Infodev Micro-payment Systems and Their Application to Mobile web

8/8/2019 Infodev Micro-payment Systems and Their Application to Mobile web

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www.infoDev.org

MICRO-PAYMENT

SYSTEMS AND THEIR

APPLICATION TOMOBILE NETWORKS

Examples of Mobile-EnabledFinancial Services in the Philippines


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MICRO-PAYMENT

SYSTEMS AND THEIR

APPLICATION TOMOBILE NETWORKS

Examples of Mobile-EnabledFinancial Services in the Philippines

www.infoDev.org

AN infoDev PUBLICATION PREPARED BY

Neville Wishart

Information forDevelopment Program


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To cite this publication:Wishart, Neville. 2006. Micro-Payment Systems and Their Application to Mobile Networks. Washington, DC:infoDev / World Bank. Available at: http://www.infodev.org/en/Publication.43.html

2006The International Bank for Reconstruction and Development/The World Bank1818 H Street, N.W.Washington, D.C. 20433U.S.A.

All rights reservedManufactured in the United States of America

The findings, interpretations and conclusions expressed herein are entirely those of the author(s) and do not necessarily refl ectthe view of infoDev, the Donors of infoDev, the International Bank for Reconstruction and Development/The World Bank andits affiliated organizations, the Board of Executive Directors of the World Bank or the governments they represent. The WorldBank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and otherinformation shown on any map in this work do not imply on the part of the World Bank any judgement of the legal status ofany territory or the endorsement or acceptance of such boundaries.

The material in this publication is copyrighted. Copying or transmitting portions of this work may be a violation of applicablelaw. The World Bank encourages dissemination of its work and normally will promptly grant permission for use. For permissionto copy or reprint any part of this work, please contact [email protected].


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TABLE OFCONTENTSForeword v

Acknowledgement vi

Executive Summary 1

1. Te Forgotten Millions 5

2. Te Philippines Experience 9

2.1 Te Impact of Mobile 9

2.2 SMAR Money 10

2.3 GLOBE G-Cash 17

2.4 Investment and Profitability 23

2.5 Customer Churn 23

3. Other Systems 25

3.1 Fundamo in South Africa 25

3.2 Safaricom in Kenya 25

3.3 MN Banking in South Africa 25

3.4 Celpay in Southern Africa 26

4. Discussion Of Te Various Implementations 29

4.1 Mobile Network Impact 294.2 Customer Features 29

4.3 Network Architechture 31

4.4 Banking Regulatory Issues 32

4.5 Bad Debt provision 33

4.6 Marketing and Sales Responsibilities 33

Table of Contents . iii


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. Micro-payment Systems and their Application to Mobile Networksiv

4.7 ARPU Imapcts and Profitability 34

4.8 Investment Requirements 34

5. Issues o Be Considered In Establishing An M-commerce Service 37

5.1 Issues for a Network Operator 37

5.2 Banking Issues 37

5.3 Market Issues 37

5.4 Competition Issues 38

5.5 Regulatory and Security Issues 39

5.6 Competency 39

5.7 ransaction Management Issues 39

5.8 Company Infrastructure 40

6. Conclusions and Future Study 43

Annex 1 47

Annex 2 51

Annex 3 55

Project Contributors 57


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Executive Summary . v

Mobile Network Operators are continuously intro-ducing new products and services to meet the evergrowing demand for mobility in todays fast-moving

world, while simultaneously attempting to make suchservices increasingly relevant to, and affordable by thepoorest members of society. One innovative applica-tion of mobile technology that has attracted consid-erable attention in recent months, is the provision of

financial services.

In many developing countries, particularly in ruralareas, access to financial services is very limited, re-sulting in a large percentage of the population operat-ing on a cash basis only and outside of the formalbanking system. However, the proliferation of mobileservices in these countries has created a unique op-portunity to provide financial services over the mobilenetwork. In light of the growing size of internationaland national remittances, this opportunity couldhave significant implications.

In an effort to understand better the potential of thisnew mobile application, which is part of a growing areaof mobile enabled commerce (m-Commerce), the

FOREWORD Information for Development Program (infoDev) haspartnered with the International Finance Corporation(IFC) and the GSM Association to conduct a casestudy of two promising examples of m-Commerce inthe Philippines, namely mobile financial services pro-vided by SMAR Communications and GLOBEelecom. Tis partnership has produced this report,

which summarizes the first phase ofinfoDevs ongoingexploration into the application of m-Commerce indeveloping markets. Tis first phase is aimed at identi-fying the opportunities provided by mobile networksin offering m-Commerce services, as well as identifying

the drivers of successful implementation.

Based on the findings of this report, it is clear that itis not only technically feasible and profitable to de-ploy financial services over mobile networks, but thatthere is significant and growing demand. In fact, m-Commerce may address a major service gap in devel-oping countries that is critical to their social andeconomic development. In addition to providingmany answers about this new service application, thereport raises many interesting questions about theusers and how they are benefiting from this service?Tese questions will be explored during the next

phase of infoDevs work in this area, the scope ofwhich will be decided in consultation with IFC, theGSM Association and its donors and other partners.

Mostafa errab Mohsen A. Khalil om J. PhillipsProgram Manager, infoDev Director, Global IC Department Chief Government & Regulatory

World Bank Group Affairs Offi cerGSM Association

Foreword v


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. Micro-payment Systems and their Application to Mobile Networksvi

Te report was funded by the Information forDevelopment Program (infoDev) in partnership withthe International Finance Corporation (IFC) and theGSM Association (GSMA), and prepared by Neville

A. Wishart, an independent consultant. Te report was supervised by Seth Ayers from infoDev and

ACKNOWLEDGEMENT

Wiebke Schloemer and William Kerr-Smith from theIFC, and with valuable support provided by GabrielSolomon from the GSMA. Special thanks to GLOBEelecom and SMAR Communications for theirparticipation in this report.


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Executive Summary . 1

Tis Paper summarizes the first phase of an ongoinginvestigation into the application of mobile-enabledcommerce (m-Commerce) in developing markets.Te Paper was commissioned byinfoDev, in partner-ship with the International Finance Corporation(IFC) and the GSM Association (GSMA).

Te investigation is aimed at identifying the opportuni-ties provided to mobile networks in offering an m-Commerce service, as well as establishing the drivers of asuccessful implementation. Tis first stage was launchedin November with a fact-finding visit to the Philippines

for on-site discussions with both GLOBE elecom andSMAR Communications, both of whom are operatingsuccessful m-Commerce services.

In addition to the Philippines study, contact was estab-lished with several groups in Southern Africa, that beinganother region where m-Commerce services have beenlaunched. In all, the following companies have co-oper-ated to supply information on their services:

GLOBE elecom, PhilippinesSMAR Communications, PhilippinesFundamo, a system supplier headquartered inSouth AfricaMN Bank, an m-Commerce service provider inSouth AfricaSafaricom, the joint Vodafone-Kenya elecommobile operator.

