DATE: 1 November 2016 1 By On Time Transcribers

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00:06 IGNACIO: Today we're going to be talking about mobile money ecosystems.
00:09 The kind of low-cost digital payments platforms that are spreading across many developing
countries.

00:16 The core principal of these ecosystems is to leverage things that already exist, to bring down
the cost of building platforms dramatically.
00:26 The first thing they leverage is, of course, the mobile communications network,
00:29 which creates the opportunity for bringing real time transactions pretty much anywhere in the
territory.
00:35 The second thing is to leverage the mobile phones that are increasingly found in peoples'
pockets, even among poor people.
00:42 This represents a deployed base of infrastructure that can substitute for the more traditional
cards and point of sale terminals.

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00:49 The third element is to leverage retail shops that exist in every village and neighborhood as
cash-in cash-out outlets.
00:57 Instead of building costly specific infrastructure for this purpose, bank branches and ATMs,
why not bring those transactions into stores that already exist.
01:08 And finally, mobile money ecosystems involve non-bank players who have traditionally been
left entirely outside of financial services.
01:17 This is often mobile operators who have a widely recognized brand, significant distribution
reach across the territory and are already familiar with transactional models,
01:28 given their pre-paid airtime business.

01:31 We've explored the first three of these aspects in detail earlier this week.
01:37 So now let me concentrate on the last one.
01:40 What is the difference between a bank and an e-money issuer issuing and managing
customer accounts?

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01:45 Well first, let's understand how a bank works. This box represents the balance sheet of a
bank, with the assets on the left and the liabilities on the right.
01:54 When the bank issues a deposit to a customer, that comes in as a liability, but then there's a
corresponding asset that will typically loan it out or invest in securities.
02:06 There are two important aspects about this balance sheet:

02:09 The first one is that the bank is intermediating the funds between depositors and borrowers.
02:16 Depositors don't have a direct claim on borrowers.
02:20 Instead, borrowers owe money to the bank, and the bank owes money to the customer.

02:25 The second aspect is the asset transformation. That has to do with the fact that assets are
generally less liquid and longer term than deposits.
02:34 The liability side of banks has a lot of site deposits, immediately liquid, whereas as loans tend
to have longer maturities, months to years.

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02:44 This creates two main sources of potential risk for banks: one is that loans will not be repaid,
02:51 in which case the bank still needs to repay their depositors; and the second one is that
depositors ask for their money back faster
02:59 than the schedule foreseen in the loan agreements that the bank has signed.

03:04 The idea with e-money issuers is to preclude them from having these two types of risks.
03:08 Generally, e-money accounts are issued not by the e-money provider itself, but by a trust.
03:16 This trust holds the value raised from customers when they're buying e-money, but the only
thing this trust can do with this money is to invest it into liquid bank accounts which are called
pooled accounts.
03:29 All the e-money trust is doing is to individualize those pooled accounts.
03:33 The balance of all e-money accounts is a hundred percent backed by bank assets.
03:39 And in fact typically, the e-money account holders have a direct claim on those pooled
accounts through the trust mechanism.

03:47 So what specifically could mobile operators do within a mobile money ecosystem?
03:52 They can get involved in managing the messaging between clients and the provider.
03:58 That's of course the normal business for a mobile operator of managing SMS, USSD, internet,
etcetera.
04:04 So here the mobile operator is purely a digital channel for a financial service provider.
04:10 The next thing the mobile operator can do is to manage the cash-in cash-out network,
04:16 because many of these cash-in cash-out outlets are in fact the airtime distribution points of a
mobile operator.
04:22 So now, the mobile operator is managing not only the digital channel, but also the cash
channel.
04:28 It's become a transactional acquisition network for a financial service provider.

04:33 The mobile operator can still increase its role from here, because it could be managing the
accounts of the financial service provider on an outsourced basis.

