How Mobile Technology Is Broadening Financial Access in Less-Developed Countries While Driving Business Opportunities for Global Companies
Access to financial services is a major challenge for more than half the world’s population. In less-developed countries, 70 percent of the population has little or no access to financial services products of any kind. Ultimately, this gap makes it extremely difficult for more than 2.6 billion people worldwide to conduct even the most basic financial transactions: payments, savings or borrowing.
Many economists, public policy analysts and philanthropic institutions have come to the common conclusion that lack of financial access for this large segment of the planet’s population is a major barrier to further economic development in emerging markets. At the same time, growth of the global middle class in Africa, Asia and Latin America has accelerated, making it even more critical to identify opportunities to close the financial services access gap. With better access to basic financial service capabilities to make payments, save and access credit, this growing global middle class population will be able to play a more powerful role in shaping the future of economic growth over the next 10 years.
Given the size and potential opportunity that this population—often referred to as the “middle of the pyramid”—represents, global financial services and telecommunications players are investing in capabilities to provide financial services to this group. Using mobile technology infrastructure as a platform, banks, technology companies and telecommunications players are starting to make investments in mobile banking services.
Many of these investments have been tentative and limited in scope because few players have taken into account the full and important macroeconomic impact this growing middle class population will have on the global investment landscape over the next 10 years. In many cases, investments have been inconsistent, fragmented or targeted to niche opportunities. However, in the last year, a few global companies have started to place bigger bets on mobile platforms that can provide expanded access to financial services over the next 10 to 15 years throughout the world, with a particular focus on emerging economies.
As companies like Visa, MasterCard, Vodafone, Telefónica and others explore opportunities to provide financial services to the “middle of the pyramid,” each is searching for an optimal investment strategy. This paper examines potential approaches for global financial services players to pursue in order to take advantage of the possibilities of new technology and the potential of the emerging global middle class. Major global players have a compelling and urgent opportunity to identify and serve the unique needs and aspirations of emerging middle class segments worldwide. If these global players can tailor technology investments—especially mobile investments—to align with the needs and market realities of this growing and underserved global population, they have the potential to unlock an extremely promising set of new markets.
Over time, large middle class populations have been associated with stronger economic growth and poverty reduction. Individuals who are no longer living in absolute poverty have a greater ability to participate in economic activities that drive long-term economic value and drive growth. Banerjee and Duflo suggest that this growth power comes from entrepreneurial activity, accumulation of human and financial capital and consumption power. Chun, Hasan and Ulubasoglu found further empirical evidence of the power of the middle class to drive consumption growth.
There are a variety of definitions of “middle class,” with significantly different definitions depending on whether the description applies to populations in well-developed countries or poorer countries. For the purposes of this paper, we will use the definition from Banjeree and Duflo that is used by the World Bank and International Monetary Fund when working with developing countries. This definition identifies middle class individuals as people living between $2 and $10 per day, which would clearly not be considered middle class in the United States or similar developed countries, but is closer to describing the vast majority f individuals worldwide who are part of the middle tier of the global economic pyramid. These individuals are “not deemed ‘poor’ by the standards of developing economies” even though they may fall well below the poverty lines in more-developed countries. Ravillion uses a slightly broader definition of middle class that reflects individuals with per capita consumption of $2 to $13 per day.
Using this definition, evidence shows that the population classified as middle class has increased by 1.2 billion people. Most of this growth has come from Asia, with approximately half of the middle class population growth coming from China alone. Nevertheless, evidence of this trend outside Asia exists, with compelling data from the African Development Bank illustrating that Africa’s middle class population has tripled over the last 30 years. Currently estimated at 310 million people, this middle class population is comparable in size to the middle class populations in India and China.
Access to financial services for savings, transactions and borrowing activity are all critical contributing capabilities to the growth potential of this group. However, access to these critical services is extremely low in most developing countries. In most developing countries in Asia and Africa, less than half the population uses formal financial services. This population represents 2.5 billion adults who might be potential targets for financial services solutions that address the challenges of developing economies.