Additional information has been obtained from vari-

ous network web sites.

Without doubt, the largest and arguably most suc-cessful m-Commerce applications are to be found inthe Philippines with over 3.5 million m-Commerceusers on the two major networks. In discussion withthe two networks, it was identified that the key suc-cess factors for that market included the ability toload prepaid airtime credits as well as the ability to

EXECUTIVESUMMARY

transfer both cash and airtime credits between cus-tomers. Coupled with these were the low values setby the operator for such prepaid top-ups or credittransfers. ypical top-ups of US$ 47 to 57 cents wereallowed by the networks (equivalent to around fourto five minutes of calls) while transfers between cus-tomers of both cash and airtime credits were permit-ted as low as US$ 4 cents.

Ref Sect. 2.2 and 2.3

In Filipino terminology, the target market was at-

tuned to sachet purchasing or the practice of pur-chasing goods in very small quantities. Tisphenomenon is known to be common in other devel-oping markets where the populace rely on cash for alltrading and can afford to buy provisions for just a fewdays consumption. Tis market does not exhibitbulk purchase tendencies and an m-Commerce offer-ing that involves a significant cash deposit or payment

will be unlikely to find any significant uptake fromthe target market.

Ref Sect. 2

While the application of m-Commerce to developingmarkets was not constrained to the Philippines, the

African market developments seemed to reflect theFilipino views indicating that the target markets inthese geographically diverse areas were very similar intheir use of cash and their expectations.

Ref Sect. 3

Te range of features available in each market showedsignificant uniformity as to be expected if the targetmarkets were similar. With minor variations, the

features of all systems included:Provision for cash deposits and withdrawalsTe ability for third parties to make deposits intoa user account (employer, family member or amicro-finance organization)Te ability to make retail purchases at selectedoutletsOver-the-air prepaid top-ups using the cash al-ready in the account


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. Micro-payment Systems and their Application to Mobile Networks2

Te ability to transfer cash between users ac-countsTe ability to transfer airtime credits between us-ersProvision for bill payments.

Tis latter feature could be used for micro-financeapplications involving both loan repayments as wellas loan advances and this area in particular is beingexploited in the Safaricom trials and in GLOBEelecoms service in conjunction with the RuralBankers Association.

Ref Sect. 2.3.1 and 3.3

Apart from the use of the service by micro-financeinstitutions (as in the Safaricom-Kenya trials and

GLOBE elecoms service) all services studied for thePaper operated on a debit account basis, i.e. the ac-count could only be operated in credit. As a result,bad debt is not an issue other than loss caused byfraudulent activity. No operator indicated any seriousconcerns in this area and provided the overall systemsecurity was ensured, the possibility for fraud couldbe managed. In that regard, most of the systemsstudied involved a bank with normal banking systemsin place. Tat arrangement results in the fraud issuebeing restricted to the banks area of involvement for

which it will be well-equipped.

Ref Sect. 4.4

Te possibility of money laundering was consideredby all service providers and it was noted that in all

jurisdictions, the banking regulatory authority hadestablished appropriate policies governing the activi-ties of the banks. Tese policies included monitoringtransaction levels and frequency, looking for transac-tion patterns and stipulating both maximum accountbalances and daily transaction levels.

Ref Sect. 4.4

While it is possible for a network operator to takealmost full responsibility for the entire m-Commerceservice, only GLOBE elecom in the Philippines wasoperating in that manner. Even then, the actual cashfloat generated was held in one of the countrys regu-lar banks. All other cases studied involved co-opera-tive arrangements between banks and networks. Inview of the regulatory issues surrounding the banking

industry, this method of operation is more likely toappeal to intending service providers, given also thatthe banks can bring additional advantages includingthe availability of debit cards through issuers such asMasterCard.

Ref Sect. 4.3

All networks confirmed that the additional SMS traf-fic arising from the service was within the mobilenetworkscapabilities and in any case, as had hap-pened in the Philippines for other reasons, a secondSMS channel was easily added and would have morethan enough capacity to handle the extra load. Otherthan the SMS traffi c implication, the m-Commerceapplication had little impact on the mobile networkitself. In all cases, the interface with the m-Commerce

system was attached at the periphery of the SMSsystem.

Ref Sect. 4.1

All versions of m-Commerce studied for this Paperinvolved a special SIM-based menu, which is a featureavailable to GSM networks. Te ability to providethe services over a US-CDMA network has yet to beverified.

Ref Sect. 4.1

While there were no quantifiable figures available onsystem costs, various estimates placed a likely cost inthe range of US$5 million to US$10 million with anexpectation that an m-Commerce system could beprofitable with as few as 25,000 users connected butthat would depend on the overall investment andservice operating costs.Various estimates placed thetransaction level at around two per customer per dayand average transaction values at between US$15 andUS$30 per customer and airtime top-ups of aroundUS$4 per time. Tese figures can only be regarded asindicative of the type of activity that may be encoun-

tered.

Ref Sect. 4.8

For all the network operators, the revenue was largelyderived from SMS charges while the banks derivedrevenue from transaction charges on deposits and

withdrawals as well as interest on the resulting cashfloat. Te general view was that the business should


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Executive Summary . 3

be a high volume/low margin activity, although somenetworks were operating with relatively highcharges.

Ref Sect. 4.2.8

Apart from the advantages to the wider economy, theservice providers noted that if implemented properly,the service would bring advantages to all stakehold-ers. While the networks would experience higherSMS usage and hence higher ARPU, the bankingindustry gained access to an otherwise diffi cult if notinaccessible market segment. Added to that were thetransaction revenue and interest on the generatedcash float. Te identifiable customer advantages in-cluded the availability of useful features includingcash deposits and withdrawals and ease of prepaid

reloads and credit transfers between users.

Ref Sect. 4.7

In combination, the features would be likely to re-duce network churn, as the customer would havemore to lose by transferring to another network. TePhilippines networks report a marked churn reduc-tion, with one measure suggesting churn droppedfrom 3 percent per month to 0.5 percent per month.

Ref Sect. 2.5

Te issue of market segment penetration was can-vassed to identify if and how the lowest levels of userscould be served, noting that the systems generallyhad a SIM to m-Commerce account link which

would prevent use of the phone for m-Commerce byany other than the registered user of the phone. Apartfrom utilizing a system design that did NO use aSIM-account link, two operators noted alternative

ways of addressing the problem. MN Bankingsanswer is to provide the other users with SIMs whichcan then be swapped over when a borrowed phone isused. Tis maintains the SIM-account link effectively

but may have some consequences for prepaid accountexpiry. Te other solution adopted by GLOBE was towork with the micro-finance organizations to assistthese users to acquire phones with a time paymentarrangement.

