Kenyan mobile money and the hype of messy statistics

Bringing @TimHarford to measure (see original podcast here http://www.bbc.co.uk/programmes/p04kxddv)

DevLog@Bath

By Susan Johnson

The hype around the success of mobile money in Kenya has been growing as mobile payments develop both there and worldwide. This week’s Economist cites a figure that 43% of Kenyan GDP is being channelled through M-Pesa each year, attributing the statistic to Safaricom itself. The figure has been rising from 31% last year, which was cited by both The Economist and the Financial Times. In August 2013, GSM Association released an infographic on “The Kenyan Journey to Digital Financial Inclusion”, which also used the 31% figure. The World Bank, CGAP, AFI and others have also used or cited such measures of progress in this field.

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Cashless in Cyprus

We are delighted to announce a new addition to our collection. The paper written by Leonidas Efthymiou and Sophia Michael (both at Intercollege Larnaca) entitled ‘When Cards and ATM’s are the only choice: A fortnight in Cyprus with no banking system, nor trust’ continues with our aim of informing the debate around cashless society and mobile payments, by detailing the events around the suspension of the banking system in Cyprus.

A brief introduction contextualised the discussion by enumerating the deployment and use prior to the crisis of ATMs, mobile and internet banking as well as some data on Point of Sale (POS) terminals in this small, open economy (where tourism is one of the main sectors of economic activity). The interaction between these elements of the payment ecosystem is even more clear when considering new technologies. For instance, Leonidas and Sophia note:

1) The only bank which offers a Contactless visa card is the Bank of Cyprus. Their 18-25 Youth card is the first card in Cyprus with contact-less technology and can be used for transactions below 20 euros, without having to insert a PIN in front of the POS. For transactions above 20 euros, you can keep the card in front of the POS, but you have to input your pin.

2) There are approximately 1460 enterprises across the island with contactless technology. Some of these enterprises include cafes such as Costa Coffee and Starbucks, pharmacies, bakeries, supermarkets, petrol stations and shops in malls.

3) JCC, the main payment system provider in Cyprus, is currently running a campaign at Nicosia cafes. All contactless transactions that take place at Nicosia cafes are eligible to participate in three monthly draws for 3 IPAD minis.

Essential to the 15 day closure of the banking system in March 2013 (similar only to the US in 1933 and Argentina in 2002), was that all electronic transactions and money transfers were frozen with the exception of credit/debit cards and ATM withdrawals. Leonidas and Sophia adopt a ‘sequence of events’ method to discuss an intensification in the use of cash during this period as ‘people can sustain themselves only by queuing at the long lines of ATMs to withdraw cash, or stay cashless and use their credit cards.’ Interestingly, during their research, they were unable to provide evidence to support rumours that ‘IOU’ notes replaced cash and cards as means of payments during Cypriot banking crisis.

Shortly after the central banks’ announcement that that banks will remain closed, long queues begin to form in front of the cash machines (18-III-2013)

In spite the Central Bank of Cyrpus’s instructions to banks that they should keep re-supplying the ATMs with money several times, by March 22nd (seven days into the crisis) long queues have formed at almost every one of the bank’s ATMs island wide. This was partly a result of panic and partly a result of the rejection of card payments by merchants. In other words (and like was the case in New York during Huracain Catrina), the payments ecosystem suffered a massive blow ‘as every card transaction directs the retailers’ money into a bank account. With a bank system under the threat of bankruptcy, or levy as the best option, most retailers prefer to turn down customers rather than accept their cards.’

In summary, the paper of Leonidas and Sophia offers a detail reach account of the Cypriot banking crisis, with a focus on the effects on the retail payment system but without loosing its connection with institutional stakeholders and macroeconomic developments. This narrative is enriched when the authors compare and contrast with developments in the US and Argentina, as it enables to ascertain the unique features of the crisis in Cyprus.

The challenge of digital micropayments in Mexico

In a recent post in the Celent Banking Blog entitled The Mobile RDC Cost-savings Myth, Bob Meara discusses the mirage of costs savings for banking thinking of introducing mobile payments alongside a well developed mulch-channel network. His argument is spot on, the cost of the transaction might be lower but there are also maintenance issues to be considered, activity cost in banking is the stuff of Alice in Wonderland and more important, potential savings might be small when considering that many have already been realized.

