INTERNATIONAL. The use of mobile phones for banking and remittances is growing worldwide, nowhere more so than the Middle East and Dubai where Mi-Pay is setting up its second data centre to support Middle East and African operators. In this interview Mi-Pay's CTO, Simon Cavill talks about some of the technical and regulatory challenges he is facing, as both the banks and mobile companies are converging on this hugely lucrative segment.
Not so long ago, people walked around with telephones the size of bricks pressed against their ears; the mobiles were considered to be at the cutting edge of technology. While they were shouting into these cumbersome devices with very poor reception, their colleagues in emerging economies were still struggling to use even more limited telecoms technology. Since then, mobile phones have become smaller, more powerful and more feature rich.
But much more than that, this decade mobile phones are fast becoming ubiquitous and their impact is being felt even more dramatically in emerging economies that are not necessarily accustomed to technologies that work easily and can perform a variety of functions. The use of mobiles for banking and payments is transforming lives and economies, especially in the unbanked and rural areas of many countries without branches and other traditional banking channels, such as ATMs, fixed line telephones and the Internet.
Mi-Pay was formed in 2003 as a friendly exit from Logica (formerly LogicaCMG), the UK-listed pioneer of RFID, biometrics, ID cards and M2M (machine to machine) technologies. MiPay was set up at that time to handle the payments side of Logica’s business. In 2003 Logica was handling 70% of the world’s text messaging, soon to take a 25% share of the global multimedia messaging market. Today Mi-Pay collects all the prepaid cash from top up vouchers, running all the payment services and linking to the operator systems to enable the correct balance to be shown on the user’s phone. Logica's anti money laundering solutions are in operation at half of the world's top ten banks and it has implemented more than 70 card infrastructure systems.
Although mobile numbers have been growing exponentially, just surpassing the 3 billion mark worldwide, mobile payments have had a chequered history. Simpay, a mobile payments company established by a consortium of European mobile operators in 2003, closed down in 2005. While developments are moving fast in Japan and Austria, in the UK, three banks, HSBC, First Direct and Alliance & Leicester, are now live with a new mobile banking platform, Monilink. This service, developed by Monitise – itself a JV between Link (the British ATM provider) and Morse - claims to be the first cross-operator/cross-bank mobile platform in the world and has a mobile interface to the UK's Link ATM network.
Monitise also has significant international developments in several countries including the US, South Africa, Singapore, Hong Kong, India, Germany and Turkey. The company views the mobile as the fifth banking channel (after the branch, ATM, telephone and Internet) emphasising its flexibility and functionality when linked to an ATM network. MiPay’s business model on the other hand works through the top-up card vendor network as the cash outlet, rather than the ATMs.
In another interesting example from the UK, a service called JourneyPay BuyVoice, enables taxi drivers to accept credit cards using their current mobile phones, giving taxi passengers the convenience of paying their fare with a card but without the need of a card terminal. Devised by Planet Payment, a US-based global payment and data processor, and JourneyPay, a UK transport payments specialist, the service has been designed as a fully managed, turnkey solution that combines a user-friendly, natural speech application with a robust payment platform to create a simple, secure and quick mobile payments solution.
The Middle East banks have only just entered the Internet world and they are already being faced with another wave of technological challenges, with the first mobile banking services available since 2007. Western Union recently said it will be launching a mobile remittance service between the Middle East and selected markets, through its own branches, agents, banks and post offices. Despite the patchy and limited success of the various mobile payments initiatives of recent years, mobile still has a significant potential as a delivery channel for payments and banking services. In the developed world, the conflict between mobile operators and the banks led to failures such as Simpay, but lessons have been learnt and a welcome resurgence of fruitful co-operation is now taking place.
The precise future of mobile payments is yet to be defined but the recent changes in the market should be sufficient to push this channel beyond the tipping point of development, with potential and appeal to the wider public. As a critical mass of phones is achieved in every market, so you can have a more rapid uptake. But there is a counter argument that in the more developed world most of the population is already happy with using standard retail outlets and Internet banks, which means there's a more limited need in these markets for mobile banking to cover the very small part of the day when a consumer isn't near a computer or close to a bank in a town centre.
