The mobile payment revolution

Mobile payments are poised to push cash management to new frontiers.

Travel to a rural village in any developing country and you're likely to encounter infrastructure deficiencies. Electricity, running water and sanitation are often rudimentary at best. However, walk down a rural main street and one modern convenience will immediately jump out -- mobile phones.

During the past decade, access to portable phones has taken off. According to the World Bank and the GSM Association, the number of subscribers in developing countries has risen more than 500% since 2000. Today, global mobile connections total 4.3 billion with about 67% in emerging economies.

Furthermore, a World Bank report found that the direct benefits of portable phone access include economic growth, job generation, productivity increases and higher tax revenue -- quite a list of gains from simply giving people a means to communicate.

But the potential of mobile phones is hardly limited to communication. "Mobile phones are increasingly becoming a popular tool for conducting financial transactions," wrote Celent analyst Prathima Rajan in a recent report. "They enable promotion of financial services in the most remote parts of the world."

Mobile phones have been used for consumer-to-consumer payments since at least 2004 when the Philippines' Globe Telecom launched G-Cash. Today, G-Cash offers services such as remittances, bill payments and microcredit, and together with Safaricom's M-Pesa in Kenya, which is the market leader in Africa, it dominates the market for mobile payments in the emerging markets. Together these two providers have nearly 10 million subscribers, which compares with Celent's estimate that there are close to 25 million mobile banking subscribers in the emerging markets globally.

Whatever the subscription numbers, payments by phone have ample room to grow. Using Celent's estimates, fewer than 1% of emerging market mobile users are currently signed up for payment schemes. But consumer money transfers is just the beginning; network operators and banks have their sights set on expanding the services into corporate banking and cash management.

Low-tech wallets

The existing mobile payment solutions are exceedingly simple. The popular G-Cash and M-Pesa services allow subscribers to transfer money using specially encoded text messages -- all users need to do is register with the service and, in some cases, install a special SIM card in their phone and off they go.

"Basically, having a mobile phone and being able to send an SMS is the only thing that is required," said Ron VanWezel, global product manager of emerging payment streams at Deutsche Bank. "The technology is relatively simple to adopt for the end user."

To transfer funds, a user sends a text message indicating the amount to be transferred and to whom. Once the transaction is completed, the party who transferred the money and the recipient will both receive SMS confirmation messages. Subscribers can then use these "mobile wallets" (or m-wallets), as providers call them, in banks, stores or post offices to buy goods or convert electronic credit to cash.

Text message-based m-wallets should not be confused with the near-field communications seen in many developed economies. The technology behind, and applications of, these "smart card" services -- for example Hong Kong's Octopus card or phones in Japan that users can hold near a sensor to pay a subway fare or buy a soda -- is different.

A study by the Consultative Group to Assist the Poor (CGAP) found that users of M-Pesa adopted the service because of its relative ease and lower cost compared to cash transfers. On a daily basis the service handles transactions worth approximately $1.96 million, averaging just $20 per transaction.

The natural evolution of mobile payments is into commercial transactions. G-Cash, initially targeted at the Philippines' robust domestic remittance market, is now being used in more than 6,000 outlets, including rural banks, schools and utility companies. Rizza Maniego-Eala, president of Globe Telecom's m-commerce subsidiary G-Xchange, said while the number of subscribers has held steady at about 1 million since 2006, transaction volumes are growing "exponentially".

"Our business-to-business initiatives, including branch-to-branch transfers and rural payroll, are driving G-Cash's growth," she said.

Existing technology is pretty much ready for commercial mobile payments. According to senior Celent analyst Red Gillen, some "B2X" -- mobile transactions originated by a business -- transaction enhancements are as simple as adding merchant IDs and invoice numbers to the current SMS-based platforms.

"The existing mobile wallet technology does not need a major tweak to include business transactions," he said. "However, to scale out, work is still needed to connect mobile transactions with businesses' back-end systems, such as accounts receivable or payroll."

"I have a very strong feeling that mobile [business] payments will really take off, because they offer a lot of value," added Gillen.

Mobile treasury

Imagine a network of distributors and retailers in rural China or India. Retailers predominantly transact with their customers in cash that they then use to pay distributors. The entire chain is cash-intensive, creating inefficiencies and security risks for everyone.

"Distributors hate cash," said Gillen. "Cash has a lot of handling costs, takes longer to process, often experiences some shrinkage while in transit and, when carried in large amounts, poses personal safety risks." Enter mobile payments.

The treasury benefits of mobile are pretty straightforward. "When you take in cash, it can take up to six days for the cash to be recognised for the corporate," said Deutsche Bank's VanWezel. "With mobile collections, transactions are recognised the next day on the corporate's account."

And, when connected with enterprise resource planning systems, mobile payments can be automatically logged, reconciled and settled on the company's books.

