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SpirE-Journal 2011 Q4

Mobile money for the poor

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Mobile money for the poor

Billions of people worldwide still lack bank accounts, let alone credit cards. Increasingly, they are able to visit websites but are unable to buy from them. However, new developments in mobile-commerce are creating the means for the world’s poorest consumers to become its latest e-commerce customers.

The United Nations estimates that 1.4 billion live on less than USD1.25 a day. Most if not all of these people would not possess a bank account let along a credit card. Ironically, a rising proportion of these people have mobile devices and are able to access the internet through common-use computers in villages, schools and community centres, or through internet capability on low-cost mobile devices marketed to the poor. But without a credit card or even a bank account, buying online is a challenge. However, a new solution has emerged out of the mobile-commerce industry pre-paid credits that can be applied to personal hand-held devices. These can be paid in cash and could in principle be purchased by poor consumers in small amounts. This solution opens up online shopping to the poor for the first time. 

A trailblazer in this space has been Visa, the San Francisco-based payments processing organization. It has launched a mobile prepaid product that allows almost anyone with a mobile phone to transfer money using a system that is similar to text messaging. While similar products have been available in the US and other mature economies, what is new about Visa’s latest prepaid plan is that it is targeted at consumers in emerging economies in Africa, Asia and Latin America. 

Prepaid mobile credits in Africa

In June 2011, Visa made a USD110 million purchase of Fundamo, a Cape Town-based provider of emerging market mobile-commerce technology. In developing countries, many companies offer their customers the ability to move money within their mobile network but Visa is hoping that with Fundamo, they will be able to allow users to move money across different mobile networks. 

In November 2011, Visa announced that they would be working with MTN Group Ltd to roll out prepaid accounts on the African firm’s cellular network, starting in Nigeria and Uganda. This initiative may help Visa’s CEO, Joseph Saunders, fulfill his goal of generating more than half of Visa’s revenue outside the US by 2015. 

In the past decade, 100 million people have gained access to previously unavailable banking services through mobile devices. How is this latest solution any different? 

Taking M-commerce to the Base of the Pyramid

If Visa’s new solution in Africa seems familiar to consumers in the OECD, it should. Superficially, it leverages the near field communication (NFC) technology that has been used by companies such as Google and Citibank to push similar products for a while now. However, Visa’s prepaid mobile plan takes NFC technology in a different direction. 

When a customer signs up for the prepaid service with Visa, they will receive a CVV (card verification number) and an ID number that is linked to their phone account. With this CVV and ID number, customers can visit any ATM that accepts Visa and withdraw or deposit money. Customers can also bring cash to an authorized service provider to complete these transactions in the event that an ATM is not nearby. The service will allow for point-of-sale transactions with any merchant that accepts Visa. It also allows for the payment of online purchases. 

Moreover, with this facility, users can transfer money domestically or internationally to other users an important advantage in communities where money transfers to families who live far away are frequently needed. 

This is made possible by the technology that the prepaid mobile plan relies on a protocol called Unstructured Supplementary Service Data (USSD). This technology works on virtually any GSM phone, not just smartphones. USSD is similar to text messaging but the difference is it is held as an open session that is, a real time connection with remote servers. 

USSD is deployed in developed markets too, but is generally used only to check account balances. In the OECD, companies have been pushing NFC technology to achieve the same results, but with little take-up. Take the process required of the Google Wallet in the US, for example: potential users would have to buy a new, likely high-end NFC capable phone. They would only be able to use these with merchants that have updated NFC-capable point-of-sales terminals from credit card companies these are for the most part only compatible with the Citibank MasterCard and only on one phone, the Nexus 4G from Sprint. Another option is the Square Card, which relies on GPS technology to detect when customers are physically close to participating merchants. 

However, what happens in an area with poor GPS reception, or when the customer does not necessarily want to broadcast that they are in the area shopping? Furthermore, merchants have to actively enrol in the Square system. These types of systems, although innovative, simply fail to be user-friendly for the majority of potential customers. That is how Visa’s prepaid mobile plan sets itself apart and ahead of the game.

The base of the pyramid

The four billion people at the base of the economic pyramid (BoP) live with incomes below USD 3,000 in local purchasing power. The International Institution of Communications has termed them Segment D and E consumers. Their incomes in current US dollars are less than $3.35 a day in Brazil, $2.11 in China, $1.89 in Ghana and $1.56 in India. When you add up those numbers to calculate their collective purchasing power, however, a behemoth emerges those in the BoP constitute a staggering USD5 trillion global consumer market, or a third of the entire GDP of the United States. 