Alternative to cash
Management consultancy Booz Allen Hamilton has found that in countries where most retail sales are conducted on a cash rather than card basis, but have high mobile phone usage, phone-based payment systems have a strong possibility of success.
“The Middle East has a high mobile phone usage,” Booz Allen Hamilton Vice-President Karim Sabbagh said recently. “Therefore a phone-based payment system that simply replaces paying by cash and other electronic means could be popular in this region."
Banks, credit card companies, handset manufacturers and telecommunications companies in the Middle East could achieve sweeping success with the right innovative co-operation model. All stakeholders have a vested interest but concerns exist over creating the right co-operation model.
Several business models for mobile banking deployment are now emerging, driven by regulatory and competitive pressures around the world. While banks are strongly promoting cashless payment transactions using technologies such as mobile phones, others are also seeing the advantages. A mobile phone based payment system, if successfully implemented, gives credit card companies, and telecom carriers another possible revenue stream.
In one example from the Philippines, the two big mobile phone companies, Smart Telecom and Globe, offer mobile banking. “Between Smart's Money and Globe's GCash, around five million registered users have been signed up, allowing them to make transfers and payments. A certain chunk of those are lower income people,” says Mark Pickens, microfinance analyst with the Consultative Group to Assist the Poor (CGAP) at the World Bank.
“The market there has benefited from consumers being very technically savvy. A large percentage of Filipinos have a mobile phone - even in the low-income customer segment - and text messaging is popular. Filipinos send more texts per day, per user than in any other country. The estimates we've received are as high as 15 per day, so Filipinos are very familiar with manipulating their handsets, and the interface with mobile phone banking draws on this familiarity.”
In South Africa, only banks are permitted to take deposits, so mobile phone companies that want to be in the mobile banking space need to enter into joint ventures. One such venture is MTN banking, which is operated by mobile telecoms firm MTN and Standard Bank. Mobile banking also opens opportunities for some entrepreneurs. WIZZIT is a mobile banking service that targets the low-income, unbanked market. It was conceived by a group of entrepreneurs and now operates as a division of the South African Bank of Athens. According to a recent survey by CGAP, nine out of ten WIZZIT customers said the service it offers is inexpensive, and three- quarters said mobile banking is closest to their ideal way of doing banking because it is cheaper, faster and safer than branch or ATM channels. The study also confirmed that WIZZIT's transaction banking service is on average one third cheaper than a comparable account offered by one of South Africa's big four banks.
In the Democratic Republic of Congo, the mobile phone based service CelPay records 500,000 transactions per month. Reports said that the amount of money in these CelPay accounts is more than all deposits in the entire banking sector. Perhaps this isn't too surprising, as there are just 30,000 bank accounts in the entire country, but more than three million mobile subscriptions. In Kenya, mobile provider Vodafone has developed the M-PESA mobile banking system in partnership with local network provider Safaricom, Commercial Bank of Africa and Faula, a local microfinance organisation. M-PESA allows customers to borrow money, check accounts and transfer money using their mobile phone.
Mobile phone banking looks very promising in countries like Congo and Kenya where the banking sector is very underdeveloped. Africa has the fastest growing mobile market in the world but mobile banking is also ready to reach lift off with the unbanked migrant workers of the Gulf, as well as some other emerging markets of the region such as Syria, Iran and Iraq.
The population in the GCC states has grown more than eight times during 50 years; to be exact, from 4 million in 1950 to over 40 million in 2007, which marks one of the highest rates of the population growth in the world. This increase has not been caused primarily by a natural growth of indigenous population but by the influx of foreign workers. The employment of large numbers of foreigners has been a structural imperative in these countries. World Bank figures show that in Qatar, the UAE, and Kuwait, foreigners constitute a majority. In the United Arab Emirates they account for over 80% of population. Only Oman and Saudi Arabia have a relatively low proportion of foreigners, at about 20% and 27% respectively.
