Mobile phones offer the best chance for much of africa to gain access to financial services according to a recent study by Research ICT Africa.
Across Africa many more people possess mobile phones than bank accounts. Mobile banking services are already offered as an addition to existing bank accounts. Instead of adding a mobile phone as a complementary channel to a bank account, why not add a bank account to an existing mobile phone number? This would narrow the access gap to financial services considerably, allowing mobiles to be used to provide services to those without bank accounts.
There are two ways in which this could be done: first, airtime cash convertibility, already a de facto practice in many parts of Africa; and second, the mobile wallet, which would allow full banking services to be performed on the basis of a virtual wallet linked to a SIM card. While the role of the informal sector in promoting economic growth in Africa is increasingly acknowledged, access to capital remains one of the biggest obstacles hindering the development and growth of the sector. Africa is struggling with access to formal financial services for its citizens and the informal sector. In addition to the underlying structural limitations of poverty; risk-averse bankers, unsuitable financial products and high bank charges have also been blamed for this state of affairs. Poor people with irregular income and informal businesses often have no choice but to make use of informal financial services, which are many times more expensive than formal ones. Formal financial services are usually only extended to those with regular income or collateral. Yet informal businesses often lack the required accounting skills and systems to generate necessary data to convince a bank to extend loans to them. A critical issue to overcome is that of asymmetrical information. Someone without a bank account approaching a bank for a loan is likely to be rejected unless collateral is at hand. The bank has no transaction history for this person or informal business and hence does not know anything about the applicant’s creditworthiness. Transaction patterns can be used to predict whether or not a customer will be able to repay a loan. Absence of a transaction history means that the ability to repay loans is unknown to banks, making it risky for banks to serve such a person unless the loan is fully collateralised. This is where m-banking could step in and move beyond simple payments and transactions to possibly provide an alternative banking system that provides access to formal financial services to the unbanked, such as credit, which may be easier to extend to the unbanked once they have built up a transaction history, through the use of m-banking and m-transfers: transactions over mobiles that go beyond the usual voice communications.
Access gap in Africa
Within the informal sector in Africa, mobile phones play a prominent role in creating and exchanging information. The RIA 2005/6 e-Access & Usage SME Survey revealed that 83.3% of the surveyed business operators owned a mobile phone, while 95.6% of all business operators rated mobile phones as either important or very important for their business operations. The results from the RIA 2007/8 e-Access & Usage Household Survey show that mobile telephony is the most used ICT in Africa and also that there are more people with mobile phones than there are with bank accounts (with the exception of Ethiopia and Rwanda where mobile penetration is minimal). Sometimes the differences are very pronounced – for example, less than every fifth mobile phone user has a bank account in Benin, Cameroon, and Senegal. Results from Research ICT Africa’s 2007/8 e-Access & Usage Household Survey indicate that significant reasons for not having a bank account are a lack of regular income and the perception that a bank account is either not needed or too expensive. In Africa, people usually only get a bank account once an employer requires it. Another main obstacle is the distance to banking facilities or ATMs. Particularly in rural areas, it is not only transaction costs and service fees, but also the cost of transport to reach banking facilities that made people not want a bank account. Conversely, in Africa banks charge high transaction fees often even for depositing money. High deposit and transaction fees ensure that banking remains the preserve of the relatively wealthy (i.e. the existing customer base) and high profit margins for banks. This is mainly possible because the banking sector is not as competitive as in the developed world.