At the other side of the spectrum, however, are micro-finance institutions working in developing countries such as Mexico. So far many they have relied on staff as the main distribution channel. Mobile payments offer the possibilities of foregoing legacy investments and jumping the queue, sort to speak.

logo-Guatemala

Thanks to a travel and subsistence grant from FUNDEF,with Gustavo del Angel and Enrique Cardenas, we have started to map the evolution of payment systems in Mexico. While on site, I was lucky to be invited to a field visit to see first hand operations from Banco Compartamos, a Mexican microfinance institution.

The day started early (kicking off at 0630 hrs) to travel in group to the nearby city of Cuernavaca. The sherpa for the day was Enrique Majos, Banco Compartamos CEO, together with his IT and PR directors. We were joined by two other directors at the site. These visits are a regular thing for Compartamos’ directors.

I was introduced to all the local staff members and took part in the daily debrief (a pilot scheme in which all team leaders report on their activities for the day and any issues from the previous day). All “colleagues” set off on to meet with their customers groups – along the lines of Gramin, Compartamos lends small amounts to individuals (chiefly self-employed women), who are part of co-sponsor groups.

During the meeting individuals bring their weekly repayment and make sure everyone has met their commitment. The “colleague” role is to inquire on the nature and state of the indiviudual’s business while also looking for cross selling opportunities. An “expert colleague” will establish good rapport with all/most the members of the group. If appropriate he/she will also hand deliver a certified cheque for any new loan.

Virtually all individuals will bring their weekly repayment in cash. The leader of the meeting will keep track (through a basic ledger and updating individual pass books manually). At the end of the meeting all repayments are then taken to be deposited in a nearby retail bank branch.

Repayment (cash is collected within the white box) - also evident on the table (Compartamos' staff in their distinctive pink shirts)

Repayment: cash is collected within the white box and is also evident on the table (Compartamos’ staff in their distinctive pink shirts)

Hence, Compartamos’ staff do not handle cash. Yet Compartamos has to rely on larger banks and a network of correspondents (such as a chain of convenience stores) to collect deposits and distribute loans. Most of these, in turn, will charge individual depositors onerous fees to provide their service. Like many other microfinance, the distribution channel is challenging growth and diversification.

Mobile payments are not the solution at present. For one, the service is highly unreliable outside of big cities and in some of the regions where Compartamos operates, there is no network cover at all. Second and most important, individuals who borrow from Compartamos work in a cash economy. Their business (such as market stalls, beauty products, or seasonal goods) is carried out in cash. Few have access to the Internet or a smart phone (yet all have a mobile).

A mobile branch (i.e. on the back of a bus or minivan) could provide some relief provided it is not a target of highjacking or highway robbery. The volume of individual business is not enough to justify deploying ATMs (let alone self-replenishing machines) in the most remote areas while other financial intermediaries discourage their use of ATM through punitive fees. The time is perhaps ripe for Compartamos and other microfinance come together in the deployment.

Cashless at the Royal Mint

A recent item in the BBC News website on the Royal Mint (below), found the apparent controversy that where money is actually made (well coins really), employees are not allowed to use them to purchase their food during lunch. This in turn let to a invitation to discuss the pros and cons of the cashless society.

Article: Made of money: The Royal Mint where cash is banned http://www.bbc.co.uk/news/business-23327926

Video: Is there a cashless society? Jon Sopel Interviews Bernardo Bátiz-Lazo (Global – @BBCNews) http://t.co/rBDHkNbU9e (6 min)

Back on track

Well it seems teaching is over and the Autumn term was too much for Dave and I to keep feeding this blog.

We also had a very interesting and thought provoking meeting at UC Irvine entitled “Payment Technologies: Past, Present and Future” (read an excellent summary by Irving Wladawsky-Berger&lt) and I also had a couple of presentations at industry conferences (I am serialising the summaries underCurrent issues in payments within the Light Blue Touchpaper blog).

So rather than boast about our travels, I wanted to restart our thoughts on cashlessness through a provocation and with the help of an apparently unrelated article that caught my attention. Entitled “How Memes Are Orchestrated by the Man“, Kevin Ashton of The Atlantic, tells a very detailed and well documented story of how commercial interest rather than a new Internet culture that which propelled the Harlem Shuffle to stardom. Interestingly, it says the meme died in February, but I still find big references to it, chief among them this one in the Mexican football classic a couple of days ago – and my football blind, eldest son immediately knew what this was about.

