Mpesa, the digital money system rolled out in Kenya by
Vodafone-owned Safaricom, is frequently cited by mobile money advocators
as an excellent example of what can be achieved when you give emerging
markets access to mobile money services.
But, as we’ve previously written, some unique and hard-to-replicate drivers were responsible for Mpesa’s success in Kenya — not all of them good.
Notably, in its early days, Mpesa drew major benefits from its extremely monopolistic market positioning, at one point even threatening the seigniorage power of the central bank and that of the regulated banking system.
Countries attempting to introduce digital money in a more measured manner have since learned the hard way that competitive digital money systems are inordinately harder to roll out — not least because they lack the harmonising efficiencies of monopolistic systems making them only marginally less costly than existing frameworks. This has impeded the roll-out of digital mobile money systems further afield.
With that in mind, it’s worth looking objectively at the physical reality of mobile money solutions in emerging markets rather than idealised narratives being propagated by digital vested interests.
A good indicator of the reality comes by way of Kenya’s 2015 FinAccess Geospatial Mapping Survey, which was released at the end of October.
A starting point is the physical reality of “digital mobile solutions”, which is often ignored, forgotten about or skirted over by digital fintech evangelists.
That physical reality looks like this:
A monopoly provider, however, avoids many of these uncertainties, thus reduces many of these costs as well (providing it can trust its own agent network).
To wit, here’s the key reason why mobile money has succeeded so triumphantly in Kenya, not so much anywhere else:
And yet, even in a highly monopolised market, there’s still the question of trusting your agents. Can trust really be assumed when nearly 14 per cent of the agent network says it has never been formally trained by the operator, while those who had mostly received training from “mobile money specialists”, whatever they may be?
One thing above all else is very notable. For all the hoopla and ballyhoo regarding Mpesa’s impact on monetary velocity in Kenya, there has been little industry acknowledgement of the increased fraud that’s come with it. From the survey:
And now compare and contrast the counterfeit money stats with that of the traditional banking system (which we know, already has principal agency problems of its own in many emerging states) – click to enlarge:
As Patrick Njoroge, governor of the central bank of Kenya commented at the launch of the survey on October 29:
For the most part, however, there’s a reason why experienced providers (many of whom are already digital businesses) withhold services from risky sectors, or if they do provide them, why they do so at prices which cover the related risks. That reason is… they’re not in the business of non-profit or charitable operations.
Given that reality, it’s not implausible that many of the mobile operators currently claiming revolutionary efficiency and profitability are sleepwalking their way into risk markets they don’t fully comprehend.
At the end of the day, poorly vetting customers for their ability to pay up for services already rendered impacts only a corporation’s potential bottom line if and when they fail to pay. Poorly vetting customers for their ability to pay others, however, potentially undermines the entire system’s solvency and hurts those who contribute productively to the system the most.
Related links:
Mpesa: the costs of evolving an independent central bank – FT Alphaville
When financial inclusion stands for financial intrusion – FT Alphaville
But, as we’ve previously written, some unique and hard-to-replicate drivers were responsible for Mpesa’s success in Kenya — not all of them good.
Notably, in its early days, Mpesa drew major benefits from its extremely monopolistic market positioning, at one point even threatening the seigniorage power of the central bank and that of the regulated banking system.
Countries attempting to introduce digital money in a more measured manner have since learned the hard way that competitive digital money systems are inordinately harder to roll out — not least because they lack the harmonising efficiencies of monopolistic systems making them only marginally less costly than existing frameworks. This has impeded the roll-out of digital mobile money systems further afield.
With that in mind, it’s worth looking objectively at the physical reality of mobile money solutions in emerging markets rather than idealised narratives being propagated by digital vested interests.
A good indicator of the reality comes by way of Kenya’s 2015 FinAccess Geospatial Mapping Survey, which was released at the end of October.