Table: Adults Who Do Not Use Formal Financial Services
Ultimately, this large, underserved market of middle class consumers represents an extremely interesting potential market for financial service providers and technology players. Rapid mobile phone adoption and consumer durable purchase trends provide strong examples of how global players can find attractive business opportunities in the developing world by serving the needs and aspirations of this growing middle class market.
Clearly there are challenges in serving a mass-market that has the diversity and geographical reach of this global middle class segment. Serving it requires a solid understanding of the major challenges that may threaten successful and profitable operations in each environment.
Many mobile money solutions have struggled to achieve critical mass and achieve levels of sustainable growth due to a classic “chicken and egg trap” that faces many new payment solutions. “In order to grow, these systems must aggressively attract both customers and cash-in/cash out merchants.” A “sub-scale trap” occurs if merchants do not gain significant transaction volume quickly and then choose to drop the service, while consumers may choose to abandon the service if there is not a big enough network of merchants that accept the solution.
Significant infrastructure issues represent one of the largest historical challenges to effective financial service delivery in less-developed countries. Given the high fixed cost of infrastructure and other profitability considerations, bank branch and ATM distribution in most developing countries is low. These challenges are compounded in many less-developed countries by a range of other issues:
• geographic dispersion;
• difficulty in adhering to diverse compliance frameworks around KYC/AML exacerbated by illiteracy and lack of formal identification;
• poor infrastructure (roads, electricity, etc.) to support branches and ATMs in rural areas
• security considerations;
• challenges of serving illiterate and/or multilingual populations;
• prevalence of the nontraditional economy and cash payments; and
• minimal electronic payment infrastructure or card acceptance reduces value of transaction accounts.
Mobile telecommunications infrastructure has already addressed many of these challenges, leading to mobile phone adoption levels that exceed the levels of financial services adoption. As a result, mobile financial services offer the promise of addressing many of these structural challenges. However, to adequately address the needs of this market, global players must assemble an impressive array of capabilities from a range of functional disciplines.
1. Core financial capabilities. The financial service needs of the global middle class are fairly basic. To date, most solutions have focused on five key service areas: money transfer, payments (both retail and bill payments), savings, insurance and credit. At some level, it would be possible to define and deliver a set of basic financial products tailored to meet the broad economic needs of discrete socioeconomic segments (e.g., low middle income $2 to $5 per day; “middle-middle” $5 to $10 per day; and high middle class $10 to $13 per day), regardless of country.
2. Mobile technology capabilities. Although many mobile operators are developing proprietary mobile financial services capabilities, with a few exceptions (e.g., Kenya), most countries are served by multiple mobile carriers, none of which have sufficient market share to establish a market-leading solution on their own. In nearly every model for financial services delivery via mobile phones, the local carriers must play a role in providing network access, customer acquisition and customer service, or the service does not have an opportunity to achieve ignition. Consequently, no single player has yet achieved sufficient credibility or critical mass across markets in providing mobile financial services.
3. Local Support Capabilities. Many factors must be addressed locally. Technology standards, mobile phone adoption differences and a host of business challenges all require local knowledge and local solutions.
4. Interoperability capabilities. Third-party players can have a role in linking the mobile operators in each country to a basic set of financial services. Players like the recently acquired Fundamo (purchased by Visa) play that role, linking financial services solutions to local mobile networks. In this model, the local carriers handle the core mobile functions (network coverage, customer acquisition and adoption and customer service) while the technology player provides interoperability between carriers and serves as a source for financial service products. In some cases, international players may also have a role in providing services that require both global expertise and local customization, including risk management, credit underwriting, insurance services, etc.
Over the last five years, a wide range of players have entered the marketplace for mobile financial services with offerings that target the global middle class. Typically these solutions have offered a small set of niche products in a geographically concentrated area, rarely extending beyond more than a handful of markets.
Despite the broad level of interest in providing services of this type, few business models have been successful or have come close to achieving critical mass, with many false starts and profitability challenges for most players. Each of these players has struggled with a variety of challenges, including shared challenges of building critical mass for a new payments service as well as unique challenges associated with diverse local regulatory, structural and infrastructure issues. The examples below highlight some case studies that are instructive both in what works and what does not.
