Tight regulation may be holding mobile banking back where it’s needed most.
M-Pesa, a thriving mobile money service launched in 2007 by Kenya’s leading mobile network Safaricom has almost as many subscribers as Kenya has adults—19 million people from a population of 43 million, according to The Economist. The majority of its customers use M-Pesa for an array of transactions, from paying electricity bills to sending money to distant relatives, on a simple text-based interface accessible on the most basic mobile phone. According to the The Central Bank of Kenya, approximately 1.5 trillion shillings (US $17 billion) was sent via M-Pesa in 2012, equivalent to just under half of Kenya's gross domestic product.
What are the drivers behind this roaring success? A report from McKinsey and Company highlights three important reasons:
- Kenya had a large mobile money access gap. In 2007, more than 80 percent of people were excluded from the formal financial sector. Although few had a bank account, a growing number of Kenyans had access to a mobile phone. Adding to that, many Kenyans live in disparate parts of the country, so M-Pesa emerged as a cheap, safe and reliable way to transfer money.
- Safaricom executives took a smart gamble with M-Pesa. There was full support at the highest level of Safaricom's management for the mobile money venture to be rolled out at scale as part of the company's strategic decision to retain its position as the dominant mobile operator in Kenya. M-Pesa has now reached a critical mass, with a massive network of agents and users, which reinforces their customer loyalty.
- Kenyan legislators allowed regulation to follow innovation. M-Pesa was initially developed outside conventional banking regulations, which created an environment with minimal barriers to entry. Mobile money has resulted in a boon for the Central Bank of Kenya, because the bank can now monitor money that was literally kept under the mattress before. However, in 2012, the Kenyan government slapped a 10 percent tax on transaction fees for financial and money transfer services to gain a little more from the mobile money profit-making pie.
Lax oversight on the regulatory side has surfaced to be a major contributor to why Kenya's triumphant mobile money experience worked so well, but may not be successfully replicated in other developing nations. According to the “State of the Industry: Results from the 2012 Global Mobile Money Adoption Survey,” conducted by GSMA, the association of mobile operators, both demographics and socio-economic forces have an impact on the efficiency of mobile money services, but regulation is the only external factor that can keep the service from succeeding.
India: The next Kenyan success story?
India in 2013 is in a similar position to Kenya in 2007, before the launch of M-Pesa. As Reuters notes, the South Asian country has an enormous remittance market, a mobile phone penetration of about 70 percent, and a banking infrastructure that is inaccessible to more than 50 percent of its population. Vodafone has a presence in 1.5 million of its retail outlets and agent locations, which far eclipses the country's bank branches 15 to 1.
Despite possibly huge mobile banking returns, expansion has been restrained. “M-Pesa’s deployment has been very successful in Kenya….[But], India is strongly governed by the financial regulator. We can therefore only issue a semi-closed wallet,” says Suresh Sethi, business head for M-Pesa at Vodafone India. Essentially, semi-closed wallets are payment instruments that are redeemable only at a certain identified merchant locations. These instruments also don't permit cash withdrawal, which limits the range of services that M-Pesa could normally cover.
Since Vodafone will not be able to import the Kenyan model of bypassing banks with mobile-to-mobile cash transfers, together with its local partner ICICI Bank, Vodafone will be required to screen customers before allowing them to withdraw cash and participate in mobile commerce. This will lead to much slower growth of the mobile money service.
South Africa: More regulatory hurdles
In South Africa, M-Pesa failed to become a local sensation when Vodacom, a unit of Vodafone Group, tried to launch it in 2007 due to the rigidity of the Financial Intelligence Centre Act (FICA). A significant amount of paperwork was demanded, which made it difficult to transfer money from a bank account to a mobile wallet. Vodacom CEO Shameel Joosub explained that a primary impediment has been regulation, along with the absence of a proper network to deposit and withdraw cash.
“The big issue has been regulation and cracking the distribution,” Joosub said in an interview with Bloomberg Businessweek. However, due to an easing of regulations that will allow the service to connect directly to banks, and on transactions less than 1,000 rand (US $100), Vodacom is anticipating a much stronger comeback with its relaunch in the next few months. There will also be a corresponding expanded distribution channel for more points of sale.
Nigeria: Taking regulatory leadership?
Nigeria may be the next country where a service like M-Pesa will be a runaway success. The Central Bank of Nigeria is taking a pivotal role in pushing for the widespread adoption of electronic banking by implementing a “cashless policy,” which piloted in Lagos and was rolled out July 1st in six other states.
The policy aims at reducing the amount of physical cash circulating in the economy, and encouraging more electronic-based transactions. According to the Nigerian Tribune, Lagos State governor Babatunde Fashola noted, “the government had both participatory and supportive roles to play in the success of the transition to a cashless society...the major step was to create enabling environment to ensure smooth implementation.” Under this initiative, mobile banking will have a crucial role to play.
It is obvious that pioneers like Safaricom and Vodacom were responsible for including millions of people around the globe into the financial sector through mobile banking services. However, regulatory barriers play a key role in determining the magnitude and rate of uptake. In places like Kenya, Madagascar, Uganda and Tanzania, where there are more mobile money accounts than traditional bank accounts, taking care that regulations guide--rather than obstruct--the expansion and use of these services is essential for the future of financial inclusion.