Mobile money will be even more relevant in SA after COVID-19
In 2018, four out of five South Africans - 80% - had bank accounts, according to non-profit research organisation FinMark Trust. On the face of it, it seems that financial inclusion is making steady progress. On closer examination, that 80% figure doesn’t tell the whole story. FinMark went on to note that in 2018. 40% of those bank accounts were either dormant — they hadn’t been accessed in 30 days; or “mailboxes” — accounts from which all money is withdrawn as soon as it enters.
For all our financial sophistication, cash remains king in SA. A 2019 Mastercard and Deloitte study, "The future of payments in SA", noted that 90% of informal enterprises used cash only; and that cash transactions in 2015 accounted for more than half the total value of all consumer transactions in the country. Mastercard determined in 2015 that “the cost of cash for consumers [was] R23bn per annum, or 0.52% of SA’s GDP, with the majority of this cost carried by lower income earners”.
With bank accounts sitting unused and cash posing such a significant drain on our consumers’ scarce resources, one would think the environment is perfectly positioned to welcome innovative solutions such as mobile money.
Mobile money — a system allowing the efficient payment, receipt and storage of money via mobile phone — has, since its rise in the early 2000s, been seen as versatile, quick, convenient, secure and low cost, and in many countries those benefits have seen its rapid and enthusiastic uptake. According to a 2019 GSMA [an industry organisation that represents the interests of mobile network operators worldwide] report, globally registered mobile-money services rose from just one in 2001 to 290 in 2019.
"Someone struggles to steal your cash when it is secured on your SIM card. I've been told that car guards in Kenya cash their tips into M-Pesa to avoid being robbed."
Total registered users globally topped the 1-billion mark in 2019. Sub-Saharan Africa in 2019 had a total of 469-million registered users transacting 23.8-billion times at a value of $456.3bn - 66% of the global total - making it the centre of mobile money.
But Southern Africa accounts for only 2% of that $456.3bn. The mobile operators - Vodacom, which saw such success with M-Pesa across East Africa, and MTN, through its MoMo mobile money offering - have repeatedly tried, and failed, to gain traction in SA. Why?
The traditional answer is an unsupportive regulatory regime which, for example, required mobile operators to partner with established banks to roll out mobile money. Perhaps this partnership didn’t allow for sufficient agility or innovation, or the banks' had a limited appetite to support a competing financial model — despite banks in Kenya having generally seen an increase in profits since the advent of mobile money due to the increased circulation of cash and the broadening of the formal economy.
But regulations aren’t the only stumbling blocks. SA is used to cash and cards. Cash works well for a crucial function: ubiquity. SA’s economy is an inextricable mix of informal and formal channels. Cards, unfortunately, are expensive and not always instantly settled. Any pervasive payment mechanism has to take this into account and has to earn sufficient ubiquity quickly enough to enable transactions across this landscape.
That’s not an insignificant ask. In India the government forced people to go digital by removing all the small denomination notes out of the economy once the digital payment system had been established and tested.
For mobile money to work it must be demonstrably better than physical cash. On the face of it, that superiority is clear. Someone struggles to steal your cash when it is secured on your SIM card. I’ve been told that car guards in Kenya cash their tips into M-Pesa to avoid being robbed. Similarly in Sudan, where travelers load their SIM before travelling home via bus, dispose of this SIM then complete a SIM swap on reaching their destination to get their wallet back.
As a digital currency, mobile money is backed by physical currency deposited at a bank. In Ghana, mobile money already makes up nearly 20% of total bank deposits. Clearly, cash-in and cash-out transactions are expensive and so operators have tried to create a broader merchant acceptance network including electricity, school fees, water and rates payments. This ensures the digital money stays in the system or at least does not exit in physical form as it goes electronically into a bank account.
Daily reconciliations are undertaken to ensure the float in the bank account equals the digital money in the system. Clearly, once you link mobile money to banks, it allow companies to pay salaries, pensions, invoices and the like directly into mobile wallets, significantly reducing the cash-in fees.
"It is high time we reduce the friction in the payments system to allow mobile money to flourish and create a more inclusive society"
Mobile money is also much cheaper than physical cash. Transactions for the consumer could be free and instant. When you buy something with a R10 note the person does not tear the corner off as a fee. My own studies have shown there is enough friction in the payments system to generate significant value to allow instant payments to be free for the consumer.
Mobile money is also more accessible, even in a country like ours with a developed banking network. In Kenya, the friction was about a bank branch, on average, being 14km away. With the introduction of "walking ATMs" — agents to cash in or cash out mobile money — this distance was reduced to about 1km. This was fundamental to accelerating the number of users. And as the price of entry-level smartphones decreases, and their power increases, accessibility will only increase.
So mobile money needs to be sold to the SA public, and that’s a sales pitch that I think can and should be made. It is high time we reduce the friction in the payments system to allow mobile money to flourish and create a more inclusive society. We can get rid of waiting 24 hours for inter-bank transactions to be settled for the smaller consumer as well as bring a number of people into the formal economy by giving them access to finance, personal insurance, pensions and savings products that are not excessively expensive relative to the size of transaction.
If I could wave my magic wand I would implement a single mobile-money platform, owned by the SA Reserve Bank, zero-rated for data by the mobile operators and with regulated access to all the banks. Artificial intelligence (AI) and machine-learning would be used to manage suspicious transactions; location services and biometrics on smartphones would be used to facilitate Financial Intelligence Centre Act (Fica) measures and onboard customers; and application programming interfaces (APIs) would be shared to allow developers and entrepreneurs to proliferate new services. Access to bank accounts via APIs has already been legislated in the EU for this very reason.
After Covid-19 we're going to need to take every chance we can to create a frictionless economy. Despite economic stimulus and infrastructure development packages, we are going to be stretched to capacity. Mobile money could serve as an effective, inclusive catalyst to accelerate the post-pandemic economy and to ameliorate financial insecurity, as we adjust to this no-longer-new normal.
The technology exists, it works, and with more than 130,000 outlets countrywide selling pre-paid airtime, water, and electricity vouchers, we could roll it out quickly. All we need is a rapid shift in our regulatory environment and a "let's solve this together" mindset.
The above is an opinion piece by our Chief Excitement Officer Stephen van Coller, that was first published on BusinessLIVE on the 3rd of June 2020.