But what is relevant to this forum is the following extract:

Google regards clicks and views as a “currency,” and take pains to get the numbers right, but unlike most other mass media, its figures are not verified by anyone who does not profit from higher numbers.

and goes on to conclude

The technology may have changed, but the money still flows the same way: to creators of contracts not creators of content.

And that got me thinking of Jon Matonis and other supporters of cryptocurrencies (see for instance Bitcoin Prevents Monetary Tyranny) or mobile wallets for that matter. Why? Because more often than not, the proponents of digital payments are focusing their discussion on content and are naive of institutional change.

The Responsibility of Mobile Money Intellectuals

The narrative for the underlying adoption of cashless payments in developing countries is that of financial inclusion: mobile phones are a widespread and thus, with a little push, more people would escape the tyranny of the cash and join the financial system heaven (with the alleged benefits this entails such as greater liquidity, possibilities for greater indebtedness and of course, the privilege of paying charges and fees to financial institutions). For 30 years or so the likes of the World Bank and the Bill & Melinda Gates Foundation have supported mobile banking initiatives as well as their predecessors, namely microfinance institutions.

But as Kevin Donovan reminds us in his brief paper, a long term review of microfinance and mobile payments questions whether outside of specific examples, either has had an impact on development. Moreover, there is a lack of critical evidence to support the millions of dollars provided to these initiatives during the last 30 years. He also reminds us of the term Mobile Money Intellectuals (coined by Bill Maurer at UC Irvine’s Institute for Money, Technology, and Financial Inclusion) or the “community of scholars and practitioners from academia, business, government, and philanthropy” that should be the base of a critical discussion around micro finance and the cash free economy.

This is not, lets us emphasise, a negation of financial inclusion or mobile payments but a call for a balanced assessment of the way forward (including different technological solutions). A case in point is PayPal, the online payments intermediary owned by eBay Inc., who has prevailed through adaption: by copying Square’s white dongle with a blue triangle; establishing a strategic alliance with Discover whilst foregoing a mobile wallet application. PayPal retains a major market share of electronic payments (as poignantly noted in this article by mashable.com).

Donovan’s view is that:

There are certainly developmental benefits to technologically enabled finance, but it would be a shame to ignore the downside or fail to address the type of foundational questions that challenge and advance our understanding of innovations such as microfinance and mobile money.

Indeed we need a conceptual and empirical body of knowledge that looks beyond fads and into what works better for society. This is what this blog and indeed, our cashless society project is all about. We are happy to count Kevin as one of the key members of our growing network.

New Working Paper: Mobile Payments in Turkey

One of our primary activities here at the Cashless Society Project is to develop working papers that examine the idea of a cashless society from historical, contemporary, and international perspectives. In keeping with that, I’m thrilled to announce that we’ve recently posted a new working paper on Mobile Payment Systems in Turkey, written by Nurdilek Dalziel and Can Ali Avunduk. Both Nurdilek and Can Ali have spent time working in the Turkish banking sector, so their paper provides a insider perspective on how the Turkish banks and mobile telephony providers are currently approaching electronic payment services.

The paper opens with a brief overview of Turkish electronic payments in general, but then quickly dives into what they refer to as “direct carrier billing (DCB).” DCB is an approach to mobile payments where the mobile network operator (e.g., Turkcell, Vodafone, etc) manages the accounts and plays the central clearing role instead of a bank or bank-owned service organization. With this approach, anyone with a mobile phone can send and receive electronic payments, even if that person doesn’t have a bank account. The authors estimate that of Turkey’s 74 million inhabitants, 27 million (37%) do not currently have bank accounts, but most of those do own some kind of mobile phone. Thus, DCB could be one method by which this “unbanked” section of the population can gain access to electronic payments.

Of course, DCB also has the potential to cut the Turkish banks out of the payments game if they are not careful. So far, the authors report, the growth of DCB schemes is quite small, their networks are limited, many consumers don’t seem to be aware of their existence, and the overall payment volumes are actually restricted by the system for fear of fraud. Thus, DCB systems do not yet pose any kind of serious threat to the Turkish banks, and the authors see them more as supplements to the existing banking system rather than substitutes.