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04:41 It could also be the one issuing the accounts. At this point it's become an e-money issuer.
04:48 But what the mobile operator can never do is invest or intermediate the funds because that
would require a banking license.

04:55 Now let's look at the economics of a mobile money system.

04:59 Let's start from the customer's side and let's consider this hypothetical red digital money
operator, RedDo, that is not unlike M-Pesa in Kenya, maybe three to five years after launch.
05:09 RedDo works in a country with a population of forty-five million people of which fifty percent
are adult, sixty percent of those have a mobile phone - it's a developing country – and this operator
really is dominant.
05:21 It has a ninety percent market share in the voice telephony business.
05:25 That means that the operator has twelve million telecoms subscribers.

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05:29 Imagine that it convinces eighty percent of its voice customers to subscribe to mobile money,
but that only seventy-five percent of those are active on mobile money on a ninety day basis,
meaning that they've done a transaction in the last three months.
05:43 So RedDo has 7.5 million active mobile money clients.
05:49 Imagine that each of them does three transactions per month – sending money home, paying
a bill.

05:54 These are electronic transactions. Some of them are cash-to-cash, like your P2P transfer,
involving a cash-in transaction at the beginning and a cash-in transaction at the end.
06:05 Some of them only have one cash transaction, for example, a bill payment.
06:10 So imagine that on average, an electronic transaction results in 1.8 cash transactions.
06:16 So RedDO is doing about forty million cash transactions, this needs to be distributed over its
agent base.
06:24 RedDO has about thirty thousand agents of which seventy-five percent are active,

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06:30 each of these agents is doing sixty cash transactions per day and they work every day of the
month.
06:37 Now, if you look at the business case for an individual agent on a per-day basis, RedDO pays
them about ten US cents per transaction,
06:45 they're doing sixty per day, so a typical RedDO agent is taking home six dollars per day.
06:51 In a developing country that's a significant amount of money.
06:55 This is an example of a system that works. There's enough volume of transactions generated
by clients to feed a very dense agent network, who have thirty thousand of them spread across a
territory serving forty-five million people.
07:08 And each of these agents is being fed enough to want to continue being in business.
07:13 Now consider another mobile money operator, GreenDO.
07:17 The numbers look very different, but let me talk you through the key differences.
07:22 GreenDO has fifty times fewer cash transactions than RedDO, but notice they operate in a
country that's only half the size.
07:29 So what explains the huge difference? Well they're losing value every step of the way.
07:35 Their country's poor size, half the number of mobile subscribers, and it's a less dominated
market; it has half the market share.
07:43 It's half as good in converting its existing customers into mobile money subscribers and it
certainly is not keeping them active.
07:51 They're also doing fewer transactions.
07:54 On the agent side, fifty times fewer transactions are distributed over five times fewer agents,
08:00 but each one is doing one tenth the volume of transactions every day, and so they're taking
home only sixty cents, not six dollars, on a daily basis.
08:10 The agents are not happy. As a result, the customers are probably not getting a good service
and activity levels are low.
08:17 The system is not working very well.

08:21 So what are the implications for financial service providers? Mobile money is a volume game;
08:24 you have to generate enough transactions from customers to draw enough business into
enough agents.
08:29 It's working out the balance between the two sides of the market that is critical, and ensuring
that the agents receive enough remuneration every day, to want to offer good service.

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08:40 Mobile money is a special form of e-money proposition that introduces a combined store
value payment instrument and payments channel.
08:49 Mobile money systems, especially in developing countries, seek to leverage existing
infrastructures and relationships to vastly reduce fixed unit transaction costs.
08:59 Non-bank e-money issuers in effect, individualize bank accounts they hold on behalf of their
customers.
09:05 They'll have a handful of pooled accounts and with that they serve thousands of millions of
customers.
09:11 And finally, we've seen how there are a variety of possible partnership models between
banks, telecoms companies and retailers,
09:17 but the relationships between them aren't always easy; the business assets and interests are
very different.

09:21 END OF RECORDING

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