The foreign labour force is a substantial drain of the hard currency earnings of GCC states, with remittances to migrants’ home countries amounting to US$27 billion each year, and US$16 billion coming from the migrant workers in Saudi Arabia alone, These remittances constitute a large portion of the GCC’s GDP; for example, in Saudi Arabia according to some recent figures they amounted to about 10% to 11% of the total GDP of the Kingdom.
Figures for 2006 show a total of 12.5 million expatriates in the Gulf. Since the last oil boom of the 1970s a massive labour emigration followed the economic developments, and Yemenis, Egyptians, Sudanese, Jordanians/Palestinians, Syrians, Pakistanis and Indians have continued to arrive in the Gulf states in large numbers. The arrival of so many low income, low credit risk workers without bank accounts is presenting a real opportunity to mobile operators.
The GSMA anticipates that with the help of mobile services, the global market for remittances could grow from about US$230 billion a year to more than US$1 trillion in five years. For mobile operators in the Middle East, the opportunity is clear, making further use of their prepaid top-up networks will enable them to diversify into a new, lucrative line of business.
Mobile payments providers Mi-Pay is therefore encouraging non-banked migrant workers to turn to the practice of buying credit for their prepaid phones into depositing spare cash in their prepaid accounts, from which to then conduct electronic money transactions. Mi-Pay is working with operators in the Indian Subcontinent, Africa and the Middle East to establish fully operational and cross border mobile money transfers free from the shackles of government regulation
BI-ME: Most of us have heard about mobile banking, but please could you explain for us how the system works and why is it emerging as such as shake-up for the traditional banks?
SC: Because of our origins with Logica and managing the funds circulating from prepaid cards we are very close to the mobile operators. This means that we know how to collect money and we know how to control fraud. We understand pre-paid.
Most of the people of the developing world rely on cash, without access to ATMs or payment cards. But what we say is that if you have access to a mobile, you have access to someone who provides the top up vouchers. Now there is a whole economy going on around airtime. If someone wants to send a small amount like US$20, they might be sending it in top up vouchers, and we are already seeing this development. There is now a currency based around airtime.
BI-ME: To what extent is your network about remittances and capturing the huge market of the labour workers in the Gulf?
SC: Money transfer has always been around for hundreds or thousands of years, often on an informal basis. We estimate that 80% of money transferred worldwide is sent illegally. There are the old methods like huwala (transfer), the chits or ‘flying money’ system or simply the trusted money brokers in any community, whether it is in Nigeria, Bangladesh or China. They are a major remittance system used in the world.
The sender will phone the receiver to say the money is sent. Often the two middlemen on each side of the transaction may never exchange value. The money can stay in the other country or a traditional method is to send an invoice for jewellery and massively inflate the invoice, so this is not traceable in any formal way. This is what we are up against in the informal remittance market. Our strategy is essentially to replace huwala in a legal framework.
BI-ME: Since you mentioned a large part of the market is unregulated, what are the regulatory issues?
SC: There are regulatory issues that will have to be tackled. For example when you transfer money by mobile from Europe to the Middle East at the moment there is no regulation. No one has thought of the issue that airtime is currency and in the end this will come down to the political influence of the operator and will be decided by governments.
BI-ME: You have recently opened an office in Dubai. What are your operations there, your ambitions and who are your customers?
SC: We have had a presence in Dubai for a while although it is only six weeks ago that we completed the formalities and set up our offices in Dubai Internet City. We will be holding a data centre in Dubai for all our African customers, so we will have one data centre in the UK and one in Dubai.
We run the entire payments system for du in the UAE, for mobile TV, for fixed to mobile and phone payments. We are in effect a de facto switch that connects to all the banks and mobile operators and for us that is an interesting area, to develop that role as a switch.
The Middle East is a very interesting market for us and the mobile industry. The mobile phone penetration in the UAE is 200%, that is of course two phones for every individual, and there is definitely a very fashion forward element to market, that we see to some extent in Asia. There is interest in the latest products and a large range of young people. So all of the elements are there, yet there are relatively little choices. In markets like Syria, and even Iran and Iraq we are seeing an explosion of mobile payments. There is always a demand to move money between people, whether the formal bank network is there or not.
BI-ME: Are you able to say anything more about du? Can we expect some new developments from them?
