Mobile Money and Financial Inclusion
TO: Peter Jones, World Bank
FROM: Sarah Johnson, Telecom Lobbyist
DATE: November 15, 2020
RE: Promoting a Mobile Payments Infrastructure in Patstan
As the World Bank considers its position in supporting or opposing the development of a mobile payment infrastructure, I am writing to you on why it is not only the right path for Patstan, but why a mobile network operator (MNO) led approach — including PatCom, the nation’s premier carrier — is the best way to deliver it.
In too many countries, too many people lack access to the formal banking system, and Patstan is no exception. As a result, its citizens face challenges to building and storing wealth, developing credit histories, and making payments to vendors and far-away family members in a convenient manner. For the federal and local governments, a cash-based economy makes it difficult to collect taxes, root out corruption, and understand developments in their economies.
Mobile payment systems help address each of these issues, as demonstrated by recent success stories like M-Pesa in Kenya. M-Pesa, launched in 2007 by Vodafone’s Safaricom mobile operator, allows users to text small payments to other users, and also includes features such as international transfers, loans, and health provision. According to CNN, the system processed around 6 billion transactions in 2016, and has raised daily per capita consumption levels of 194,000 (~2 percent) of Kenyan households since 2008, suggesting it has been effective in reducing poverty.
An alternative model popularized by India’s Unified Payments Interface features a critical stumbling block for financial inclusion: it is dependent upon users already having access to a bank account. Another critical feature is the incorporation of India’s Aadhaar digital ID, a component that is not nearly as robust in Patstan.
Why invest in a mobile-led approach instead? The most important success factor is generating rapid adoption by making it easy for users to enroll and use the service. For the purposes of exchanging small sums with other individuals, the process of buying a mobile phone involves sufficient safeguards as-is, including proof of identity, and need not be constrained by the more onerous requirements for opening a bank account. Furthermore, PatCom and other telecom firms are well-positioned to support these services, as their retail branches and local partners are already located in the remote towns and villages that banks have little interest in serving.
Enabling mobile payment infrastructure promotes the interests of the World Bank’s twin goals of reducing global extreme poverty to 3 percent by 2030 and promoting the income growth of the bottom 40 percent of the population within its member countries. The key to sustaining an affordable service for Patstan’s most vulnerable citizens is to provide these services at scale. The World Bank is uniquely able to help PatCom (and other local telecom firms) to overcome the start-up costs associated with building, marketing, and growing this groundbreaking solution.
I look forward to your response and the prospect of working together on this vital initiative.
TO: Peter Jones, World Bank
FROM: Ernie Steele, Consumer Advocate
DATE: November 18, 2020
RE: RE: FW: Promoting a Mobile Payments Infrastructure in Patstan
Peter — thank you for forwarding me the above note. Similar to our past discussions on the World Bank’s digital identity efforts, I would be happy to offer my thoughts on mobile payment infrastructure from a consumer welfare perspective, as well as a response to this telecom lobbyist’s framing of a potential solution.
In summary, I agree with her assessment that mobile payment systems offer great benefits to both government institutions and those enduring financial exclusion. However, the solution that the World Bank supports in Patstan must consider the impact on the consumer and other long-term implications. On balance, I believe that the “UPI model” should be Patstan’s default option.
First, M-Pesa and other MNO-led payment solutions are not imperfect. Indications show that expanding access to credit via its lending products had unanticipated consequences such as a raft of gambling defaults. Perhaps more troublingly, in an industry that already has monopolistic tendencies, the network effects associated with the growth of the most successful solution means that a dominant player (such as PatCom) could come to exert significant pricing power on the consumer. M-Pesa does not allow transactions with other platforms, nor does it have an incentive to do so. Finally, success in one jurisdiction does not mean success will follow elsewhere. A recent project to expand M-Pesa to South Africa was a failure, primarily as a result of duplicating existing services and poor marketing.
While the telecom lobbyist is correct that requiring bank accounts will limit access for many consumers, bank-led mobile payment solutions also have positive aspects. In some respects, India’s Unified Payments Interface simply took a different approach, emerging as a means for enabling interoperability between banks and platforms, operating like an “e-mail address for money.” Ease of use is a big advantage, as UPI transactions do not need to make the multiple “legs” that mobile money transactions must between accounts, wallets, and beneficiaries. Banks are also already subject to financial regulatory frameworks and feature the internal processes that might mean they are less susceptible to the own-goals that result from inexperience — such as the gambling defaults issue, or more importantly, one day falling afoul international money laundering or terrorist financing penalties.
In assessing the tradeoffs between the “M-Pesa model” and the “UPI model,” here is one way to summarize the essential difference: M-Pesa starts with a user-centric approach of delivering the service to as many people as possible and refining the banking implications over time, whereas UPI prioritizes getting the banking component right and then building the necessary infrastructure to incorporate hard-to-reach customers. Neither system’s current limitations are destiny. Telecom firms might eventually prove adept at services typically performed by banks. Perhaps through legislation or regulation changes, the Patstan government could ease the process for bank account creation, or otherwise encourage banks to increase their offerings — mobile and otherwise — to those who are not currently profitable to serve. The bottom line: these are political decisions which require not only the World Bank’s recommendation, but the careful reflection of Patstan’s democratically elected leaders.