Ref Sect. 4.2.7

In summary, the evidence available suggests that m-Commerce is a viable service that has significantbenefit to emerging markets in particular. Its majorbenefits are the extension of banking and moneymanagement services to the largely unbanked sectorsof the economy including in particular, the ability toextend micro-loans to this sector as well as providingfor easy repayment. Te Paper notes these are notnecessarily the features that would be top-of-mind tothe target market and on the basis of the Philippinesexperience in particular, m-Commerce service pro-viders must provide a range of features useful to thatsegment including airtime transfers as well as cashtransfers between users. Te importance of settingrealistic user charges was also noted, as was the need

for the service provider to carefully assess the issuesinvolved in starting a service.

Ref Sect. 5

Tese issues included: Who would be the parties involved, e.g. banksetc.

What responsibilities would each party under-take

What services are to be offeredIs a debit card appropriate

What charges will apply

Estimating the likely transaction volumesDeciding on the system vendorsIdentifying management and operational skillsets requiredEnsuring the back-offi ce support services areavailableEnsuring a robust and effective customer careservice is availablePreparing a realistic business case and projectplan.

Finally, there were some areas identified for furtherresearch in a later phase. Tese were the need to checkthe applicability of the current systems to networksusing the US-CDMA technology, the possible needsfor technical standards, the identification of the avail-able system vendors and the issues raised by multipleusers sharing a common mobile phone.


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The Forgotten Millions . 5

In developed economies it can be demonstrated thatthe population has wide and easy access to the bank-ing system, with an extensive uptake of EFPOS andcredit cards.Virtually all retail establishments havefacilities for accepting both types of transaction inaddition to cash and such facilities can often be foundin service areas such as taxi cabs and even parkingmeters.

However, there are many economies where such wideacceptance of a cashless society is many years away.Tese are primarily economies where the average in-come is low with many people having no involvement

with a bank at any time in their life. Tese peoplesurvive on cash and they very likely have no trust thata bank would serve their interests very well. At thesame time, many banks would regard this segment ofthe market as being unworthy of any effort and likelyto be more trouble than its worth. In many cases, thecash assets held by any one individual would be toosmall for any bank to regard as having value when

considered alongside the traditional costs to maintainbanking records for a customer.

With the advent of mobile, that situation has changedin a subtle way, but the change has not yet been rec-ognized in many markets. Specifically, the samemarket segment that has shunned the banks and theassociated electronic funds transfer systems, has con-tributed to the very high growth of prepaid mobileservices in these markets. Tese users are often char-acterized by the need to communicate but withoutthe complexity of a formal account with the networkoperator. Tey are invariably given prepaid service

and while some markets insist on knowing the iden-tity of the user, at least at the time the connection isactivated, there is no certainty that this informationis accurate in the long term. Tis class of user prefersanonymity and that is what they can often get withprepaid mobile. opping up their account is as simpleas buying a new prepaid card from a retailer and en-tering the details into the phones keypad.

1. THEFORGOTTEN

MILLIONS

Given that there are now large numbers of prepaidusers in developing markets who are very familiar

with using their phones for text and voice messagingas well as refilling their credit balance on the prepaidsystem, this same group is an ideal segment to target

with a micro-payment feature. In many cases theyhave no relationship with any bank, do not useEFPOS or credit cards and yet they have the abilityto perform financial transactions as evidenced bytheir ability to purchase and activate prepaid cards foradditional credit.

Tis potential has been recognized in a few markets,with arguably the most success in the Philippines.

1.1 THE SIGNIFICANCEOF THIS SEGMENT

Te advantage of developing a market for micro-pay-ments or m-Commerce, is that it continues to drivethe economic system toward a cashless transactionenvironment. Elimination or minimization of physi-cal cash has many advantages including less opportu-nity for fraudulent or criminal activity, reduction ofcash handling costs and, for the user, less reliance onhaving the right amount of cash when needed. It alsoallows the value of money to be better utilized. Cashheld outside the banking system is not available forshort-term investment so that the time-value of thecash asset is lost.

In the more affl uent economies, there is already agood infrastructure for a cashless environment withmost people having bank accounts and an array ofboth debit and credit cards. Nevertheless there is anunderlying need for cash for minor purchases butthere is little incentive to eliminate cash entirely.Tese economies can manage quite well and there isno specific interest group that feels suffi ciently underpressure to develop systems aimed at eliminating cashfrom the environment. Systems that have been devel-oped in such markets are often expensive and hence

not particularly attractive to the user.

In the developing economies however, there is a verylarge under-class that is totally reliant on cash for alltheir day-to-day expenses. Moreover, this under-classmakes no use of the banking sector and so is invisiblein terms of its cash value. At the same time, the needfor cash forces the providers of goods and services in


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these markets to have adequate cash-handling facili-ties and this comes at some cost.

In these cases, the commercial organizations havemuch more to gain by addressing the problem of cash

transactions. Not only is the risk associated with cashholdings that much greater, but the time-value of thecash being held outside the banking sector is entirelylost. Furthermore, the population in this category islost, i.e. unseen by the banking sector.

For these reasons, there is likely to be more incentivein developing economies to move the population at

large away from cash, than exists in developed econo-mies. Tat being so, a solution that meets the needsof developing economies will also have extensive ap-plication in the developed economies. Tis arises be-cause the solution must be accompanied by very low

costs as if it were otherwise, the solution would haveno appeal in those developing economies.

Te resulting low cost solutions can then be appliedin the developed economies resulting in further effi -ciency gains.


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The Philippines Experience . 9

As with many developing economies, the Philippinesis characterized by a very large under-class. Whileother analyses have considered the population to besubdivided into five categories, A to E, there is noquantitative assessment as to the make-up of thesefive layers other than to regard categories A and B asthe upper and upper-middle income groups, with Cto E corresponding to lower-middle, low and povertylevel groups. What is agreed is that the three lowercategories comprise the bulk of the Philippines popu-

lation.1

Probably in common with other developing econo-mies, the characteristic of the lower groups is theirtotal reliance on cash for their day-to-day subsistence,

whereby their cash resources will sustain them for nomore than a few days. Tis in turn leads to a differentmanner of purchasing lifes necessities. Te conceptof a major shopping visit to buy food in bulk is oftennot possible. Instead, provisions will be purchased inquite small quantities, often on a daily basis, or atleast several times each week.

Tis characteristic has given rise to the term sachetpurchasing,whereby goods are packaged in very smallquantities and sold through small stores specificallycatering to this segment of the population.2 Testores, termed sari-sari stores, build up a personalrelationship with their customers and may actuallyoffer credit arrangements to cover diffi cult times forone of the local families.

