchase a new SIM card incorporating the mobile banking application.

“The uptake was dismal, and after a year, GCash moved to develop an application that did not require the user to swap their SIM,” said Krugel. Globe Telecom switched to an SMS-based mobile banking solution.

Notably, this experience was not repeated in the highly successful M-PESA mobile payments service in Kenya which utilises a SIM-based application that requires a customer to replace his or her existing SIM card.

Wizzit banks on USSD

Wizzit’s technology choice was unstructured supplementary service data (USSD) which has similarities with short message service (SMS) technology.

However, unlike SMS, which is a store-and-forward solution, USSD enables a real-time interactive session between the mobile phone and service provider.

“USSD is as standard a feature as SMS and is available in an estimated 95 percent of handsets today,” noted Krugel.

“USSD has proved to be absolutely the appropriate technology,” said Richardson. “There are no personal banking details loaded on the phone, a security feature that consumers like,” he added. Additional transaction security is provided by a four digit PIN.

“We have not had a single fraud or attempted fraud,” noted Richardson. He added that Wizzit’s system has been audited by MasterCard and professional services firm KPMG.

Initially Wizzit used a technology solution from technology developer Cointel. However, it subsequently switched to a fully in-house developed solution. Notably, Wizzit is what Richardson termed system agnostic and is interoperable between all South African MNOs and banks.

Officially launched in April 2005, Wizzit is an affordable service with a real-time transactional capability. To open an account a ZAR39.99 ($4) once-off fee is charged and thereafter, it is a pay-for-use service, with no monthly fees, no minimum balance requirements and no penalties for non-use or excessive use.

Customers receive an optional MasterCard Maestro-branded debit card when they open an account. The card provides domestic and international access to ATMs and facilitates POS purchases and cashback transactions at numerous major South African national retailers’ stores.

In addition, Wizzit backs up its service by enabling customers to make deposits at any of ABSA Bank’s 800 branches and the South African Post Office’s 2,600 outlets. Salaries and wages can also be deposited directly into a Wizzit account.

Typical fees are ZAR4.99 for recurring debit orders and stop orders, ZAR2.99 for Wizzit-to-Wizzit account transfers, ZAR4.99 for Wizzit-to-non-Wizzit account transfers and ZAR0.99 for bill payments, prepaid electricity purchases and balance enquiries.

Indicative of the potential of person-to-person money transfers alone, private development agency FinMark Trust estimates that in 2005, ZAR12 billion was transferred by migrant workers to their families in rural areas.

This was largely via informal means at costs of up to 25 percent of money transferred. However, benefits of mobile banking go beyond costs, particularly in a developing country.

“It takes the average South African 47 minutes to access a financial services point, while it takes an average of 15 seconds to do a mobile transaction,” said Richardson.

A sound business model

Technology was not the only major consideration when developing Wizzit. Equally important was the overall business model.

When strategising Wizzit’s founders took into account what Richardson termed five powerful parties: Regulators, payment card associations, big banks, MNOs and global remittance companies such as Western Union and MoneyGram.

“They will not just sit back and let someone eat their lunch,” stressed Richardson.

The result was business model which does not disenfranchise any of the five, said Richardson.

“We will work with all of them,” he explained. “It places Wizzit in a very powerful position.”

Another key element in Wizzit’s business model is its marketing strategy. This does not rely on advertising but, rather, an extensive network of “Wizzkids” trained by Wizzit to open accounts for customers at their homes or work.

Richardson declined to disclose how many customers Wizzit has garnered. However, he conceded that it is a market that requires considerable time to build a sustainable, commercial venture.

“There are no quick bucks to be had,” he stressed, adding that Wizzit should breakeven by mid-2009.

Undoubtedly, Wizzit is also in what has become a highly competitive market in which South Africa’s big-four banks, numerous smaller banks and joint MNO/bank ventures are clamouring for market share.

Indicative of the uptake, van Rensburg noted that it took eight years for the total number of internet bank users to reach 1 million in South Africa.

“It took eight months for mobile banking to reach the 1 million mark and there are now about 5 million consumers in the country using mobile banking,” said van Rensburg.

