A previous MMU blog “Can India Achieve Financial Inclusion Without the Mobile Network Operators?” concluded “MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion.”
All well and good… and of course MNO-led mobile-money models have been more successful than bank-led models in several parts of the world. This is in part because mobile money is a more natural “fit” to MNOs’ high volume, low value transaction and agent-based business. But also the business case for MNOs is based on reducing customer churn and digitising payments for airtime, in addition to the revenues for managing payments transactions.
Furthermore, payments are inter-spatial transfers that can be confirmed either by receiving the money, and/or with a simple call by the sender to the receiver – thus building instant trust. These factors (together with MNOs’ natural advantages as first movers in this market) put them in the perfect position to make the market for digital financial services.
Conversely, banks are much more comfortable handling low volumes of high value transactions in their own premises (and certainly not with dispersed agent networks). And the business case for banks is primarily based on offering a range of products. Furthermore, since many of these products (for example insurance and savings) are inter-temporal (as opposed to inter-spatial) in nature, immediate confirmation and thus trust in the new digital financial system is much more difficult to achieve.
But ...in markets where the Central Bank insists on bank-led models and prohibit MNOs from issuing e-money, are MNOs likely, or able, to play the market making role for digital financial services? The moves from Airtel with Axis Bank and Vodafone with ICICI Bank in India suggest that (after many false starts) MNOs will indeed play a very significant role as agent (or business correspondent) network managers.
Why? Well, MNOs have several significant advantages as agent network managers:
- They have established multi-layer distribution networks, with many thousands (in India’s case 1.5 million!) of retailers selling airtime and providing extensive urban and rural coverage.
- The MNO business model is based on usage (those high volumes of small value transactions), and therefore more aligned to the willingness and ability of the poor masses to pay in small sums; unlike the traditional bankers’ business model that is based on float.
- Mobile pre-paid platforms that manage high volumes of low value electronic recharge are very synergistic with the needs of digital financial services. These platforms also allow the ability to offer highly customised and relevant products (supplemented with capabilities for fine segmentation and analysis of usage trends).
- MNOs have high levels of brand awareness amongst poor and rural customers that can be leveraged well for cross-selling financial services. MNOs also invest regularly and extensively in marketing and promotions to create channel and consumer awareness.
- Telecommunications is a well regulated service industry, similar to banking. Thus mobile retailers acquiring new subscribers are well equipped to handle KYC norms and service activation processes.
- Telecommunications is also an investment intensive and long gestation business. Thus mobile operators have superior capability to source funds, and make large investments with long time horizons for returns.
- MNOs work through extensive partnerships, aggregating third party products seamlessly into their offerings – essential for the success of digital financial services.
- Last, but quite importantly, in many countries there is severe competition, price-wars, and commoditisation of voice and basic services, so MNOs are highly motivated to offer stable, diversified value-added-services that promise substantial upsides in terms of reduced churn, decreased airtime distribution costs and increased revenue.
Digital financial services in one of the few industries that has a clear first mover disadvantage. Building the trust of low income people in electronic money, the systems that manage it and the agents that provide the cash in/out services is a very challenging proposition. But MNOs are, in many ways, better placed than banks to meet these challenges – they are likely to be essential to achieve digital financial inclusion, even in India and other bank-led model markets.