SC: I don’t want to speak for them, but naturally as a new operator they have to be innovative and they have to be forward thinking in the market. You will certainly see a lot of things coming up from them.
BI-ME: You have a large number of customers in Africa. What has been the effect there, in the countries where you are working with mobile operators to offer the service?
SC: The mobile operator is usually a large employer in the countries where we work, and a big payer of tax or licence fees, so they have an influence with the government. There are effectively mountains of cash from vouchers spread around top-up shops and we collect that money and send it around to the operators. We can equip the vendors with the infrastructure to manage their cash and to show the cash value, monitor it and send it offshore. In effect we offset one against the other.
The customer has a one time PIN and ID card and the two values are put into the system through the phone. The operators are able to reach the entire country quite cheaply. We don’t get involved with moving the money around since it is already there [in the top-up shops].
BI-ME: What is the charging and the business model?
SC: The card vendor gets a margin. The operator gets a small amount and Mi-Pay gets a small amount. The operator also gets the benefit of having his money offshore as well as using it in the local currency. At the same time we are allowing people to top up internationally, since they can choose to transfer either airtime or money. As most prepaid phones in the developing world are offline for an average of 17 days every month, more phones are active for more of the time. The values of this are of course trivial compared to the usage in the market.
When we transfer airtime we can allow that to be passed on to other users by P2P. At a later stage we are also looking at allowing customers to buy phones by top-up vouchers. We are also exploring new areas like paying for games of chance with airtime. We can basically build the whole economy through the existing infrastructure.
BI-ME: We hear about contactless credit and debit cards already going into use and mobile phones being used for payment in a retail situation. Is that also part of the big picture, of mobile phones being used for all kinds of payments such as shopping, tickets or taxi fares?
SC: I will be careful how I answer this, because there is a lot of expectation and people at the end of the day are naturally cautious when it comes to money. Cash is ingrained in our DNA and it took 40 years for credit cards to take off in the West. In the Middle East there are other religious objections to credit cards.
People are wanting to create debit methods rather than credit methods. But yes certainly, mobile networks are a new way to get banking services, where it is appropriate.
BI-ME: It seems that there are the mobile operators on the one hand and the banks on the other hand, both converging on this space called mobile banking? Do you think that is the case and how will the situation pan out in the future?
SC: There is an interesting battle between the operators and the banks. On the one side the banks want to be conservative, but they also want to stimulate demand. The bank that buys the operator, or the operator that buys the bank is the one that will be successful.
Considering that there are only two or three mobile licences in any given country there is by definition a limit on these banking channels. So if I was a bank I would be looking to make a partnership right away.
MTN in South Africa recently made a joint venture with Standard Chartered and created a mobile bank that is growing at a fantastic rate. In this way you get the best of both worlds, and I predict that we will see a lot more of these 50-50 deals.
BI-ME: You presented mobile banking almost as banking for the poor. Mobile users are growing a very fast rate in Africa to reach around 200 million and it represents a natural market. But would you say that is a fair definition? In conclusion, is mobile banking only for the unbanked?
SC: It is banking for the poor and it is working in a variety of ways. But I would say it is banking for the entrepreneur, for the small business. Our market is going to be with the millions of entrepreneurs. With us they can do their banking and cash control and all the things that are critical to any kind of trade. There is also a benefit to the banking industry as it offers a cost-effective mechanism to access a new marketplace. I see a lot more partnerships coming up between the operators and the banks.
Note: Mi-Pay is a leading provider of mobile-initiated payment services offering outsourced pre-paid top-up, stored value (micro-payment) services and transactional marketing (loyalty) services. Target customers include mobile operators, e-money providers, media, utilities, transport companies and local authorities. Mi-Pay’s payment services and value-added business operations enable cost-effective supply and operation of:
• Mobile Initiated Payments (top-up and secure SMS/Java payments)
• Micro Payments (white-labelled micro-payment accounts)
• Media Instant Payments (services for Digital Broadcasting services)
• Meter Initiated Payments (top-up for wireless utility meter service providers)
• Mobile and Internet Payment Service Provider (payments for digital content providers, transport companies and local authorities)
For more information visit www.mi-pay.com