What drives (mobile) payments in emerging markets?

August 7, 2011 wsadmin Willstream Labs

The mobile payment space in emerging markets is evolving at a rapid pace. After a first phase led by mobile carriers (Safaricom, $8 billion moved last year), many other players are trying to secure positions of strength.

Visa acquired Fundamo for $110m – a “land grab” in the region. EBay acquired Zong (250 carriers) for $240m, thus having a direct access users (via in-carrier billing) in emerging markets.

Over 4 billion people have access to a mobile which by far exceeds the number of bank accounts.The opportunity is compelling and the need for mobile payment options ringing loud and clear. Unfortunately, converting mobile subscribers into financial service users is not that simple an equation.

For users with no direct income, how much help would a bank account really, be? Opening a bank account should be a consequence… the end result of someone operating some form of business or an activity for which financial inclusion serves as an accelerator. Having a just a mobile phone is not enough.

Mobile carriers have been extremely successful at recruiting low income users and turning them into sources of revenues. Prepaid plans along with airtime sharing allow carriers to efficiently tap into this “income sharing economy”. As an example, the pan-African group MTN serves over 140 million users with over $16.5B turnover. In markets where the financial resources are poorly distributed, sharing one’s income is critical. Mobile Money is a direct evolution of airtime sharing, started a decade ago so that ultra low income users can tap into more fortunate peers accounts.

Inspired by this example, what adaptations are required for digital payments to fit into this “income sharing economy” and its unwritten rules ?

Years back, I used to help a friend (here), run his local grocery store, on my free time. The reality i discovered was striking: Most payments at the store were actually funded by a (remote) third party source, not by the actual buyers’ own income. Knowing that third party, often allowed the merchant to advance groceries or lend cash to clients, with limited risk.

3-Parties payment model

The more “fortunate” locals support all their relatives over the month, literally “sharing their income”. This is the financial side of the traditional Southern African concept : Ubuntu.

Migrants travel many miles away in search of a better life and, more importantly, to support their family in their home country. In Senegal, “76% of urban households have at least one member living abroad” and providing the critical funds to pay for food, education and healthcare.

In the first world, a payment interaction is a simple buyer/merchant relationship. Funds owner and spender are most often the same person. “I make money, and then I decide where to spend it”.

 In developing countries, however, the money-maker and money-spender are most often two different parties. A transaction is almost always a three-party interaction: Funds Owner, Spender and a Merchant. 

Traditional brick-and-mortar payment systems (cards networks) have not been designed for these type of transaction and miss funds owners’ needs.

Active Control

A key aspect of this model is that “funds owners” aren’t neutral. They have actual objectives when delivering theses funds and often in the form of strict spend instructions. Many migrants successfully sent cash…but struggle to enforce the actual needed last mile purchases. Instead of funding education, healthcare, food… the received cash gets diverted, wasted locally, behind their back.

Making sure these arrive where intended is a key part of the equation and a key weakness in today’s payments or transfer services, in emerging markets.

We will be covering further details in subsequent posts…

Thanks for reading and stay tuned!

Toffene B. Kama, Founder, Willstream Labs Inc.