Money transfer in Africa
Significant amounts of households receive remittances from another household, either in a different city or a different country. The cost of remittances however is a concern for those sending money home. International airtime transfer is therefore an efficient and cost-saving solution. Several multinational mobile operators, such as Zain, already allow cross-country airtime transactions. The role of international remittances in developing economies is gaining increasing global recognition and economic significance to national economies. Estimated at about US$221 billion worldwide in 2006, sub-Saharan Africa accounted for only US$9 billion or 4% of the total (World Bank, 2006). As a whole, developing countries received more than twice as much inward-bound remittance than official development assistance (ODA), excluding debt. In sub-Saharan Africa as a whole, inward-bound remittances were over three times larger than ODA. On a country-by-country basis, however, it is by no means the norm for developing countries to receive more remittances than ODA. This is the situation in Benin, Burkina Faso, Cameroon, Côte d’Ivoire, Ethiopia, Mozambique, Namibia, Rwanda, Senegal, Tanzania, Uganda and Zambia. Nonetheless, international remittances are becoming increasingly significant to national economies. However, the actual size of remittances would be much higher if informal remittances were taken into account. The large amounts of money that are remitted home by economic migrants each year are not sent home without cost and concerns. According to the UK Department for International Development (DFI D) the largest concern for those sending money is whether it will arrive home safely, followed by concerns over excessive charges and delays in receiving the money. Money transfer agencies in the UK have signed up to a new Customer Charter that commits them to provide transparent information on these issues. Charges for sending money internationally are dependent on whether sender and recipient have bank accounts, the speed of transfer, destination country, amount sent, exchange rates, and so on. The smaller the amount of money sent, the higher the charges (expressed as a proportion of money sent). The cost of sending £100 can vary from four to 40%. Results of Research ICT Africa’s household survey reveal many households receiving money from, or sending money to another household. In all countries in the survey, between 8.5% and 39% of households have received money from other households. Although it is more common to receive money from a household in another village or city, significant amounts are received from abroad (except in Burkina Faso and Ethiopia, where more households receive money from abroad than they do from another village or city). In most of the countries surveyed, remittances were more often received through a money transfer agency like MoneyGram or Western Union than through banks. In Mozambique, Namibia, Nigeria, Tanzania, South Africa, Uganda and Zambia, remittances were more often received from a bank account, reflecting either the better-developed banking systems and higher bank penetration in these countries or else the absence of Western Union and MoneyGram services. Notably however, banks and agents such as Western Union and MoneyGram together make up only a small fraction of the transaction channels used. Sending money in person, through a friend or family member, or through other informal channels is more popular. Similar trends can be observed for households sending money to another household. There seems to be substantial demand for a service that meets the concerns of people regarding security and costs. In addition, institutions that reduce the costs of remittances can expect a higher-thanproportional increase in the value of remittances – in other words, remittances display negative cost-elasticity.
Airtime transfers in Africa
In all 17 countries surveyed, 7.4% to 53.9% of respondents indicated that they had transferred airtime to someone else’s mobile phone. The majority of the transfers conducted were as a favour to family and friends – however there is also significant usage of airtime to pay for goods and services in a few countries. In Ghana, Nigeria, Tanzania and Zambia, 4.2% to 14% respondents indicated that the transfer was to pay for goods and services. On the other hand, 4.8% to 68% of respondents across all countries surveyed indicated that they had received airtime from someone else before. The most prevalent type of transfers were those received from family or friends or airtime received as part of a financial transaction with someone else. In all countries except Burkina Faso and Rwanda, 0.3% to 9.9% of respondents indicated that they had received airtime before as payment for goods or services. The survey indicates widespread use of airtime transfer, but not such a widespread use of airtime to pay for goods or services. For example, 88.3% of people in Kenya that had received airtime received it as a favour from a friend or family member, compared to only 1.2% who received airtime as payment for the provision of goods or services. 24.8% had bought airtime from an independent source (i.e. from someone that was not a family member or a friend, most likely an electronic re-fill or top-up).