2.1 THE IMPACT OF MOBILE

When GLOBE elecom introduced GSM mobile

services in the early 1990s, it attacked the high revenueend of the market with an emphasis on post-paidservices, but with the later development of prepaidtechnology, the company commenced a prepaidGSM service in 2000. When SMAR eventuallycommenced GSM services in 1999, it had little op-tion but to seriously address the traditional prepaidsegment of the market, which it did believing thatprofitability could come from a low margin, highvolume business

2. THE PHILIPPINESEXPERIENCE

Following its introduction of service, SMAR re-searched the uptake and the way in which the cus-tomers used the service and found that their lowestvalue prepaid recharge card was still too expensive formany of the users. Tese users could not afford the

minimum P300 (US$6) charge for the card. As a re-sult, the minimum card value was reduced to P30 orUS60 cents. Tis new value was quickly recognizedby the market, resulting in a very high customergrowth rate for SMAR. Tis experience reinforcedthe view that the lower groups in the economic pyra-mid are influenced not only by the price of theproduct but also by the cost of the smallest elementof that product, i.e. the segment was conforming toits characteristic of sachet purchasing.

Following SMARs necessary efforts to cater to the

lower socio-economic classes to secure a customerbase, it became apparent to the company that therewas a definite future in this largely untapped marketsegment provided costs and hence the service chargescould be kept at a very low level. Te lesson from theprepaid recharge card value alone was an incentive tofurther reduce the recharge values but that could onlybe done if there was a move away from the more usualscratch cards to an electronic over-the-air (OA)system.

As a result, the company turned its attention to tech-nologies that would allow such a move and recognized

that such technologies could deliver much greatervalue than just prepaid recharge using OA concepts,and that gave rise to SMARs launch of their firstmobile banking and commerce service, SMARMoney, in December 2000.

Since then, various changes to the product have beenmade and it has been joined in the market place byGLOBE elecoms own mobile money remittanceand payment service called G-Cash. Tis newGLOBE service resulted from the companys desireto develop a unique m-Commerce solution and waseventually launched in 2004.

oday in the Philippines, the emphasis in the mobilemarkets is on low transaction costs (text messaging attypically US2) and minimal re-charge values

1 Economic crisis dampens ChristmasAC Nielsen review in Manila Times,28 October 2004, www.manilatimes.net/national/2004/oct/28/yehey/top_stories/20041028top2.html2 Small Grocers in Asia Surviving Onslaught of Retail ChainsA C Nielsenreview of 16 June 2004, http://www2.acnielsen.com/news/20040616.shtml


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(US60) coupled with ease of use and a range oftransactional applications aimed at addressing thepopulations needs. Both GLOBEs G-Cash andSMARs SMAR Money are being actively pro-moted and from the information supplied, both are

experiencing a high uptake of the services.

Tese same low sachetcosts have significantly influ-enced overall mobile demand,which now exceeds 33million users out of a population variously estimatedat between 85 and 90 million. Tis mobile penetra-tion level presents both major operators with enor-mous potential in the area of m-Commerce.

2.2 SMART MONEY

SMAR Money is the product offered by SMAR

Communications. It has a related product, SMARMobile Banking that allows customers to transferfunds from their bank accounts to their SMARmobile service account including prepaid recharging.Tese two products can co-exist with some custom-ers.

SMAR Money was first introduced by SMAR inDecember 2000 and has gone through several itera-tions to the present time. As currently configured, theservice appears to address most requirements for agood and reliable micro-payment platform.

2.2.1 Product Description

Te SMAR Money product is essentially a facilityfor linking the users phone to a cashaccount.Facilities exist for the customer to deposit cash, with-draw cash, top up the mobile phone prepaid creditlevels from that account or other bank accounts, all

without going near a bank or a SMAR offi ce if needbe. Inherent in the operation is an ability to transfercredit between mobile users, so as well as allowing asemi-formal cash transfer, it allows the users to ma-nipulate their credit in the system to suit their par-

ticular needs. It operates entirely on a credit basis, i.e.funds must be in the system before a customer canmanipulate those funds. As a result bad debt is not anissue. Te system gives no credit to the users.

In its simplest form, SMAR Money has no out- wardly obvious attributes. Te service is menu-driven from the phone and the customer can performall necessary actions using the phone alone.

In its preferred form, the service is coupled to a bankdebit card as can be found in any community aroundthe world. In this case the customer is provided witha card issued under the MasterCard banner, that canbe used anywhere a normal debit card can be used,

i.e. in AMs, shops etc.

Te service is aimed at providing a wide range oftransaction capabilities all of which should haveconsiderable appeal to the target market. It is coupledinto an account held by Banco de Oro (BDO) so thatthe user is effectively operating a BDO account usingthe phone as the transaction medium.

Te specific list of features provided by SMARMoney is as follows:

Cash deposits

Cash withdrawalsransfers of credit to the prepaid account (re-charge of prepaid serviceSMARLoad)ransfers of cash to and from other usersransfers of airtime credit from one user to an-other (SMAR Pasa Load)Cashless purchasing at a wide range of shops

where the retailer has a SMAR Money accountCashless purchasing at any MasterCard-enabledretailer with a MasterCard debit cardDirect credit from employer payrollBill paymentInward international remittances from Overseas

Filipino Workers (SMAR Padala).

Annex 1 shows in tabular form the range of servicesavailable along with restrictions, capabilities andcosts. However, the following descriptions cover theimportant aspects of the Companys service.

Customer Sign-up. For the customer wishing to be-come a SMAR Money customer, the applicationprocess is relatively simple.

Te normal situation involves the customer visiting aSMAR offi ce and signing up for the service. Tis

may involve a SIM card change and it is necessary forthe customer to have the phone available at thattime. A cash deposit into the account is not requiredat that time but without a cash balance in the ac-count, no purchases or withdrawals can be made.However, having opened the account, others cantransfer credit into it (see below). Te customer willnormally be encouraged to sign up for the associateddebit card at a cost of P220 which includes the first


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years subscription charge. Subsequent years attractthe same charge, i.e. P220 per annum. Assuming thecard is uplifted by the customer, it is prepared whilethe customer is being signed up and given to thecustomer at that time. If the customer applies at an

offi ce that has no card-printing facility, the card canbe mailed or picked up over the next day or two.

If the customer chooses to not have a card, then thereis no charge for the sign-up.

Under normal circumstances, the customer will makea cash deposit into the system at this point.

As an added method of subscription, the companyhas provided an over-the-air activation process whichregisters the customer on SMAR Money and allowscredit transfers to the account but until the customervisits a SMAR offi ce and provides the necessary IDas required in the Philippines, cash withdrawals andpurchases are not possible. Tis feature is specificallyaimed at the SMAR Padala feature described be-low.

Automatic Transaction Update. Tis feature, whichis built into all the transaction services, provides fora text message to be sent to the user whenever atransaction is performed, whether by the use of thephone directly or by way of the bank debit card ifthat option has been chosen. Tis feature operates at

all times on all transactions and provides the cus-tomer with a level of confidence in the use of theproduct. As an added safeguard, the customer hasfree access to the current credit balance using themenu on the phone and can also request a printedstatement of the transactions at a nominal charge.

