In SA, 50% of the people are unbanked. About a third of those aren't just unbanked, but previously banked. Something made them fall off the formal economy ladder. This is a damning indictment of the local banking sector.
There have been a series of attempts at providing mobile payment solutions for existing bank customers and the millions of unbanked people in SA. The latest is Vodacom's M-Pesa service. However, to date, there hasn't been any success on the scale of M-Pesa in Kenya or MTN MobileMoney in Uganda.
It isn't at all clear why this should be.
At the recent Tech4Africa Conference, I highlighted some of the reasons why mobile payments are so important, especially at the lower end of the market, and what a good solution would have to offer.
The advantages extend well beyond a larger customer base for small-scale farmers, traders and shopkeepers, or reducing the need to travel to town for even basic transactions. With decent mobile payment services, agents can act as bank tellers to handle wage payments, remittances, transfers, and cash withdrawals. They can sell electricity, airtime, and even small-scale insurance policies or micro-loans. These services filter out into the wider community, giving people more time, more money, and more opportunities. This is how an economy really grows: organically at grass-roots level, instead of through patriarchal planning and social welfare services.
"Here's the ideal," I said. "We're looking for a system that can allow a buyer to pay any merchant and allow a merchant to accept money from any buyer. It must allow person-to-person money transfers, whether they meet in a shop, or send money home across country borders. It must be real-time. It must be usable not only for large transactions, but also for small ones. It must smoothly integrate with both bank accounts and paper money."
Sadly, strict regulation means very few innovators can enter this market. Essentially, only someone in full legal partnership with a bank can offer mobile payment services. The result is that most mobile money solutions merely replicate high-end banking services, instead of addressing the actual needs of people in the low-income, unbanked sector.
The reason for the dominance of banks is SA's strict deposit-taking law. Only a bank can hold money for someone on the understanding that it is to be repaid at some future date. This law makes it illegal to use other tokens of value, such as airtime, vouchers, or loyalty schemes as a substitute for cash.
The reason for this law is not depositor protection, as the Reserve Bank's Dave Mitchell claimed at an ITWeb mobile payments conference last year. It is, of course, annoying if your bank fails and you lose your money, but is it really any different if the company that fails owes you in clothes, or air miles, or phone calls? Why aren't banking regulators protecting consumers from such failures?
The real reason is protection of the currency. The government wants control over monetary policy. It pays for overspending by devaluing the currency, using an ingenious trick known as "quantitative easing". You might recognise it as "printing money". If citizens are free to switch to a currency that keeps its value, government would not have this power. That's why we are no longer allowed to use gold as currency, and why we are legally required to accept the South African rand if it is offered in payment of debt.
The result of all this over-regulation is a powerful banking cartel that doesn't even need to collude to skim the cream off the economy. The spread between credit and debit interest is astonishingly large. Charges on anything that gets near a bank are astonishingly high. Transfers take astonishingly long, while your money sits in limbo earning astonishing amounts of interest. This profit gets collected, astonishingly, not by you but by your bank. Less astonishingly, there is no real desire on the part of banks to challenge this corrupt system.
So, when a bank and a telco do partner to offer mobile payments, both of them are going to want a big slice of the action. Eighteen months after its launch, MTN Banking, also known as MobileMoney, has gained little traction in SA, unlike in Uganda, Ghana and Ivory Coast, where it can claim over two million customers. The difference is that in those countries it was launched as a real mobile wallet, rather than a banking product backed by Standard Bank, complete with a bankcard and bank account number.
Bank charges are a key reason why so many people don't trust banks with their money. When someone who does not earn much puts R100 in a bank, they expect to get R100 out. That's not how banks operate, however. Instead of investing deposits to earn income, banks now charge customers every time they loiter with intent at an ATM. Without blushing, banks charge fixed fees on small transactions, and percentage fees on bigger ones. Cash in your pocket, however vulnerable to thieves, remains the smart option for many people.
With MTN Banking, the charges problem remains. Transfers cost R3, withdrawals cost R5, and deposits cost 1% with a minimum of R3. This isn't exactly cheap, if you're a low-income, small-transaction customer.
I recently spoke with a small business owner, who was hoping to get his workers to use a bank account for wages. He found he had to increase their pay to cover bank charges, or the workers wouldn't accept it.