Speeding up the flow of liquidity to a company creates all kinds of benefits. Most large corporations practice some form of daily account sweeping or pooling, often transferring money to a central account overnight to earn interest before being distributed back into operating accounts ahead of the working day. The more money a company has to sweep, the more interest can be made.

In addition, automating transactions reduces the chance (and frequency) of errors and the need for large accounting teams.

Mobile payments present treasurers the greatest benefits in emerging economies. "We're seeing the most rapid advancement in developing markets because mobile payment moves them from a primarily cash-based society to electronic money," said Thomas Wiles, transaction banking director of Standard Chartered Bank. "The underlying driver is just the economic efficiency that this new value transfer mechanism brings across."

Leif Simon, Asia-Pacific product management regional head of cheques and payments at Deutsche Bank, agrees. He explained that mobile services allow transactions in developing economies to "leapfrog" the stages of traditional payment means, whereas in developed countries SMS payments would potentially serve as "substitutes for existing cashless transactions" rather than new advances.

Not so fast

Signing up businesses for mobile services is not as easy as one would think, however. "Treasurers are understandably conservative, especially when it comes to using new technologies themselves," said Wiles.

Ask any analyst or bank executive for a company using the service and most will pause before explaining that its mobile payment solutions are still in their nascent stages. However, after a little digging and a few phone calls Coca Cola confirmed that it uses portable phones for payments from small retailers in the Philippines. There are also reports of Heineken and Unilever using the service in remote areas of Africa.

In addition to their novelty, treasurers have concerns over the security of mobile transactions. Kirk Tutterrow, director of marketing at banking technology vendor S1 Enterprise, addressed these concerns: "To be honest, mobile is just as secure as the online channel and probably more secure. Everything is encrypted over mobile cellular networks whereas public wi-fi is one of the most glaring holes in internet security."

Users are not the only ones with reservations towards mobile solutions. Regulators also stand in the way. One concern is that phone operators are not covered by most existing financial services regulations. Many of the existing m-wallet services are products originated by network operators -- for example, Globe in the Philippines and Safaricom in Kenya -- with banks participating only as part of the service universe. When a user converts cash into electronic credit, it effectively leaves the regulated financial system.

When asked what guarantees G-Cash gives its subscribers, Maniego-Eala said that every "one peso of G-Cash is backed by an equal number of pesos in a commercial bank account". This does not amount to insuring deposits despite Globe Telecom and G-Xchange having remittance licenses and being central bank authorised e-money issuers.

In the first quarter 2009, the central bank of the Philippines passed rules governing electronic money accounts, requiring Globe to acquire an electronic money issuers license, and declared that the credit in m-wallets was not considered a "deposit" thus not insured by the Philippine Deposit Insurance Corporation.

"Regulators, however, have now woken up to the fact that new payment mechanisms are emerging," said Dianne Challenor, Asia-Pacific regional head of payments and receivables for Citi treasury and trade solutions. "In most markets, we have seen regulators step up and issue rulings that require MNOs [mobile network operators] to either obtain a money transmitter and banking license or find a bank partner." These are moves that could open the mobile payments door to banks.

Financial institutions are keen to take advantage of opportunities in the segment. Deutsche Bank and Standard Chartered Bank have launched mobile payment authorisation solutions aimed at on-the-go finance officers and treasurers but see significant opportunity in more micro collections and payroll flows. How they work with operators remains to be seen.

Deutsche's VanWezel said he foresees a symbiotic relationship developing where banks bring the payment solution and operators the infrastructure and network to the table. "Banks should be able to take their payment revenue and the operator takes the extra traffic that goes over the network," he explained.

Up, up and away

Despite the obstacles in front of mobile B2X payments, few people -- if anyone -- think they are far off. The most conservative estimates put them at three years out, while the most optimistic predict widespread use of phone payments by the second half of 2010.

"Countries where there already are person-to-person schemes, that are a little ahead in mobile person-to-person payments, will be ahead in mobile B2X," said Celent's Gillen. If G-Cash is any example, he is probably not far off the mark -- the service already offers business-to-consumer payments and pay-roll services, putting mobile collections well within the realm of existing possibilities.

Corporates are likely to drive adoption of mobile services. At first glance, they stand to gain the most -- lower costs, increased automation and greater security are just a few of the benefits. If rapid adoption is what banks and mobile operators want, they would best be advised to target businesses like Coke, which have large distribution and retailer networks that would then have an incentive to join the service as well.

But the benefits of mobile do not stop at company treasuries. CGAP has found that incomes in households that signed up for M-Pesa have increased by as much as 30% since they joined the service; a rise that has positive implications on economic development, individual empowerment and purchasing power.

Interest in mobile payments is strong. Now it's just a matter of waiting for all the players -- including banks, corporates, mobile operators and government regulators -- to figure out the who, when, where and how before the corner store starts paying for its Cokes with a text message.

This article first appeared in the Cash Management Supplement that was published together with the November 2009 issue of FinanceAsia magazine.

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