Mobile payment systems for Africa
In order to use the mobile phone as a strategy for the integration of the unbanked into the world of formal banking, instead of adding a mobile phone as an additional channel to an existing bank account, a more transformational option would be to add a bank account to an existing mobile phone. This should be feasible since each mobile phone number is unique and would push the access frontier considerably by turning each mobile phone number on an operator’s network into a bank account number. Currently mobile operators already maintain some kind of bank account for each of their subscribers in order to track their airtime usage. When airtime is purchased these accounts are credited and when calls are made or SMSs sent they are debited. These airtime systems could be extended to cater for add-on financial services, which extend to the unbanked and the informal economy. Such a strategy would help leapfrog some of the existing obstacles to getting a bank account and other financial services (depending of course on the national regulatory environments). It would mean establishing an alternative transaction mechanism to the expensive formal banking system, one that makes transacting electronically as convenient and cheap as dealing in cash. Alternatively, using the conception of such an account, an individual can easily have multiple accounts associated to their mobile phone, one for airtime, one for money value and another one for savings, for example. The saving sub-account would be money value as well, but not immediately accessible depending on the savings account conditions. In the case of only one account, airtime and cash would need to be convertible. This raises a couple of issues that will be discussed in the next section. Using several sub-accounts may help avoid many conceptual and regulatory issues. In the subsequent sections, we’ll look at the implications of these two models. Firstly, airtime-cash convertibility – using only one account on the mobile network servers, and secondly, Mobile Wallets – sub-accounts on the mobile network servers. In both models transactions would need to cost very little or nothing, and banks or operators would make their money from extending financial services and in other novel ways.
Demand for mobile banking & payments
In Kenya, which has one of the most successful m-banking applications in Africa, banks are complaining to the financial services regulator that mobile operators are unfairly competing against them. John Wanyela, an executive director of the Kenya Bankers Association argued in The Sunday Nation that ‘you do not allow innovation to outsmart regulation’. This is precisely the point: innovation often outsmarts regulation. It is up to policy-makers to create an environment that supports innovative applications and to adjust regulation to evolving innovations. Results from RIA ’s e-Access & Usage Household Survey indicate that there would be significant interest in some of the above-mentioned options being offered as m-banking services. It is individuals’ attitudes to mobile banking in Botswana particularly that point to the opportunity for mobile operators and banks to cooperate. Between 19.7% and 26.3% trust mobile operators and banks respectively, but together 44.4% state that they would consider depositing their salary into a mobile bank account. A similar picture emerges in Ghana and South Africa.
The challenge to policy-makers and regulators is two-fold: firstly, to encourage banks and mobile operators to develop solutions that are not proprietary, and secondly, to allow access to potential new entrants that can disrupt the lucrative business models of the banks and mobile operators. The key challenge is to do this while at the same time ensuring high levels of security and trust. Just like convergence forced the integration of broadcasting and telecommunications, so mobile banking is forcing the convergence of the financial and telecommunications sectors. Unfortunately, the convergence of two such heavily regulated industries means that this potential is unlikely to be met unless policy-makers lay the ground rules for innovation. Recommendations could include encouraging the development of industry standards for mobile banking security based upon open access principles and changing regulatory systems to allow mobile operators to become banks, or banks to operate Mobile Virtual Network Operators (MVNOs). Banks need to get back to basics and focus on making money through financial intermediation rather than through transaction fees. Policymakers and regulators need to ensure that evolving systems serve the broader objectives of economic growth and development as well as protect consumer interests, while creating an environment that encourages and rewards innovation. The unbanked are unbanked for a reason. They will only transact electronically if there are limited or no transaction costs involved, and if doing so is convenient and secure. Serving the currently unbanked profitably and sustainably requires a radically different approach. A complete paradigm shift needs to occur in order to determine how the poor can be profitably brought into the banking sector.