Cash-In. Tis feature allows the user to deposit cashinto the users account. As it is a physical medium,the cash must be deposited at one of the designatedcash deposit locations. Tis includes SMAR andBDO offi ces along with a range of accredited retailers

who have agreed to take deposits. Every deposit must

be covered by an acceptable ID in accordance withthe requirements of the countrys central bank (BSP).If the customer does not have the available debit cardthen the deposit is manual and the depositor must fillin a deposit form that requires a formal ID. If thedepositor has opted for the debit card, then that canbe used in a cash deposit terminal available at somelocations. Te terminal accepts the card and currencynotes in payment with a minimum note size of P100

and the minimum deposit is set at P500. Note thatthese are country-specific requirements unrelated tothe technology.

As noted above, as soon as the cash has been depos-

ited, the customer will receive a text message in addi-tion to a paper receipt from the cash teller orautomatic teller.

Cash-out. Tis is the reverse of the cash-in procedurebut is potentially a more flexible arrangement. In thiscase the customer can withdraw from a bank orSMAR cashier or accredited retailer in exactly thesame way as depositing cash. Again, a withdrawalmust be completed with acceptable ID. However,users who have opted for the additional bank debitcard can use that card in AMs worldwide that ac-cept MasterCard transactions; in that case the cardprovides the ID link. Subject to retailer policy, cash

withdrawal from retail establishments using the debitcard is technically possible although it is not a prac-tice in the Philippines market.

Retail Purchasing. In this transaction, the user hastwo options. One is to use the debit card, in whichcase the purchase is done according to normal prac-tice where a debit card is used.

Te other alternative can be used at participating re-tailers, and that involves the retailer originating the

transaction request through his own SMAR mobilephone terminal. Subject to the customer having acredit balance to cover the intended purchase, thecustomer receives an authorization request via SMS.Once authorization is given, the retailer and customeraccounts are updated and the customer receives aconfirmation of the transaction via SMS.

Credit Transfers. Tese are convenience transactionsfor the customer, allowing the transfer of a credit bal-ance to another customer. Te customer initiates atext message indicating the amount of the transferand the SMAR Money customer to whom the

transfer is directed. Subject to fund availability, bothparties receive a confirmation SMS.

An extension of this service is marketed by SMARunder the banner of SMAR Padala and is aimed atthe significant number of Overseas Filipino Workers(OFWs) who regularly transfer funds to family backin the Philippines. For this, SMAR, in conjunction

with BDO, have established links with RAVELEX,


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a worldwide group specializing in money transfersand Forex cash conversions with outlets at airportsand in cities in many countries. In the case of theseForex transfers, the OFW must know the mobilenumber of the Filipino family member and that fam-

ily member must have a SMAR Money account.Recognizing that initially at least, many SMARcustomers will not also be signed on for SMARMoney; the company has provided an over-the-airregistration method for such users to quickly registerfor SMAR Money. While this will quickly registerthe customer for the purposes of an internationaltransfer, the customer must still visit a SMAR orBDO offi ce to uplift the cash.

Te same concept allows employers to make directcredits to customersSMAR Money accounts.

Airtime Transfers. Tis is another form of credittransfer where the SMAR Money customer cantransfer airtime credit to another SMAR Mobilecustomers mobile account. In reality, this transfercan be done without being a SMAR Money cus-tomer as there is no cash transaction with all creditrecords being held within the SMAR prepaid sys-tem. Te service is marketed as SMAR Pasa Load.

Prepaid Top-Up. Tis is a natural extension of theservice, using either SMAR Money or their mobilebanking feature, SMAR Mobile Banking. It allows

transfers of credit from a SMAR Money or bankaccount direct to the prepaid card account. Teminimum top-up from a cash account is P30(US57).

Merchant Opportunities. As an adjunct to prepaidrecharging, SMAR Money offers participating re-tailers the opportunity to sell airtime to customers inlieu of previously used prepaid scratch cards. It ismarketed by SMAR as SMAR Load. As long asthe retailers have credit in their SMAR accounts,they can sell units of airtime to prepaid users who donot have the capability to do so themselves. Te

smallest transfer recognized by SMAR is a value ofP2 (US4).

2.2.2 Market Uptake

SMAR report that as at November their customerbase was approximately 20 million of whom 2.5 mil-lion had subscribed to SMAR Money. Of these,around 1 million have implemented the full feature

set, i.e. they have taken the debit card option, whichallows all the features available through a normalbank debit card, including use overseas.

Information made available indicated that the service

was continuing to grow at a steady rate. A majordriver was the ability to recharge prepaid services byquite small amounts. Te minimum recharge al-lowed is P2, which will only pay for two text mes-sages. As noted above, the minimum top-up value isP30 through the normal top-up facility.

Overall usage of SMAR Money and its related ser-vices is reported to be very high.

Almost all the companys prepaid users (98 percent oftotal customer base) utilize the OA recharge featureeither directly by transferring credit from SMARMoney or by purchasing airtime in sachetsfromaround 700,000 co-operating dealers.3

Of the estimated 8 million OFWs working overseas,over 1 million are using the SMAR Padala service totransfer almost US$50 million per month into thePhilippines economy through SMAR Money.4

Users transferring airtime contribute a load of aroundone transaction per customer every four days.

SMAR Money transactions are approaching

US$100 million per month, all of which pass throughthe BDO network, and the banking partner, BDO,reports an added cash float of aroundUS$10 mil-lion.5

2.2.3 Service Charges

For the basic service with no debit card facility, thereis no initial fee. All costs are transaction related.

If the card option is chosen, there is an ongoing an-nual charge of P220 (US$4) for the facility in addi-tion to the transaction charges.

Te transaction charges are few and fairly simple:6

Every customer-initiated SMS (inter-accounttransfers etc) costs P2.5 (US5)

3 SMART presentation (Powerpoint) to IFC-infoDev, November, 20054 Ibid5 Ibid6 SMART website, product tariffs


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Retail purchases using the phone incur a P1 SMSfee (US2), which is also the standard SMS fee.No charge if the card is usedCash deposits and withdrawals through a cashierattract a fee of 1 percent of the transaction value

Cash deposits using a card are freeCash withdrawals at BDO AMs are charged atP3 (US6)Cash withdrawals at other AMs are charged atP11 (US21)

2.2.4 The Business Partners

Te product is jointly operated by SMAR in con-junction with Banco de Oro. Trough Banco de Oro,the product also has access to the MasterCard ser-vices

SMARs role is essentially that of a transport sys-tem and host to around 20 million mobile custom-ers, some of whom would be normal bank customers

with credit and debit card facilities, but there wouldbe significant numbers who do not currently haveany relationship with a bank. SMARs serviceprovides for customers to send text messages to thebanks systems using high level encryption availableto them through the SIM card features. No aspectof the cash transfer and credit arrangements is held

within the mobile network.

With minor exceptions, SMAR receives its incomeentirely from the SMS charge that is levied for thetransaction.

Banco de Oros role is that of a retail bank providingnormal transactional services to its customers usingthe full range of cash and debit card services. As such,the bank takes full responsibility for audit, fraudmanagement, account security etc. under its normalbanking licence. Tis ensures that the service operatesentirely within the limits of the Central Banks juris-diction.

