The Rise of Mobile Money

The sun hits your eyes as you wake up on a beach somewhere in Thailand with hazy memories of the night before. You pull yourself up out of the sand trying to figure out how you’re going to get back to the city, when it hits you…you spent all of your cash last night.  A few years ago, it would have been time to hitch hike a ride back to wherever or wash some dishes at the local restaurant.  But this is 2010 and “we have an app for that”. It seems you luckily remembered to sign up for the latest mobile money service for mobile, so you can transfer money via SMS to your taxi driver or who ever and manage to pay your way back to town.
A situation like this is not all that far from reality.  Over the course of the past few years, a technology that turns our mobile phones into a literal ATM has gained wider use and has begun it’s break into the mainstream.  “Mobile Money” allows for a mobile phone user to do exactly what it sounds like: to send money or to pay for goods and services through their mobile phone in lieu of cash.
This is not without good reason: mobile money will allow for millions of people across the world who would otherwise be without access to formal banking, often called the “unbanked”, a means to save and transfer money as needed.  According to information collected by the GSM Association (the organization that unites nearly 800 mobile phone providers worldwide) a great many of the world’s “unbanked” population live in South America, Sub-Sahara Africa and Southeast Asia and are now poised to have access to banking.
The adoption of this technology has in no means been a slow transition.
For example, in East African markets, mobile money service M-PESA was a trailblazer, beginning its operations in Kenya in 2007 and later Tanzania.  M-PESA allows for users to make cash transactions via SMS to other M-PESA users as well as users not affiliated with M-PESA. Although it is not a traditional banking operation, the service allows its users to perform many functions of a traditional bank, including deposit, withdraw and transfer.  By 2009, M-PESA (operated by Kenyan mobile operator Safaricom) had nearly 6.5 Million subscribers and nearly 2 Million daily transactions. The advent of this technology allowed millions of young migrant workers to transfer money back home in an efficient and secure manner. Having proved itself in Kenya, the technology is poised to make a grand entrance into other markets, most notably in many parts of Asia.
The technology behind banking the unbanked
While the terminology “mobile money” or “e-money” makes the concept seem rather simplistic, the technology behind the concept has yet to become standardized and currently exists in four primary models, some of which we are already accustomed to.  The first and most prevalent method utilizes SMS and USSD communications that sends a message to a short code number that then informs a merchant that the money has been transferred. This would allow a user to send an SMS to friend (with or without a subscription to a mobile money service), who then can exchange that message for cash.  Some providers, such as Obopay, which is very popular in Indian and American markets for its ease in sending money between the United States and India, require the recipient to sign up for Obopay before “cashing out” from the transaction.
Mobile money and mobile banking are not just limited to SMS and USSD communications.  Direct mobile billing—which is extremely popular in the Asian online gaming market—allows a user to enter a PIN and one-time-password which is linked to the user’s mobile account thereby bypassing banks and credit card companies altogether.  It’s like PayPal, except it’s not linked to a user’s credit card or bank account. But that’s not to say that you can’t use traditional online methods to pay for things with your mobile phone.  Wireless Application Protocol (WAP) browsing allows you to pay much as you would from the browser on your desktop through a debit/credit card or something like PayPal.
Yet, Contactless Near Field Communication (NFC) may be the next big thing in mobile money technology.  This technology eliminates the use of credit cards and physical payment all together; essentially, you swipe your mobile phone over a reader and depending on the vendor and transaction, enter a pin for authentication.  The transaction would be the same as though you used your credit/debit card.  This technology has been in existence in Japan since 2001 as “e-money”, with its first use being for public transportation and later smaller transactions. During the first half of 2010, Japanese consumers’ use of this technology swelled by nearly 39% compared to a year ago.  Many “e-money” offer incentives for the use of the technology, offering one point for every 100 Yen that is exchangeable for 1 yen.  Although, Japanese consumers are limiting their spending to small purchases of about 700-1000 Yen, the technology still accounts for 180 Billion in transactions in 2006 and was projected to hit 2.8 Trillion by 2011 by Japan’s Nourma Research Institute.  This technology is now beginning to enter into other Asian markets as well as the US market with great fanfare.
Further Expansion in Asian Markets
In the last month, New Zealand based Mobilis announced the launch of their Mobilis Mobile Money Transaction Platform for their affiliated operators spread across the Middle East, Africa, Asia and Oceana. This technology will utilize SMS and USSD transfer technology that will allow a subscriber to transfer money from one mobile to another without the need for a bank account.  According to a press release from Mobilis, they seek to reach the “unbanked” population—a population to be an estimated 1 billion mobile phone users—and provide them with access to financial transactions.  The desire to bank the unbanked is far from an unworthy cause; prior to the introduction of mobile banking technology, sending money from country to country (such from the United States to India) was quite difficult and often expensive.
A recent study from the Consultave Group to Assist the Poor (CGAP) that looked at mobile banking services in Africa, South America and Asia (including operators in Afghanistan, Cambodia, India, Pakistan, and the Philippines) concluded that mobile banking is roughly 19% cheaper than traditional banks.  Furthermore, mobile banking is 54% cheaper than informal options for money transfer, such as hawala, which is an alternative remittance system, used throughout the Islamic world.  This being said, it is natural that mobile money services should flourish in markets where sections of the population have little access to formal banking; migratory jobs and living in situations where they are sending money back home.  While this is in no means a clear stereotype of the Asia-Pacific region, it does provide an inviting market for further use of the technology.
Outstanding Issues
This is not to say that the expansion of mobile money will not come without risks.  With millions of users spread across many different countries, the potential for illicit use of the technology—especially for money laundering and financial terrorism (ML/FT)—comes into play.  While the average transaction of mobile currency through SMS and USSD is usually a small amount in excess of $25, a few small transactions can build up to enough to carry out an attack, albeit a small one.  Additionally, illicit users of SMS/USSD transactions might be able to complicate the money trail by sending small amounts through various different users or accounts before withdrawing the funds.
However, this isn’t a reason to panic.
While a report from the GSMA on the security of mobile money agrees that the rapid nature of mobile transfers is inviting for illicit use, it also shows that even without FATF mandated AML/CFT mechanisms in place, mobile money is protected by security features that come “naturally”.  Mobile money is traceable because transactions are recorded and can be linked to the user’s phone number or SIM card.  Perhaps most interesting is the fact that the GSMA highlights how most countries are now employing know your customer (KYC) practices such as proof of identity when purchasing a SIM card.  While this is not to say that mobile money won’t be used for illicit transactions, but it does prove the difficulty of doing so.
Although SMS/USSD transactions might be secure, it would be worth it to pose the question as to whether or not Contactless NFC transactions, such as the Japanese “e-money” are as secure.  Many commentators believe that Contactless NFC technology will eventually replace credit cards as the everyday workhorse of cashless transactions; while this might be the ultimate fantasy of technophiles across the globe, research data taken in 2009 from Japan is indicative that it will take quite a while for it to catch on.  25.2% of Japanese users of “e-money” said they would use e-money for small purchases of less than 1,000 Yen, but interestingly 68.5% of those polled said would still use credit cards for large purchases over 50,000 Yen.
Mobile money is still in its infancy and will take quite some time to replace cash and plastic transactions.  Issues regarding AML/CFT and security must be worked out before the technology truly enters into the mainstream. However, its speed, user-friendliness and short history of providing banking for the “unbanked” coupled with entrance into many “unbanked” markets is the recipe for a technology that in a few short years will be standard for any mobile phone operator.  So, if you happen to wake up on a beach in Thailand and realize that you’re out of cash, mobile money might just be there to save you.
Article via Analyst Network