Naturally, many of the country’s mobile banking users are drawn from the ranks of what would be the equivalent of banking customers in developed markets. Richardson stressed that there are few “meaningful competitors” in Wizzit’s target market.

“It requires a special mindset to get the bank to the unbanked,” said Richardson.

While stressing that in no way was he being critical of big banks, he noted that they “cannot be all things to all people.”

Wizzit captures global attention

Wizzit’s business model has stirred up considerable interest worldwide, with recognition including the IFC’s acquisition of a 10 percent stake in Wizzit in 2007. The IFC is actively involved in promoting the mobile phone as a solution to banking the world’s unbanked.

Adoption of the Wizzit model is also spreading beyond South Africa’s borders. A new service has already been launched in an unnamed African country and another is set to launch within a few weeks in an unnamed Eastern European country.

“We have proved that the Wizzit model is easy to replicate,” noted Richardson.

Richardson has also found himself in demand as a speaker at numerous conferences worldwide. Of particular significance he said was the Clinton Global Initiative (CGI) conference held in September 2008, at which Wizzit was the only South African bank invited.

Formed in 2005 by former US president Bill Clinton, the CGI’s objective is to improve the lives of the world’s underprivileged. Among outcomes of the September conference was an initiative to provide 50 million people with access to mobile financial services.

It is not just in the service delivery arena that Wizzit has attracted attention but also in what is still a grey area in the development of mobile banking and payments – regulation.

Among countries that have called on Wizzit is India, where Richardson was invited by the Reserve Bank of India (RBI) to present the Wizzit model to key executives of the Indian banks. The RBI, said Richardson, indicated that the bank-led Wizzit model was what they had in mind in the introduction of mobile banking.

In particular, the RBI was not in favour of MNO-led mobile payments services and the regulatory problems this implies. This is clearly evident in operating guidelines for mobile banking and payments issued by the RBI in June 2008.

In its guidelines the RBI noted: “The long term goal of the mobile payment framework in India would be to enable funds transfer from account in one bank to any other account in the same or any other bank on a real-time basis irrespective of the mobile network a customer has subscribed to. Restriction, if any, to the customers of particular mobile operator(s) may be only during the pilot phase.”

Richardson believes strongly that the bank-led model is the correct one and that regulators in most countries will ultimately adopt this approach. His view is supported by Liisa Kanniainen, an executive director of mobile banking industry body Mobey Forum and vice-president, mobile banking, at Swedish bank Nordea Bank.

While Kanniainen said that the mobile banking and payments market could still have three to five years to go before there is industry-wide agreement on a standard business model, it must be a banking-backed one.

She stressed that regulators must oversea the mobile banking market: “It must be part of the system and not a special case.”

However, indicative of diverse thinking, van Rensburg believes that a mobile banking service can be MNO-led.

“They must just think like a bank and comply strictly with regulations,” said van Rensburg.

He added that he believed the RBI’s guidelines represent over-regulation and would restrict growth. By contrast he had high praise for mobile banking and payments guidelines issued by regulators in Pakistan and Nigeria. Both, he commented, were “excellent.”

M-PESA comes under attack

Undoubtedly rivalling Wizzit for global attention is M-PESA, a SMS-based payments service launched in mid-2005 by UK MNO Vodafone in Kenya in conjunction with local MNO Safaricom and microfinance organisation Faulu Kenya. A bank account is not required to become an M-PESA customer.

M-PESA’s services include depositing cash into and withdrawing cash from M-PESA accounts, mobile-to-mobile transfers, buying Safaricom airtime, paying bills and making repayments on loans from Faulu Kenya.

M-PESA agents, of which there are some 5,000, provide account loading and cash withdrawal services while cash can also be withdrawn at specially equipped ATMs. Maximum transaction amount per day is KShs70,000 ($880) and the maximum transferable per transaction is KShs35,000.

A roaring success, M-PESA reached the 5 million customer mark in January 2009, a total representing some 16 percent of Kenya’s total population. M-PESA processes about 280,000 transactions per day with a total monthly value of about $125 million.