The complexity of banking is another reason many people avoid it, and MTN Banking is not much less complex than a traditional bank account. Sending and receiving cash is limited to other MobileMoney account holders, bank account holders, and MasterCard merchants. In the mobile phone, it offers a convenient transaction channel, but at heart it is still a formal banking product.
As SA's trade and industry minister, Rob Davies, once put it: "The formal banking sector in this country is not designed to fulfil this role [of banking the unbanked]. Our banking laws are extremely conservative."
The poster child for mobile payments is the Safaricom-led M-Pesa system in Kenya. It has amassed over six million customers since its launch three years ago.
The M-Pesa product, developed by Vodafone, seems a little better positioned than most previous attempts at a mobile money service. It still requires the formal backing of a formal bank (Nedbank, in this case), but it does allow you to send money to any mobile number in the country. This is a big step forward, since it brings into play the entire market that has mobile phones.
However, like MTN Banking, it isn't cheap. Prices are roughly in line with those charged by M-Pesa in Kenya, at R2.45 for a transfer to another M-Pesa customer, and R10 for sending money to a non-customer. At the low end of the scale (the minimum transaction size is, you guessed it, R10), this is a large chunk of the money that changes hands.
Bank charges are a key reason why so many people don't trust banks with their money.
Ivo Vegter, ITWeb contributor
CGAP, an independent policy and research institute that studies financial access to the poor, estimates mobile money solutions in Africa are on average only 19% cheaper than brick-and-mortar banking. However, at the low end of the market, for transaction values of $23 instead of at the median transaction value of $69, they're about 38% cheaper. Either way, the cost is less than half of the informal providers of money transfer services, such as couriers, moneylenders, bus services, and post office services.
The report finds that it isn't so much the actual pricing, but the way in which products are priced, that is key to adoption. For example, small transactions should attract small charges, and free deposits makes a mobile money account a better way to save than a bank offers.
With Vodacom M-Pesa, small transactions are no cheaper than large ones, but it does offer free deposits, unlike MTN Banking. An ordinary customer can save up to R5 000 this way, and only pays R30 for the five R1 000 transactions it takes to withdraw the money.
There is one other service in SA that does everything M-Pesa does. This is Wizzit, the mobile banking solution backed by Bank of Athens, and launched in 2005. It has achieved some market penetration, with over a quarter of a million customers, but it is nowhere near the 10 million that Vodacom claims to be targeting in its first three years. It will be fascinating to watch these two compete. Wizzit can claim a track record, and a great image in poorer areas thanks to its policy of recruiting the unemployed as agents. The other has huge market visibility and two famous brand names - Vodacom and M-Pesa - behind it. If life were fair, Wizzit would win this fight. Life isn't.
Will M-Pesa succeed where others before it have failed? Let's check the boxes:
* "We're looking for a system that can allow a buyer to pay any merchant..." Check.
* "...and allow a merchant to accept money from any buyer." Check, provided the buyer uses M-Pesa or has a bank account.
* "It must allow person-to-person money transfers..." Check. The recipient only needs a mobile phone.
* "...whether they meet in a shop, or send money home across country borders." Fail. No international transactions here, though domestic remittances are fine.
* "It must be real-time." Check (somewhat surprisingly, given banks' addiction to sitting on other people's money during transfers).
* "It must be usable not only for large transactions..." Check. Transaction limits are R1 000 a day and R13 000 a month, probably to thwart money-launderers, but this will do for a large majority that is presently unbanked.
* "...but also for small ones." Not really. Flat fees make small transactions expensive. Between deposit, transfer and withdrawal, two registered customers pay a flat fee of R8.45. Under a couple of hundred rand, where vast numbers of transactions take place, that's going to bite.
* "It must smoothly integrate with both bank accounts and paper money." Check.
Infrastructure such as M-Pesa could do wonders to stimulate SA's economy. Especially among the poor, it could make a huge difference. By wasting less time and money transacting, they can spend more time actually making the money in the first place. Besides this, a swath of new transactions becomes possible with an efficient mobile money infrastructure.
M-Pesa has more to recommend it than most previous attempts, including free deposits and the ability to send money to any mobile phone.
It might be wise, however, to reserve judgement until 10 million people actually turn up with their IDs to register for the service.
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