In addition to meeting the immediate needs of man-aging the debit accounts for the SMAR customers,the bank is able to offer other services to these cus-tomers and could conceivably introduce them to thefull range of services offered by the bank and quiteseparate from the specific services available throughSMARs network.

2.2.5 Transaction Security

Security of the transactions with particular emphasison PINs and account details is of utmost importanceand is taken care of using SIM-based encryption.

2.2.6 Network Traffic

Te Philippines is noted as arguably the worlds leaderin the use of text messaging (SMS). For most foreignnetwork operators, the SMS service can be carried onthe control channel that exists as part of the infra-structure at all cell sites. Tis control channel handlesthe normal housekeeping associated with connectingmobiles to the network but in a normal network, thischannel is relatively lightly loaded and it was thisavailable capacity that provided the SMS service an

opportunity for near cost-free carriage. In thePhilippines however, the market developed aroundvery low charges for SMS calls, currently P1 (US2).Te result was a very high uptake and use of SMS.Current industry estimates place the SMS usage inthe country at around seven SMSs sent per customerper day, and at that level, the Philippines networkshave had to equip two data channels for controlchannel and SMS functions in place of the usual onesuch channel.

In that context, the introduction of SMAR Moneyhas not caused a major problem. SMAR report no

network or SMS overload from the introduction ofthe service, and while exact transaction loads are notavailable, best estimates place the added load ataround two SMS calls per customer per day for thosecustomers on the system.

2.2.7 Network Technology Issues

Recognizing that SMARs approach is essentially toprovide the transport mechanism for the service, itsinvestment in added technology is understood to befairly modest. SMAR has developed both the hard-

ware and software required for the service in conjunc-tion with BDO and specialist suppliers and as withother value-added service applications, the facility isan add-on to the existing network.

Te company has indicated a willingness to workwith other networks worldwide to facilitate a tech-nology solution in those networks.


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A simplified network architecture is shown below.Te key feature of the SMAR implementation is itstransparency and the concentration of the necessarycommunications security aspects and transaction in-terface management in the peripheral unit linked to

the SMS platform and to the BDO network. BDOhave retained full responsibility for its part of thesystem including all necessary software and hardwarerequirements.

2.2.8 Handset Compatibility

Te service makes use of SIM-based memory andmenu capabilities and is compatible with GSM Phase2 Plus SIM standards. As that particular standard hasbeen in operation for at least five years, the majorityof customers on the SMAR network have compati-

ble handsets.

Te company believes that US-CDMA systems would only support the service where SIM-basedhandsets are used. Tis aspect will require furtherstudy.

2.2.9 Telecom Regulatory Issues

As the service involves no new or unusual telecom-munications aspects and tariffi ng is consistent withcurrent practices, the company reports that the regu-lator has indicated no interest or concern with the

service. Certainly based on what is being offered and

the manner in which it is being offered, it wouldseem highly unlikely to raise concerns in any but themost restrictive regulatory regimes.

2.2.10 Central Bank Issues

Because of the way in which the service is being im-plemented, i.e. all transactions are held within theBDO system, SMAR has been able to side-step thesignificant issues that are of concern to the CentralBank (BSP). As in all jurisdictions, there are controlson the movement of cash with particular emphasis onsecurity, bank liquidity and the elimination of moneylaundering opportunities.

In this case, SMAR has left all such activity in thehands of BDO and as a result, it is BDOs responsibil-

ity to meet the Central Bank requirements. It does thisby making sure that the SMAR Money accounts arehandled in exactly the same way as other accounts. It isfor this reason that the depositing and withdrawal ofcash from the system requires the customer to presenta formal ID or have a bank debit card.

As an added constraint, dictated by the bank and/orthe Central Bank, the SMAR Money account islimited to P50,000 at any one time (US$950) and isaccompanied by daily transaction limits. Such re-quirements will always be unique to the specificcountry and are not dictated by the technology or the

system concept.

FIGURE 1.


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2.2.11 Summary Comment

Te SMAR Money product is well thought out andappears to address the issues that are most likely to beof concern to the average customer in the Philippines.Its key features include:

Catering for small transaction sizesCapability of high transaction volumes

Apparent security using modern encryption tech-niques for protection of customer PINs and ac-count detailsEase of sign-up and does not require the customerto provide a credit history. Only a recognized na-tional ID is required to meet the countrys finan-cial regulationsDepositing and withdrawing cash is as easy as itcan be while meeting Central Bank requirements

Allowing customers to transfer credit from oneuser to anotherPermiting electronic payment for goods and ser-vicesEnabling OA recharging of prepaid accounts.

It is probably true that most if not all of these arepresent in other models but the distinguishing featureof the SMAR model is its transparency and use of astandard banking organization to record and managethe transactions and associated cash holdings.

In that regard it has an advantage in that it removes

the network operator from the usually severe restric-tions that are a necessary part of the financial andbanking sectors. Tat probably means it is easier toimplement in developing economies as it is much lesslikely to cause concern to the various central banks.On the other hand, it requires the operator to identifya co-operative bank who can see the advantage for thebank.

In the Philippines case, the banks advantages are theextra cash float available and the access to a largenumber of otherwise inaccessible customers. A fur-ther advantage comes from the banks development

of its relationship with those customers, leading tothe provision of added services.

SMART Communications Inc.CEO Interview

Napoleon L. Nazareno became CEO and President ofSMAR Communications Inc. in January 2000. Under

his leadership, SMAR claims a dominant 58 percentmarket share in terms of customers. SMAR has won

global recognition for its innovative SMAR Moneyproducts and services, which are now used by approxi-mately 3 million of the companys total 20.8 million

subscriber base. Mr Nazareno serves as a member of theBoard of Directors of the GSM Association.

1) Please provide a brief overview

of the service.

We launched in December 2000 in co-operationwith First E-Bank, which has since been acquired byBanco de Oro, and MasterCard, one of the worldsleading payment services providers. SMAR Moneyis the worlds first reloadable electronic cash wallet,linked together by our cellular network. Te card is

the ultimate in cashless convenience. Once cash hasbeen transferred to the SMAR Money account, itcan be used in thousands of shops and restaurants.Te cash value may also be used to load airtime, payutility bills, or transfer money from the SMARMoney card to another card. SMAR Money hasserved as the platform by which other m-Commerceservices have subsequently been built.

2) Why was the service launched?

We needed a differentiator in our service offeringbecause everyone else was offering the same phone

and text services. We believed that once subscribershad become familiar with SMAR Money they

would be less likely to change operators. It hasbrought a great deal of stickiness to the 3 millionsubscriber base. For instance, our churn rate for non-SMAR Money subscribers is about 3 percent. Forthose that use SMAR Money, its roughly about 0.5percent. Tey hardly ever change operators.

3) What are the most popularapplications from the service?

