Mobile 305 Lesson 2: Emerging Markets Mobile Prepaid Evolution

by Tim Attinger

Mobile 305 (elective. Mobile 205 and Debit 201 recommended): Emerging Markets Mobile Prepaid

Lesson 2 Discussion Board: What do you think has been the most significant obstacle to the growth of financial inclusion initiatives and the penetration of electronic financial services in emerging markets? Regulation? Economics? Demand? Distribution? Etc.? Click here to respond.

In our first class, we discussed how a growing middle class in emerging markets are prime candidates for the next great growth curve in electronic payments, and how they are underserved by traditional financial services today. The low-income individuals in those markets — and one might argue in developed markets like the United States — are even more woefully underserved by the established banking and payments infrastructure in emerging markets. As a these populations grow and mature in earning power and spending power, they fuel the core economic growth of the countries in which they reside.

But how best to reach consumers in the inner cities and remote villages of emerging markets when the reach of banking infrastructure and the financial services they deliver is so limited? What products would best serve those consumers who average less than $USD 500 in monthly income and need access to those funds daily? How do you provide that access on a regular basis? Remotely? How do you service those consumers effectively and economically? How do you take deposits and disburse funds, manage bill payments, facilitate money transfers, manage account information, and deliver transaction records to millions of consumers? How do you make that delivery sustainable, beyond the $millions or even $billions in charitable start-up capital that developed-world organizations driven by the cause of financial inclusion may wish to throw at you? Do you do it by building a lasting business model that delivers financial inclusion while actually creating economic value and a reasonable return for the companies engaged in that effort?” Let’s take a look at some interesting stats that might inform an answer.

Opportunity Abounds:  In the developing world, the majority of consumers are underserved by traditional payments capabilities and providers. Payment instrument distribution and acceptance are challenged by a combination of a lack of electronic payments network infrastructure, relatively low distribution of core payments instruments by traditional providers, and low acceptance of electronic payments by physical retailers. At the same time, distribution of mobile services typically outstrips that of financial services, with many operators enjoying quite broad distribution networks of physical retailers who sell and service mobile accounts. As the vast majority of emerging market mobile accounts are prepaid, these retailers also provide cash-in/ cash-out services for the purpose of airtime purchase.

A Passage on India: Let’s take the example of opportunity in India, in round (and large) numbers. A population of nearly 1.2 billion people. An economy growing in the high single digits. A labor force of over half a billion people. Predictions of a growing middle class that will surpass the total population of the United States in number within the next 18 months. A growing consumer and services economy where 70% of the population lives outside of urban centers, and nearly two-thirds of the population is under the age of 35. Most estimates of banking penetration have over 70,000 branches serving roughly 200 million accounts and adding roughly 4-5 million (say, the entire population of Louisiana) about every month.

Considering the size and diversity of the country, and in light of the relative recency of India’s move from managing the economy along social democratic principles to more liberal market-driven guidelines, that banking penetration and growth is impressive. That is, unless viewed in contrast to the relative penetration of mobile telephony. Mobile communications has been called the world’s first ubiquitous technology. And with roughly 5 billion devices in circulation, that is certainly true. India is a fine case study for that ubiquity. Mobile operators, such as Bharti Airtel and Reliance, have collectively established over 600 million mobile accounts in India, and they’re adding accounts at an average of ~10 million per month. Just for reference, that’s a mobile population greater than the total populations of the United States, Mexico, and Canada combined. And they’re adding the population of Manhattan every month.

What’s more, the distribution networks these operators have built to sell and support mobile services are impressive, particularly when compared to traditional financial services infrastructure. Mobile services companies have expanded rapidly by building distribution networks with hundreds of thousands of small business agents. By most estimates, the few hundred thousand bankcard acceptance locations in India are surpassed by the total number of SIM-sales agents for Bharti Airtel alone, with nearly a million small businesses serving as cash-in/cash-out facilities selling prepaid mobile airtime to Airtel customers.

If you were interested in providing core financial services, electronic payments, and remote access to a vast population of consumers — as is the government of India, the Gates Foundation, and others — you might look at the mobile operator business and decide that therein lays the road to reaching your financial inclusion goals.  Which is exactly what they’re doing. The Reserve Bank of India has provided for changes in banking laws to 1) allow banks to use these small merchant distribution networks as correspondents for delivering banking services to untapped consumer segments, and 2) make provisions for the distribution of prepaid semi-closed loop payments instruments by mobile operators to their subscriber base. 

Banking Where and How You Live, and Shop: As a result of these minor changes in the regulatory environment in a place like India, a sea change is underway that is defining how the majority of consumers find, access, and adopt financial services. Consumers are finding access to basic deposit services at their local grocer or pharmacist. They’re still putting money across the table to fund airtime in advance, only now those prepaid funds are actual rupees in a virtual account. Consumers can access that account from a basic menu on their 2G mobile to top up airtime, pay bills, and transfer money. They can pull cash out at any small business that sells airtime, turning the mobile distributor population into a vast ATM network. And they can see their account balance “on line” via text or USSD through the same simple mobile interface.

This example is repeating across the world in multiple emerging markets in various forms, but all with the same basic structure. The next billion consumers are entering the global marketplace for electronic payments through the world’s most ubiquitous technology, mobile, and finding day-to-day service and cash management through a combination of remote mobile access and local merchant distribution. The deposit account they are establishing is a more broadly useful version of one with they are already familiar — prepaid. What’s more, the business model supporting this vast network of distribution and access — mobile communications — is already built and self-sustaining. Financial services are an adjunct, a value-add, to a business that already reaches nearly every consumer on the planet. 

So there’s a commercial model for delivering on the promise of financial inclusion that doesn’t involve constant rock-concert fundraisers nor billionaire donations to achieve its ends. Which is surely a good thing. That the mobile operators who are delivering these services to consumers look to be building and growing a new generation of financial services infrastructure, processing capability, and payments network is also surely a good thing. Well, that is, perhaps unless you happen to be a bank, or a payments network, with an eye toward growing your business into the next billion electronic payments consumers. In which case, you can either view this development as a threat or as an opportunity. 

In our last section, we’ll take a look at what the growth of non-bank mobile payments networks tied to retail distribution might mean for the growth prospects of traditional payments networks in emerging markets. We’ll also see what this emerging market model might mean for the growth of prepaid products with underserved consumer populations in developed markets, like the United States.

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