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.

The Multiple Meanings of “Cashless”

One of the interesting aspects of the “cashless society” concept is that it is essentially a negative vision for the future. Like the “paperless office” (which was another hot topic in the 1960s and 70s), the “cashless society” vision focused on what it would remove instead of what it would add in its place. It said much more about what it would not be, and very little about what it would actually look like once it arrived.

In many ways, this lack of positive definition was actually a good thing. It enabled several different groups and firms to all pursue a common goal, even though they disagreed, sometimes vehemently, about the specific details. Amongst the bankers of the 1960s, the goal was relatively clear: replace paper checks, notes, and coins with some kind of electronic funds transfer system. But how that system should be structured, who should govern it, who should pay for it, who should operate it, and how consumers and business should access it, were all open questions. For each of these questions, there was money to be made and lost, so not surprisingly, different groups had very different opinions about the potential answers (for more details, see our working paper, “How the Future Shaped the Past“). A general meaning of “the cashless society” might have been shared, but the specifics were hotly contested.

Despite these disagreements about the specifics, however, US bankers in the 1960s assumed that these new electronic transactions, as well as the accounts they accessed, would still be denominated in US Dollars. In other words, the cashless society might eliminate paper bank notes and checks, but it wouldn’t eliminate money altogether, nor would it replace the centralized, state-issued fiat currency with a host of privately-issued ones. “Cashless” was really just a synonym for “electronic transactions.” The cashless society promised to automate the mechanisms of monetary exchange, but it would leave the existing state-issued fiat currencies firmly in place.

This time around, however, I’ve noticed a broadening of the meaning of “cashless” to include such things as privately-issued electronic currencies (e.g., BitCoin), as well as the dream of a completely moneyless society. When most contemporary bankers, journalists, and academics use the phrase “cashless society,” they still mean something similar to what the 1960s bankers meant: the replacement of paper checks, notes, and coins with electronic transactions—except that this time, those transactions are initiated with a mobile phone instead of a plastic card. But several reactions we have recently received to our working papers indicate that at least some people consider “cashless” to also mean “dollar-less” or even “completely moneyless.”

The cashless solutions that seem to get the most attention from the press these days (e.g., Square) are really just making it easier for more people to access the existing electronic payment networks owned and operated by Visa and MasterCard, both of which settle using existing state-issued currencies. But BitCoin and other electronic currencies are quite different. BitCoins are not issued by a state or a central bank. BitCoin is an alternative currency, one that is parallel to the dollar, pound, euro, yen, etc., and can be exchanged for these central-bank currencies according to market-based, variable exchange rates. The BitCoin system is certainly “cashless”—all their accounts and transactions are processed electronically—but it is also more than that.

As historians and social scientists, we should of course strive to let actors define their own categories, and avoid layering our own meanings upon them. Actors in the 1960s seem to have had a more restrictive definition of “cashless,” but that definition may be broadening today to include alternative currencies, as well as moneyless barter societies. As we investigate the discourse or the actual systems from a given era, we must pay special attention not only to what is said, but also what is left unsaid, what is simply assumed.

But as analysts and authors, we should also make clear what we mean by our key terms so that our readers know how to interpret our work. I have so far been using the term “cashless” in the more restrictive sense, and will use terms like “alternative currencies” or “moneyless” to describe the other categories.

What meanings have you been assigning to the term “cashless?” And what terminology do you prefer?

Myths and realities of the cashless society

People *think* that technology moves fast and culture moves slowly. I mean, the Rolling Stones are still one of the world’s most popular bands, right? But that’s not always true. If you look at futurists’ takes from the middle of the last century, their biggest misses were not just technological (jetpacks instead of iPhones) but cultural .. [such as failing to] anticipate the rise of the natural and organic food movements. Alexis C. Madrigal – The Atlantic

A panel named as above took place at the European Business History Association annual conference (#ebha2012) in Paris (August 30th to 1st September, 2012). The panel was chaired by Carles Maixe (@carlesmaixe) from University of La Coruña (Spain), who introduced the audience to the authors as well as the idea behind this blog/forum. A common theme was looking at the practical implications of delivering on the idea of a cashless society by not for profit deposit taking financial institutions.

The panel was composed of:

The comments by Mark Billings (Exeter, UK) and the discussion that ensued included contributions from of Patrice Beaubeau (Paris Ouest Nanterre, France), Steve Toms (Leeds, UK), Chris Colvin (Queens Belfast, UK) and Osamu Uda (Nihon, Japan), among others. Points raised included (included, in no particular order):

  • This panel and indeed a good attendance, reflects a growing literature and interest to look at the impact of technology in financial services from an historical perspective, which is challenged to provide a true comparative history of automation (rather than individual case studies sitting side by side).
  • For the foreseable future we are likely to talk about “the less cash society” (see recent article in Gadget Lab — www.wired.com about generalise mobile payments needed at least another 10 years).
  • There is a need to look at the impact of cashless (and indeed deeper analysis of ATMs) into bank employees and banking practices.
  • Provide a comprehensive survey of how the idea of a cashless society has been dealt with, at least conceptually (including contributions to economics, social costs of different payments, anthropology, etc).
  • It is still not clear the importance of differences in the institutional setting to promote financial inclusion and aid (or hamper) a cashless society.
  • The 1960s sees the birth of the modern monetary economy, which in large part is based on applications of computer technology.
  • The discussion on the cashless society (and particularly contemporary narratives) tends to emphasise the artifacts (such as mobile phones or chips) as opposed to what is money and its economic and social uses.

The discussion continued during the evening (see photo below). An idea here emerged following last week’s post on transparency, as it was considered that surcharges on cash withdrawals were similar to a regressive tax: a fixed value regardless of amount withdrawn is more punitive on lower income individuals as the total payment of surcharging fees is a greater proportion of their income than for high-income individuals. An empirical issue is which of the two groups observes greater frequency of withdrawals and keeps a higher balance of cash and coins. Gustavo del Angel baptised this effect as “feeding the gander”, in a loose symil to the large tubes commonly used in the creation of fois gra, replicating the payments pipeline giving no option but to “eat” the surcharge.

(L 2 R): Gustavo del Angel, Carles Maixé-Altés and Bernardo Bátiz-Lazo, Paris (Sep, 2012)