Te most popular application is SMAR Load, intro-

duced in May 2003 for our prepaid customer basethat makes up 98 percent of our subscriber market. Itis a revolutionary way of loading your prepaid ac-count. Its an over-the-air prepaid reloading serviceoffering airtime in what we call sachet-likepackagesusing the SMAR Money m-Commerce infrastruc-ture. It brings down the denomination of prepaidloads to affordable levels for our low-end consumers.


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8) How do you expect the micropay-ment service to develop over time?

Te next step is to allow our subscribers to purchaseother services such as Internet access and gaming us-

ing their mobile phones. Tat would diversify theSMAR Money product and make it a universal wal-let. Consumer goods companies are interested in us-ing our platform. We already have the strongest retaildistribution network in the country and that couldbe a springboard for us to use it as a vehicle for otherkinds of transactions that can be developed. We are intests now and hope to launch commercial services inthe second half of 2006. We wont launch until it isrobust, secure and reliable.

9) What are your goals for the service

in terms of subscriber numbers?Te number of users is now growing exponentially. Itused to be one or two per cent a month but now it isdouble-digit. Te reason for this is SMAR Padala,as families are using it to transfer funds between rela-tives.

I would really hope we can double our 3 millionSMAR Money customer base by the end of nextyear. Tat is a conservative target.

10) What do you believe were the

critical market conditions necessaryfor a successful launch?

Our market is a low-income market. TereforeSMAR Load, SMAR Padala and all the SMARMoney applications have addressed the specific needsof the mass market and that is why it has been suc-cessful. Te other critical factor is the fact it was reli-able, robust and secure from day one.

Apart from that we also have a market that is not re-sistant to change. We had a substantial subscriberbase when we launched SMAR Money that was fa-

miliar with SMS. Because this is SMS-based, it be-came a natural evolution for them. Our networkalone has 500 million outgoing messages per day.

11) Do you believe a similar servicecould be replicated in other countries?

I think you could replicate it in regions with similarmarket conditions to the Philippines. Indonesia is a

market where it could really work. China, India andCambodia are others that also have great potential.

Africa, perhaps. Tere must be an existing SMS habitthough. Latin American regions like Mexico and

Argentina are also potentials.

2.3 GLOBE G-CASH

G-Cash is the competing product offered by GLOBEelecom. It has several related products that providecustomers with flexibility in managing their mobileservices and using the m-Commerce facilities.

G-Cash was first introduced by GLOBE in October2004 and is a natural extension to the other relatedproducts offered by the company.

2.3.1 Product Description

Te G-Cash product is essentially a facility for link-ing the users phone to a cashaccount or walletasdescribed in the companys promotional material. Incombination with the other related products, facili-ties exist for the customer to deposit cash, withdrawcash and top up the mobile phone prepaid creditlevels from that account. Inherent in the operation isan ability to transfer credit between mobile users, soas well as allowing a semi-formal cash transfer, it al-lows the users to manipulate their credit in the systemto suit their particular needs. It operates entirely on a

credit basis, i.e. funds must be in the system before acustomer can manipulate those funds. As a result,bad debt is not an issue. Te system gives no credit tothe users.

Unlike the competing SMAR product, G-Cashdoes not currently make a debit card available.

Te specific list of features provided in G-Cash is asfollows:

Cash depositsCash withdrawalsransfers of credit to the prepaid accountransfers of cash to and from other usersransfers of airtime credit from one user to an-other (GLOBE Sharea LoadandAsk a Load)Cashless purchasing at a wide range of shopsDirect credit from employer payrollBill paymentInward international remittances from OverseasFilipino Workers.


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A comparison will show that the services offered arevery similar to those offered by SMAR as can beexpected in a competitive market. However, in devel-oping its competitive offering GLOBE has endeav-oured to add as many useful attributes as possible by

way of association with banks and other service in-dustries. Some of the specific transactions it has en-abled include:

Payment of income taxes and annual businessregistration feesPayment via the Internet for games, cinema tick-ets and online storesransfers from bank accounts to G-cash via

AMsDonations to charity and civic-oriented projects,e.g. Red Cross, Unicef, etc.

While this wide range of features is not necessarilyrelated to the technology, it indicates what can bedone to make the service useful and attractive to thecustomers.

Annex 2 shows in tabular form the range of servicesavailable along with restrictions, capabilities andcosts. However, the following descriptions cover theimportant aspects of the companys service.

Customer Sign-up. For the customer wishing to be-come a G-Cash customer, the application process isrelatively simple. It involves registration as well as the

making of a cash deposit.

For the more usual case,the customer will make acash deposit into the walletat the time of registra-tion. Tis deposit is not mandatory at this stage butis necessary before the walletcan be used.

In a lesser number of cases, OFWs or other Filipinosmay wish to transfer cash to a GLOBE customer andin this case the deposit is credited to the nominatedGLOBE customer account, perhaps even before theaccount holder is aware of the proposed transfer.

In both cases, registration is essential for the accountto become active and the registration process is madeeasy by the companys use of over-the-air activation.Te activation involves use of the SIM-based menuand an SMS text format that includes the customersname, address and national ID.

Tere is no charge for initial registration.

Automatic ransaction Update. Tis feature which isbuilt into all the transaction services, provides for atext message to be sent to the user whenever a trans-action is performed. Tis feature operates at all timeson all transactions and provides the customer with a

level of confidence in the use of the product. As anadded safeguard, the customer has free access to thecurrent credit balance using the menu on the phoneand can also request a printed statement of the trans-actions at a nominal charge.

Cash-In. Tis feature allows the user to deposit cashinto the users account. As it is a physical medium,the cash must be deposited at one of the designatedcash deposit locations. Tis includes GLOBE offi cesalong with a range of accredited retailers who haveagreed to take deposits. Every deposit must be cov-ered by an acceptable ID in accordance with the re-quirements of the countrys central bank (BSP) and ischarged at 1 percent of the transaction value with aminimum of P10 (US19).

As noted above, as soon as the cash has been depos-ited, the customer will receive a text message in addi-tion to a paper receipt from the cash teller.

Deposits may be made into other customers ac-counts.

Cash-out. Tis is the reverse of the cash-in procedure.

In this case the customer can withdraw from a GLOBEcashier or accredited retailer in exactly the same wayas depositing cash. Again, a withdrawal must be com-pleted with acceptable ID. Te transaction charge isagain P10 or 15 of the transaction value.

Retail Purchasing. Retail purchases are possible atseveral thousand participating retailers, and this in-volves the retailer originating the transaction requestthrough his own cell phone terminal. An authoriza-tion request is then sent from the retailer and, subjectto the customer having a credit balance to cover theintended purchase, the retailer and customer accounts

are updated and the customer receives a confirmationof the transaction via SMS. In the case of some super-markets, the retailer has arranged special access fromthe cash register, thus removing the need for eachcheck-out counter to have a G-Cash phone available.

Credit ransfers. Tese are convenience transactionsfor the customer, allowing the transfer of a credit bal-ance to another customer. Te customer initiates a


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text message indicating the amount of the transferand the GLOBE customer to whom the transfer isdirected. Subject to fund availability, both parties re-ceive a confirmation SMS.

