How Prepaid and Mobile are Driving Commerce in Emerging Markets

In Digital Transactional Processing, Industry Solutions, Insights, Prepaid by Salim Dhanani

Flip phones are back, according to an article that made the rounds recently.  Reading it I wondered “Did flip phones ever go away?”

 

by Salim Dhanani
Director of Business Development

They might seem like a kitschy throwback for many of us in the west, but in much of the world “feature phones” are still de rigueur—and in some cases it’s the closest thing to a bank for miles.

In fact, combined with prepaid programs, feature phones are the most important commercial vehicles in emerging markets. There are 2.5 billion people in the world who don’t have a bank account, and don’t even have access to the banking system. Even if they were qualified, there are no local, feasible banking options.

What they do have are feature phones.

Traditional prepaid plastic cards—the kinds that work wonders for the underbanked in South America and Eastern Europe—are useless in rural parts of Africa, East-Asia or the Middle-East. With no ATMs and no points of sale that can process plastic cards, what good are they?

Instead transactions happen phone-to-phone. Consumer to merchant or peer to peer—this is when mobile shines. And it’s all rooted in prepaid transactions.

M-pesa—Safaricom’s mobile money programme in Kenya (and now in 9+ other countries) and the cornerstone of these prepaid transactions—is essentially just airtime. These prepaid phone minutes have value and are bought, sold or exchanged. I can visit an M-Pesa dealer in rural Kenya, purchase minutes in cash, then transfer any portion of those to a vendor in exchange for a product or service. That vendor can, in turn “spend” those minutes on something else.

It’s a fast-moving medium of exchange and a prepaid model that opens up a wealth of opportunity for economic growth in un-banked parts of the world. The brainchild of Vodafone, M-Pesa may be the most successful form of mobile money, but there are many other global initiatives to increase the number, and variety, of channels into the traditional banking system.

The upside for emerging markets is massive:

There’s a low barrier to entry, facilitating financial inclusion for a previously unbanked population.

If I have a small crop in the Central African Republic, or am part of an artisanal collective in rural Uganda, with the right supply links, I now have a simple vehicle for quickly widening my potential market.

It means people that really are unbankable—not ‘unbankable’ in Western Europe, but unbankable in the shanty towns of Lima—can finally have some payment instruction to give a potential employer. It could mean the difference between staying in the ‘shadow-economy’ or paying taxes to receive much needed public services.

Regulation – Regulation – Regulation!

At the moment this is an entire ecosystem of mobile money that the Central Bank has no authority over. But regulatory constraints are changing fast—largely due to the introduction of cryptocurrency. Just like Bitcoin, there’s always a question of whether regulatory authorities will let pseudo-currencies truly take off.

Regulation isn’t bad, but there’s a massive delta between the crawling pace of regulatory change and the galloping needs of commerce and money-movement—in both emerging and emerged economies!

There are nuances that need to be addressed market to market. At the moment there are a few different solutions. Each needs to be relevant in any new context.

We’re seeing a few top level players doing really well in this space but at the moment this really is the wild west. I’d like to see if something as ubiquitous and carte blanche as Western Union will ever emerge using this technology.

Right now the question is “How?”: How will emerging markets evolve to incentivize this inflow? And how will developed market regulations constrain that outflow?

Somewhere in the middle the players will converge and we’ll find out.