C.K. Prahalad has written extensively on this particular segment, proposing that businesses, governments and donor agencies should stop considering this segment as victims. Instead, they should be seen as entrepreneurs and value-demanding consumers. He proposes a mutually beneficial relationship between multi-national companies and this segment, in which the MNC can serve a new market in a way that is responsive to that particular market’s needs. 

However, how do these four billion people make an income?

Those at the base of the economic pyramid earn a living doing a variety of jobs, but most can be categorized into a few domains. Domestic workers (who are mostly women) essentially do the housework that allows professionals and business-persons to work outside of the home. There are also homeworkers who work within or near their home for small, “piece-rate” income. They earn money through sewing, packing, doing routine assembly and artisanal production, for example. Being a street vendor is an especially popular option in larger cities, and can encompass anything from being a cooked food street vendor to selling consumer electronics. Waste pickers make a living through collecting, sorting, recycling and reselling materials that someone else has thrown away. 

What is the feasibility of their participation in the e-commerce market?

South and Southeast Asia

The International Institution of Communications surveyed specifically South and Southeast Asia and found that 36%, 72%, 29%, 14%, and 36% of Pakistani, Indian, Sri Lankan, Pilipino, and Thai Segment D and E consumers had never heard of the internet. However, 92% to 98% of them had used a phone in the last three months. Mobile phone penetration data suggests that this usage is increasingly through mobile devices rather than landlines.

Africa

The Group Speciale Mobile Association (GSMA) has reported that the African continent is the world’s second largest mobile market by connections, trailing only Asia. Africa is also the fastest growing mobile phone market in the world and has outpaced all other mobile phone markets in a three-month period this year when it reached a staggering 649 million connections. Every year for the last five years, the number of mobile phone users in Africa has increased by nearly 20%. 

China

As is well-known, China already supports a well-established and colossal e-commerce culture. Not more than five years ago, less than 10% of China’s urban population participated in online shopping. However, this figure more than doubled to 23% in 2010 and is forecasted to again double to 44% by 2015. Considering the sheer size of China’s population, it is estimated that 30 million additional Chinese consumers will shop online for the very first time every year until 2015. By then, e-commerce is expected to go from representing 3.3% of the country’s total retail value to 7.4% (as a comparison, it took the US ten years to reach that point).

China’s culture of e-commerce could translate into big profits for firms like Visa, which are rolling out pre-paid mobile credit solutions. However, unlike the case of NFC in the US, China already has an established and fully functioning system of its own for dealing with consumers without credit cards or bank accounts. The is best seen from Taobao.com, an online shopping website that is similar to Amazon.com. Taobao is the 11th most successful website in the world and rakes in more money than most US e-commerce sites except Amazon (but perhaps not for long). Taobao.com works differently in China because of the country’s low credit card penetration and a challenging logistics environment. 

One of the major barriers for e-commerce in China has been low credit card penetration consumers that do not live in a major hub city like Shanghai and Beijing mostly do not own a credit card. Moreover most consumers distrust the notion of paying in advance, due to a weak infrastructure for disputes resolution. The way Taobao solved this was through an escrow-accounts option called Alipay. Payments from consumers into Alipay, which can be made via online bank transfers with credit or debit cards, are held in escrow until the order is received. Most consumers use Alipay to purchase their Taobao products. 

Another option, and one that is sure to be the biggest competitor against prepaid mobile plans, is the cash on delivery (COD) method. Products would be delivered to the recipient, who would sign for them and pay cash to the delivery-person a simple method that has allowed anyone with access to the Taobao website to have physical access to its products as well. The only limitation is that not all of the vendors on Taobao opt for the COD method the numbers are quite low when compared with those paying via Alipay, online bank accounts or credit cards. 

In China, more than 70% of the “super heavy” spenders on Taobao are from the middle and affluent classes. However, with the advent of mobile pre-paid credit in future, more segment D and E consumers can be expected to join their ranks.

Conclusion: Uncaging poorer consumers

Prepaid mobile credit solutions hold great promise as a means of enabling poorer consumers to avail themselves of a wider range of cheaper products (and services) online. It also promises to open up a vast and exciting new market for e-tailers. 

However, selling to Base of Pyramid consumers is fraught with challenges. For starters executing product delivery to remote villages with poor connectivity to urban hubs, providing post-sales support and dealing with requests for refunds. Vendors would also have to contend with the inevitable political backlash against consumers being cheated online. 

Enterprising firms would have to invest in education and infrastructure to clear a path for others to follow. These pioneers could be social enterprises or not for profit firms. That was the pattern seen in the development of micro-credit where much of the pioneering work was done by non-for-profit’s like Grameen Bank, with more commercially oriented organizations following suit much later. 

In whatever way this market space evolves, one thing is assured firms that are prepared to go outside their comfort zone will have the best chance of gaining first-mover advantage.

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