M-PESA offers the perfect example of the potential of mobile payments in developing markets, commented Birch. Consult Hyperion was closely involved in development of M-PESA together with Vodafone, owner of the technology which it has also deployed in Afghanistan and Tanzania.

“M-PESA provides a valuable case study of digital money in action,” stressed Birch. “It involves replacing cash with electronic money, it is for the mass market, it radically reduces transaction costs for the least well off, it provides new functionality including remote payments and, most of all, it provides an infrastructure that delivers capability and efficiency to the microfinance world.”

However, for all the positive attention received by M-PESA it has also drawn the attention of Kenya’s minister of finance, John Michuki who announced in December 2008 that Kenya’s central bank would conduct an audit of M-PESA. His announcement came three days after Western Union and Vodafone announced that they were to launch a mobile phone-based remittance service between the UK and Kenya in which M-PESA would play a central role.

The decision to audit M-PESA marked an about turn by Michuki who had two weeks earlier defended M-PESA in parliament, commented Mark Pickens, a microfinance analyst with World Bank affiliate the Consultative Group to Assist the Poor.

“This could be the latest sign of a growing backlash against new entrants – like mobile network operators – into traditional banking space,” said Pickens. “Banks have put pressure on the [Kenyan] central bank to put a heavier regulatory yoke on M-PESA. We’ve seen a similar trend in other countries where mobile operators are eager to offer mobile financial services.”

The 48 commercial banks in Kenya have a total of about 3 million customers and 750 banking outlets. Pickens noted that M-PESA has also come under heavy attack in the local media. A recent article in the East African Standard, for example, commented that M-PESA “could be a disaster waiting to happen.”

In addition, said Pickens, Michuki is on record with the East African Standard as saying: “I am not sure M-PESA will end well. We want to protect wananchi [citizens] from the sharks who want to make money from the misfortune of others.”

The remittance conundrum

International remittances – a $280 billion annual market – is another major opportunity for mobile phones in developing and developed markets. It has become a focus of organisations such as the GSMA which is aggressively pursuing its Mobile Money Transfer programme with the backing of payments industry players such as Western Union and MasterCard.

“The GSMA’s initiative makes great sense,” said Richardson. “The technology is available but the big barrier remains regulatory issues.”

This barrier was no better illustrated than by a report published by the US Department of State (DoS) in March 2008 in which it warned that there are already indications that money launderers and those who finance terrorism will avail themselves of mobile payments.

The DoS stressed that “digital value smurfing” represents “a very clear threat”. Digital value smurfing refers to dividing large sums of money into multiple transactions in a way that ensures each transaction is below the value that would trigger financial institutions’ reporting requirements.

Van Rensburg dismissed the DoS’s report as ill conceived, a view shared by Birch.

“The main argument against mobile payments, naturally, is that these new services can be exploited by criminals, terrorists and so on, and these issues will clearly need to be addressed if we want to win over the general public and see any significant growth in mobile transactions,” said Birch.

He added that an argument people might use false identification to obtain a mobile subscription or use a prepaid phone is no different from the argument that criminals obtain bank accounts in false names.

“Which I’m sure they do,” said Birch.

“However, suppose the CIA notices that my prepaid phone is sending money to Osama bin Laden a couple of times a week,” he continued. “The fact that they don’t know who I am, but that they do know my phone number – and therefore the phone numbers of everyone else I’ve been talking to or sending money to, and pretty much where I am – sounds pretty useful to me. Much more useful, for example, than knowing that I showed up a Western Union office with a bogus ID and walked out with some untraceable cash.”

For good reason it seems Richardson noted: “Mobile payments is a tough mountain to climb. There are many questions yet to be answered.”

However, this is not preventing a proliferation of new mobile banking and payments services in developing countries worldwide. In Africa alone at least four new services have been announced since late-2008 and include one by UK bank Standard Chartered in Uganda in a venture with MNOs Warid Telecom and Zain. Proliferation of mobile payments services raises a particular concern for van Rensburg: a shortage of people with the necessary technology skills. For any would-be vendor it would be difficult to muster 20 people skilled in mobile banking technology to undertake a project, he warned.

“The industry really needs some form of training academy or degree course,” he concluded.

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