Sidebar: Model 1 - Airtime cash convertibility
Airtime is already being used in several African countries as a form of currency. In most cases it does not substitute for cash but rather complements it. Initially developed to enable friends to share airtime across multiple prepaid SI M cards, the absence of convenient alternatives to transferring money over long distances has led to this airtime exchange becoming a cash remittance substitute. In fact, remittances from family members living abroad, transferred as airtime, are fast becoming an easy and popular means of sending money. The way it works is that the person abroad purchases airtime online or at dedicated agents and this airtime is then immediately transferred to the receiver’s phone. The receiver can then either use the airtime for calls and SMSs or sell it on or purchase goods with it. This points to the crucial success factor for airtime being accepted as an alternative to cash – either airtime needs to be widely accepted as an alternative currency, in that transactions can be made, and goods and services can bought with airtime – or airtime needs to be convertible backwards to cash. If airtime could be used to pay for any product, there would be no need to convert airtime back into cash. If people could pay for day-to-day shopping with airtime they would build up a transaction history. If salaries could be paid in airtime, the loop would be complete. Airtime would move in this closed loop and liquidity would be increased by new airtime being bought by mobile users and reduced by airtime being used to make calls or send SMS. The key success factor for airtime to be accepted as a means of payment is that it must resemble cash, i.e. there should be no transaction costs for the end-user and it must be widely accepted. All other forms of credit (such as credit cards and cheques) have substantial charges associated with their use. Currently, there are no formal avenues to change airtime back into cash, though a vendor might convert airtime to cash by selling it to someone else that needs airtime. Transaction histories however could be built up through airtime transfers, regardless of whether it is backwards compatible to cash or not. Cash convertibility would be much more attractive however, but there are three obstacles that need to be overcome to allow for backwards convertibility:
• If airtime is convertible to cash, then selling airtime would be equivalent to accepting deposits and mobile operators would require banking licences. Alternatively banks could cooperate more closely with mobile operators or become virtual network operators themselves (like Virgin Mobile in South Africa – and in many other countries worldwide – where it does not own any mobile infrastructure).
• Value added tax is charged on airtime. Some countries, like Uganda, also charge customs and excise duties. The value-added tax obstacle could be overcome by negotiating with the receiver of revenues to treat the VAT part of bought back airtime as input VAT. This would usually not be possible since private individuals are not registered for VAT and hence cannot issue VAT invoices. However, it should be possible to get to a special agreement for airtime given its potential for poverty alleviation.
• Value is currently lost in the distribution channels for airtime. Mobile operators pay resellers a commission for selling it. The value lost in the distribution channel can be 20%. That is, for every 10 US $ airtime sold the operator receives only 8 US $. If the operator would buy the airtime back it would make a 2 US $ loss.
Currently retailers sell airtime because they get a commission. It is clear to see that if retailers are to become the cash-out points and banks the cash-in points then everyone will benefit. Retailers benefit because the cash they take in is instantaneously transferred into their bank accounts. Banks benefit since they can raise capital cheaply and get an additional tool to evaluate the creditworthiness of informal businesses and the unbanked (a critical future customer base). The informal sector and the unbanked benefit from gaining access to formal financial services and being able to transfer money nationwide and beyond to family members and business partners. The RI A household survey asked respondents what factors would make them prefer to receive airtime rather than cash. In all countries except Botswana, the transaction costs were more of a source of concern for the respondents than its acceptance as a means of payment, reflecting both the widespread acceptance of airtime as a means of payment, as well as fear of the charges involved – charges associated with formal banking.
Model 2 - Mobile Wallets
The second model is based on the concept of several sub-accounts or wallets being associated with a particular SI M card. From a software and hardware perspective, it would be straightforward to give the user a second or third wallet that stores money electronically. Administered on a secure server, money can be transferred using the same channel and technology as for airtime transfers. Airtime purchase could then be a transfer between the two wallets. At that point of transfer, VAT would be applicable and a reverse transfer would not be possible. This resolves the VAT problem of Model 1 and also addresses the loss of value in the distribution channel. VAT would only be charged at the transfer from the money wallet to the airtime wallet. Mobile operators benefit from this system since they can cut out the distribution channel as users can now charge their phones with airtime anytime without the involvement of third parties. In this model, airtime and cash are not the same thing, even though they use the same technology. Banks and users still benefit in the same way as they do for Model 1. The GS M platform is already being used in Africa as a transfer mechanism for virtual currency which is convertible to cash, against transactions fees. Kenya’s MPES A, for example, is a mobilebased alternative for non-bankaccount transfer mechanisms such as Western Union and MoneyGram. It is clearly cheaper, but not yet cheap enough to function as an alternative currency. The charges are too high for micropayment (i.e. to pay for small items such as bread or milk). As the amount of money transferred increases, the transaction costs become more reasonable. Mobile wallets could be operator or bank specific or they could be completely independent, operating on servers that communicate with banks, individuals and companies across operator networks.