M-PESA. Started in 2007, M-PESA may well be the most-studied experiment in mobile financial services. A mobile phone-based money transfer system run by Safaricom, Kenya’s largest cellular operator, M-PESA has achieved an astonishing level of adoption in a very short period of time. By September 2009, more than 8.5 million Kenyans had registered for the service and transferred $3.7 billion USD worth of value using M-PESA. This value was equivalent to approximately 10 percent of Kenya’s GDP. However, the high cost of person to person money transfer combined with technology challenges has affected the profitability of this solution. Nevertheless, the M-PESA model is a useful example of a nascent firm that is beginning to operate like a financial services platform, bringing financial services and mobile operators together to create value for customers.
Given the rapid growth of the M-PESA model, studies have attempted to assess the true impact of this solution on economic activity and economic development in Kenya. The results of most studies, while preliminary, are promising. Morawczynski and Pickens observed that the system resulted in smaller but more frequent remittances to rural areas, resulting in an overall net increase in remittances to rural areas. Plyler et al. observed that M-PESA enabled small businesses to expand and grow while also increasing monetary circulation in these communities. Recent data from Mbiti and Weil found that 26 percent of users reported using M-PESA to save money. Moreover, surveys of M-PESA users indicated that a significant percentage of users were interested in receiving their main income via M-PESA and paying bills using M-PESA.
Ultimately, the M-PESA service has been an overwhelming success for Safaricom to the extent that Safaricom continues to invest in and grow this solution, most recently announcing plans to add an interest-bearing savings component (M-KESHO) to its offerings.
Empirical evaluations of this service suggest, via real-world examples, the tangible benefits of serving a relatively modest population of middle class customers in an emerging economy. And while it is clear the Safaricom solution has some unique elements that are difficult to replicate elsewhere—most notably Safaricom’s overwhelming leadership and market share in Kenya’s mobile arena—the M-PESA example provides clear indications of the value that can be harvested through a relevant service for the global middle class.
MTN Uganda’s MobileMoney. Although this service isn’t yet at the one million customer mark, it too has shown a remarkable level of progress in the last two years with relatively low initial funding requirements and achievement of positive cash flow within 14 months of launch. Most of the profitability of this new venture has been driven by money transfer fees and lower churn rates for MobileMoney customers.
Mobile Initiatives in Tanzania. Although Tanzania doesn’t typically spring to mind as a hotbed of innovation, this market of 42 million people is home to four serious contenders in the mobile money space. Vodacom, the market leader (39 percent market share), has a Tanzanian equivalent of M-PESA that has more than one million enrolled customers. It is probably the most successful mobile money deployment outside of Kenya. Three other mobile network operators—Zain (Zap), Zantel (ZPesa) and Tigo (Tigo Pesa)— offer mobile money services that are vying to for customers in this vastly underserved market, which has only 500 bank branches nationwide.
Easypaisa in Pakistan is another telecom-led solution that is having some success with its payment solution. A joint effort between Telenor Pakistan and Tameer Microfinance Bank, Easypaisa was launched in 2009. It has grown to include a network of 11,000 agents where consumers can handle bill payments and money transfers. One unique aspect of this solution is that consumers do not need a Telenor account or even a mobile phone to use the service at any Easypaisa shop; they simply present cash to an agent who then handles the transaction via the shop’s mobile phone. This strategy has enabled Easypaisa to grow to more than one million transactions per month. Easypaisa believes that this volume will enable it to become a gateway to migrate customers to a suite of financial services based on an e-wallet. The leaders of Easypaisa also claim that mobile financial services in Pakistan help create jobs, stimulate GDP and increase savings rates among the poor.
Mobile Initiatives in India. The last three years have witnessed mobile experiments by both global and local players in India. Three of the most notable include 1) the partnership between Obopay, Nokia, Union Bank of India and YES BANK; 2) a joint venture between Visa and Monitise; and 3) bharti airtel’s mobile financial services offering.+
The Obopay/Nokia experience in India’s mobile financial services market has been challenging. After entering the Indian market in January 2008, the venture has struggled to get traction. Heavy regulatory challenges and other local country issues have affected the ability of the solution to ignite, despite Nokia’s position as the dominant mobile phone provider in the country. In December 2010, Nokia acquired Obopay’s India operations; it recently started shipping mobile phones in India preloaded with the Obopay applications, potentially giving the solution a new lease on life in that market. In addition, Nokia stores will facilitate service registration and cash-in and cash-out transactions, making it far more practical and convenient for many Indians to use the service. However, although the solution operates through partnerships with Union Bank of India and YES BANK, regulatory issues and customer adoption challenges are likely to continue to be issues because both banks are relatively small.