A starting point is the physical reality of “digital mobile solutions”, which is often ignored, forgotten about or skirted over by digital fintech evangelists.
That physical reality looks like this:
What these shopfronts represent are the physical entry and exit
points for national cash into and out of the mobile e-float network.
Contrary to the fintech evangelist narrative, these points are essential
if mobile money is to maintain its valuation peg with the national
currency. Without such points, there would be no national value
transfer, just a network of variably priced efloat. Without such shop
fronts, there would also be no way for the unbanked population (which
doesn’t have digital deposit accounts with the conventional banking
system) to acquire mobile units to send anywhere.
So why then is the conventional banking system so reluctant to run these branches directly?
The simple answer, of course, is risk versus return. As a general
rule there’s too much of the former and too little of the latter — not
to mention, a helluva lot of operating expense in between.
Mobile money systems cut down on many of these costs by relying on
networks of agents rather than having to recruit or invest in personnel
and infrastructure directly. Hence the tendency for monopolisation and
Uber-esque platform effects.
In a competitive system — especially one which lacks the presence
of a supervisory authority or regulator — competing vendors will have
their own way of doing things, from how they vet agents and users, to
how they manage deposits and withdrawals, or even how they secure and
hold funds.
Given the lack of common standards, the greater the competition, the
greater the uncertainty regarding whether or not operators meet basic
standards. The greater the uncertainty, the greater the risk. And the
greater the risk, the greater the need for vendors to do their own
checks when accepting mobile money originating from other vendors. By
which point, it’s hardly worth the trouble or the expense.A monopoly provider, however, avoids many of these uncertainties, thus reduces many of these costs as well (providing it can trust its own agent network).
To wit, here’s the key reason why mobile money has succeeded so triumphantly in Kenya, not so much anywhere else:
And yet, even in a highly monopolised market, there’s still the question of trusting your agents. Can trust really be assumed when nearly 14 per cent of the agent network says it has never been formally trained by the operator, while those who had mostly received training from “mobile money specialists”, whatever they may be?
One thing above all else is very notable. For all the hoopla and ballyhoo regarding Mpesa’s impact on monetary velocity in Kenya, there has been little industry acknowledgement of the increased fraud that’s come with it. From the survey:
And now compare and contrast the counterfeit money stats with that of the traditional banking system (which we know, already has principal agency problems of its own in many emerging states) – click to enlarge:
As Patrick Njoroge, governor of the central bank of Kenya commented at the launch of the survey on October 29:
The fieldwork interviews gave some interesting feedback, with some of the key issues that emerged indicating instances of fraud. Mobile money service providers reported the highest instances of fraud at 37 percent as compared to 10 percent of bank agents. Counterfeit money was the greatest reported type of fraud amongst service providers in forex bureaus and mobile money providers, while fake identification was the highest reported type of fraud amongst insurance providers and capital markets service providers.We must remember that fintech and mobile money promoters have an interest in depicting a world where digitised solutions have the potential to eliminate all system ails, including the costs of servicing risky sectors. We must also remember they have an interest in depicting a world wherein incumbents purposefully constrain services for no good reason at all.
For the most part, however, there’s a reason why experienced providers (many of whom are already digital businesses) withhold services from risky sectors, or if they do provide them, why they do so at prices which cover the related risks. That reason is… they’re not in the business of non-profit or charitable operations.
Given that reality, it’s not implausible that many of the mobile operators currently claiming revolutionary efficiency and profitability are sleepwalking their way into risk markets they don’t fully comprehend.
At the end of the day, poorly vetting customers for their ability to pay up for services already rendered impacts only a corporation’s potential bottom line if and when they fail to pay. Poorly vetting customers for their ability to pay others, however, potentially undermines the entire system’s solvency and hurts those who contribute productively to the system the most.
Related links:
Mpesa: the costs of evolving an independent central bank – FT Alphaville
When financial inclusion stands for financial intrusion – FT Alphaville
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