Mobile Phone Banking

WHAT IS M-BANKING EXACTLY?

“the delivery of financial services outside conventional bank branches using information and communications technologies and non-bank retail agents”.

Why branchless banking? BoP customers usually have no access to many services and products including financial services. These customers represent high volumes and low margins to businesses. For businesses to profitably enter the market, costs need to be reduced, most especially fixed costs (variable costs tend to change with the amount of business being conducted).In commercial banking there is rarely a more important fixed cost than the cost related with buildingand sustaining branches and staffing the branches with employees.

Branchless banking will be an effective solution to reduce the fixed costs that arise with banking branches as long as it does not impair the financial services provider’s ability to generate profits. It thus has the potential to expand financial coverage to previously unserved population segments.

Before analyzing M-banking, let’s define first some slippery concepts that are often encountered in this arena. E-money is one of those concepts for which there is no common definition. The one agreed by the European Union’s Electronic Money Institutions Directive6 (2000) defines e-money as the “monetary value as represented by a claim on the issuer which is: (i) stored on an electronic device; (ii) issued on receipt of funds of an amount not less in value than the monetary valueissued; (iii) accepted as a means of payment by undertakings other than the issuer”.

The most accepted definition for the BoP also requires that the electronic store of value is on a device that is in the customer’s possession.
In the case of M-banking both models have been successful. They usually involve a partnership among banking service providers, telecommunications software firms and mobile telephone servers. The difference is that in the bank-led model, commercial banks are the ones at the driving wheel, while in the non-bank led model, the mobile operator is the one in charge. For example, Wizzit, owned by The South African Bank of Athens and based in South Africa, and XacBank, based in Mongolia, are M-banking bank-led models. M-Pesa, owned by Safaricom (which in turn is owned by Telkom Kenya, 60%, and Vodafone, 40%) and based in Kenya, and G-Cash, owned by Globe Telecom and based in the Philippines, are examples of M-banking non-bank led services. It must be noted, however, that currently the financial services offered are relatively simple. Many providers only offer rudimentary savings accounts and money transfers between different accounts.

Kenya’s M-Pesa (Pesa means “cash” in Swahili, while M stands for Mobile) was launched in March 2007 by Safaricom. M-Pesa was specifically designed to target the
unbanked and hence all services in offer do not require a consumer bank account. Its
customers need not have a bank account if they do not want to and can withdraw cash,
make payments or send money only using their mobile phones. A network of airtime
sellers dotted around the country is in charge of turning cash into e-money.
Within the first month, Safaricom had registered over 20,000 M-Pesa customers, well
beyond the original business plan. By July, it already had 500 agents and 150,000
customers.

National regulations are pivotal in deciding which model will arise in a specific market. If regulators require a financial institution to be directly involved in transactions, bank-led models will tend toflourish. Commercial banks are usually the largest players and have the capacity and expertise required to successfully provide branchless banking. However, most banks are not interested in this option because it is assumed to be less profitable than regular banking. Often for countries with
no legal framework, no M-banking industry will arise because of the risks associated with it. In turn,if mobile operators are allowed to enter this market, they will do so. Why? Because mobile telephony is a very competitive industry in developing countries and its margins tend to be lower than for commercial banking. Mobile banking services help mobile companies increase their customer base, enhance customer loyalty and generate additional revenue.