The Visa/Monitise joint venture was announced with great fanfare in May 2010, with plans to “provide a platform for financial institutions and mobile operators in India to offer a range of mobile financial services,” including banking, bill payment, ticketing, mobile top up and other services. However, since that announcement, there has been little news from the joint venture, suggesting the companies are struggling to find Indian partners for their technology platform even as large players like State Bank of India and bharti airtel move forward on their own. One exception is a recent announcement from Standard Charter India (which is admittedly a small player in India) to leverage Monitise to provide a range of mobile applications for the Indian market designed to target the growing Indian middle class.
It is unclear what Visa will do in India. Its June 2011 acquisition of Fundamo of South Africa may provide a stronger option for expanding its India business than the existing Monitise solution. Nevertheless, Visa has reiterated its support for collaborative activities with Monitise; thus the ultimate solution in India might represent a blending of capabilities. What is obvious, however, is that lack of a local partner has affected the status of this joint venture. Clearly, Indian banks and Indian regulators are looking to partner with players that have a strong, on-the-ground presence in their lucrative market.
airtel money, launched in January 2011, is India’s first mobile wallet offered by a telecom operator. Under a license from the Reserve Bank of India to use the “Semi Closed Wallet,” bharti airtel provides capabilities for mobile bill pay (electricity, gas and financial services), mobile top up, ticket purchases and point-of-sale payments. Initially launched in a small footprint (Guragon, then expanding to Delhi), the solution includes discounts and offers for merchants as part of the network. The solution will ultimately leverage airtel’s joint venture with the State Bank of India to provide banking and financial services to unbanked Indians across the country, providing an extensive cash load network that will combine airtel’s existing physical footprint with partner merchants to enable cash loads/deposits.
South African Mobile Initiatives. As the largest economy in Africa, South Africa has seen a variety of technology investments in mobile financial services, especially because many global players see South Africa as a critical gateway to the broader African continent. That said, some of the most successful mobile experiments in South Africa have been homegrown, with Fundamo, recently acquired by Visa, leading the pack.
Founded in 2000, Fundamo is a mobile banking and payments technology provider that offers mobile financial services to unbanked and underbanked customers in Africa, Asia and Latin America through partnerships with companies like Western Union, Accenture, S1 and others. At the time of Fundamo’s recent acquisition by Visa, the company had 50 deployments in more than 40 countries, providing service to more than five million registered subscribers. Fundamo has been able to achieve this geographic reach via a model that provides modular and configurable technology services to both mobile network operators and financial services companies, enabling both to leverage their mobile wallet to provide payment services, mobile top up, remittances, person-to-person payments, bill payments and account management services.
WIZZIT, a subsidiary of the South African Bank of Athens (Johannesburg), is a financial services solution provider for unbanked consumers in South Africa. It offers a transactional bank account, cell phone top up, payments, money transfer and person-to-person payment capabilities. Founded in 2004, WIZZIT is a solution with a close partnership with the World Bank’s Consultative Group to Assist the Poor (CGAP). Its mission is to provide access to financial services to underserved segments of the South African population. To date, they have experimented with a range of mobile financial solutions, including wholesale payments between small shop owners and their suppliers, debit card and ATM access solutions and other solutions. Perhaps the most unique aspect of WIZZIT is its unique direct sales model that uses young “Wizz Kids” to help evangelize the solution directly with the target customer base.
Finally, Standard Bank of South Africa, a pioneer in branchless banking services in South Africa, provides an interesting example of how traditional banks can provide a solution to underserved populations via a mobile delivery model. As shown below, Standard Bank uses a network of merchants to facilitate cash deposits and provides a distributed framework of sales agents, area managers and service representatives to support branchless accounts in the field. Account information and payment transactions can be accessed via mobile phone, and a range of additional banking products (including savings and loans) are supported as well.
Standard Bank of South Africa: Branchless Banking Model
Despite the challenges of serving the diverse and geographically far-flung populations that comprise the global middle class, this segment represents an impressive demographic segment. A wide range of players have already begun tapping into the potential market opportunities. Despite country-specific challenges, low volume and constrained spending capacity, players like Fundamo and M-PESA are proving that it is possible to profitably serve the global mass market/middle class.
Most of the success stories to date have been in smaller countries, often with highly concentrated telecommunications and/or banking sectors. However, the potential represented by these early-stage successes has led players like Visa and MasterCard to cement significant deals (with Fundamo/Monitise and Telefónica respectively) to serve these markets. To the extent that these players can use their global expertise, scale and capital to help standardize and commercialize mobile financial services solutions in emerging markets, there is tremendous potential to create economic value for the global player and really change these markets.
Ultimately, however, these players each need to find unique, sustainable and differentiated ways to address the four core components of a successful mobile financial services model:
• Core financial capabilities. As many of the case studies highlight, the needs of the global middle class are broad if somewhat less sophisticated. Consequently, a successful solution will need to effectively provide a range of products that likely include remittance, payments, mobile top up, savings and affordable credit. In most cases a local banking partner will be critical.
• Mobile technology capabilities. Fundamo and others have found a way to work collaboratively with mobile technology operators, which is clearly a critical component to a successful market ignition and delivery strategy. Most of the existing success stories in the mobile money arena either are led by local mobile network operators or have a strong partnership relationship with them.
• Local Support Capabilities. This is an area where different companies have shown great innovation and creativity in how to tailor sales, service delivery, support and other locally unique capabilities.
• Interoperability capabilities. Whether it is connecting solution capabilities within a country (mobile networks, ATM networks, etc.) or dealing with cross-border financial issues like remittance, interoperability is key.
As payments and financial transactions around the world become increasingly electronified, it is critical to align the payment and financial services infrastructure to support the most significant demographic trend on the planet: growth of the global middle class. Failure to adequately address this issue not only has serious implications for the growth prospects of emerging markets; it also has material implications for revenue and profitability growth for multinational companies that face maturing financial service markets and slower demographic growth in the more-developed economies.”ƒ
BIBLIOGRAPHY
Abhijit Banerjee and Esther Duflo, “What Is Middle Class about the Middle Classes Around the World?” Journal of Economic Perspectives 22(2): 3-28 (2008).
Thorsten Beck, Asli Demirguc-Kunt and Soledad Martinez Peria, “Reaching Out: Access to and Use of Banking Services Across Countries,” Journal of Financial Economics (2007).
Alberto Chaia et al., “Half the World Is Unbanked,” Financial Access Initiative Framing Note (October 2009).
Natalie Chun, Rana Hasan and Mehmet Ulubasoglu, “The Role of the Middle Class in Economic Development: What Do Cross-Country Data Show?,” Asian Development Bank, ADB Economics Working Paper Series, No. 245 (January 2011).
Patrick Honohan, “Cross-country variation in household access to financial services,” Journal of Banking and Finance 32, May: 2493-2500 (2008).
Isaac Mbiti and David N. Weil, “Mobile Banking: The Impact of M-PESA in Kenya,” National Bureau of Economic Research, NBER Working Paper 17129 (June 2011).
Olga Morawczynski and Mark Pickens, “Poor People Using Mobile Financial Services: Observations on Customer Usage and Impact from M-PESA,” CGAP Brief (2009), available at http://www.cgap.org/gm/document-1.9.36723/BR_Poor_People_Using_Mobile_Financial_Services.pdf.
Megan Plyer, Sherri Haas and Geetha Nagarajan, “Community-Level Economic Effects of M-PESA in Kenya: Initial Findings,” IRIS Center Report, University of Maryland (2010).
Martin Ravallion, “The Developing World’s Bulging (But Vulnerable) ‘Middle Class’,” The World Bank, Policy Research Working Paper, WPS4816 (January 2009).
“The Middle of the Pyramid: Dynamics of the Middle Class in Africa,” African Development Bank Market Brief (April 20, 2011) [Note: The definition of Middle Class in this study is $2-$10 per day].
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