Airtime ransfers. Tis is another form of credittransfer where the G-Cash customer can transfer air-time credit to another GLOBE mobile customersmobile account. Te service is marketed as GLOBE

Ask a Load or Share a Load.

Prepaid op-Up. Tis is a natural extension of theservice, using G-Cash to transfer credit to the mobileaccount.

Bill Payments. Te company has a limited group ofutilities to whom account payments may be madeusing G-Cash. Most recently it has negotiated forG-Cash to be accepted as a tuition payment methodat almost 100 universities and tertiary institutions.

Micro-Finance has been provided for in the G-Cashservice and agreement already reached with the RuralBankers Association of the Philippines (RBAP). Inthis service, users can use G-Cash to make loan re-payments and it is understood that the bank con-cerned will shortly use the G-Cash service to advancemicro-loans to the target market. Tis feature willenable small financial institutions to provide servicesin areas not currently well served by the larger bank

thus significantly extending their reach.

Merchant Opportunities. As an adjunct to prepaidrecharging, G-Cash offers participating retailers theopportunity to sell airtime to customers in lieu ofpreviously used prepaid scratch cards. It is marketedby GLOBE as Auto Load Max.

2.3.2 Market Uptake

GLOBE indicated around 1 million customers areusing the service and the service is experiencing goodgrowth.

Considering that the service has only been availablesince 2004, uptake has been very good.

2.3.3 Service Charges

All costs are transaction-related. Te transactioncharges are few and fairly simple.

Each customer-initiated SMS (inter-account transfersetc) costs P1 (US2)

Retail purchases using the phone incur a P1 SMS fee(US2), which is also the standard SMS fee

Cash deposits and withdrawals through a cashier at-tract a fee of 1 percent of the transaction value with aminimum of P10 (US19).

2.3.4 The Service Configuration

Unlike SMARs approach whereby it operates theservice jointly with BDO, the GLOBE approach isto maintain and operate a clearing house facility

which records all transactions and arranges settle-ment between the retailers and the G-Cash custom-

ers. Tis results in GLOBE having responsibility forthe usual banking issues of fraud management andmoney laundering prevention. However, the cashfloat from the customer balances is held by thecompanys usual business bank, although that bankhas no knowledge of the individual user activity oraccount balances.

Each participating retailer maintains a balance in thesystem and this balance is used as the float for trans-actions involving the G-Cash customers.

All settlements between GLOBE and its partner es-

tablishments are done via the cash management sys-tem of partner banks.

2.3.5 TRANSACTIONSECURITY

wo-factor authentication (phone and PIN) is per-formed for each transaction. Users have a choice ofusing standard SMS messages or SIM-based menusand encryption.

2.3.6 Network Traffic

As noted earlier, the Philippines is recognized for itshigh levels of SMS usage at around seven messagesper customer per day. Te load from the G-Cash op-eration equates to roughly two messages per G-Cashcustomer, which represents a relatively small load onthe SMS system and the network.


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2.3.7 NetworkTechnology Issues

GLOBEs approach necessitates a purpose-built fi-

nancial transaction processing facility. Such a facilityhas been designed and implemented by the companyand it has indicated a willingness to work with othernetworks worldwide to facilitate a technology solu-tion in those networks.

A simplified network architecture is shown above.Te key feature of the GLOBE implementation is itsemulation of a banking network, albeit with someconstraints, such that it does not require the creationof a partnership with any specific banking partner.

2.3.8 Handset Compatibility

Te service makes use of SIM-based memory andmenu capabilities and is compatible with currentGSM SIM standards.

2.3.9 Telecom Regulatory Issues

Although offering a very wide range of features, theservice involves no new or unusual telecommunica-tions aspects and tariffi ng is consistent with currentpractices. Te company reports that the Regulatorhas indicated no interest or concern with the service.

2.3.10 Central Bank Issues

With GLOBE taking responsibility for all the finan-cial transactions, the service is of specific interest tothe banking regulator (BSP) and the Anti-MoneyLaundering Council (AMLC).

At this stage of development, the company has lim-ited the customers account size to an instantaneous

maximum of P10,000 (US$189). While this is a dif-ferent value to that for SMAR, the difference is notrelated to the technology or method of service provi-sion, but rather to company policies. GLOBE has

FIGURE 2.


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commented that this value was discussed with andagreed by BSP.

2.3.11 Summary Comment

Te GLOBE G-Cash product is well thought outand appears to address the issues that are most likelyto be of concern to the average customer in thePhilippines. While its approach is significantly differ-ent to that of SMAR, it is nevertheless a viable alter-native that would have application in other markets.Its key features include:

Catering for small transaction sizesCapability of high transaction volumes

Apparent security using modern encryption tech-niques for the protection of customer PINs andaccount details

Easy sign-up and does not require the customerto provide a credit history. Only a recognized na-tional ID is required to meet the countrys finan-cial regulationsDepositing and withdrawing cash is as easy as itcan be while meeting Central Bank requirements

Allowing customers to transfer credit from oneuser to anotherPermitting electronic payment for goods and ser-vicesEnabling OA recharging of prepaid accounts.

Tese features are similar to those of its competitor,

which is as to be expected, but the method of imple-mentation is somewhat different. Its greater involve-ment with the financial aspects makes the approachsomewhat more complex, but at the same time theneed to find a banking partner is eliminated. Tedifferent approach has also enabled GLOBE to offerinnovative features to the product, something thatmay be more diffi cult with a simpler approach.

GLOBE Telecom-CEO Interview

Mr. Gerardo C. Ablaza is President and CEO of GLOBE

elecom. In October 2004 the company launched itsG-Cash micropayments service, which now boastsaround 1 million subscribers.

1) Please provide a brief overview ofthe service.

G-Cash is GLOBEs cashless and cardless wallet inyour cellphone. Te service was launched in October

2004, with an initial set of three anchor services: (1)international and domestic remittance; (2) P2P(phone-to-phone or person-to-person) transfers; and(3) payments for retail purchases. With G-Cash, allof GLOBEs subscribers, more than 12 million at this

time, are m-Commerce-enabled. Because our sub-scribers do not need to have a card or bank accountto be part of the service, G-Cash has immediatelyprovided m-Commerce capability to a previouslyunderserved segment of the market, including those

who currently do not do banking, either because oftheir diffi culty to comply with the deposit require-ments of financial institutions or the inconvenienceof obtaining access to such services.

We now have around 1 million registered subscribersin G-Cash and close to 400 accredited partners cov-ering 3,000 or more outlets. G-Cash is also availablein 16 countries via 27 international partners witharound 200 outlets. Since we launched G-Cash a littleover a year ago, other types of services have alsoevolved. Tese include (1) tax and business permitpayments of the Bureau of Internal Revenue; (2) billpayments for utilities, schools, and insurance compa-nies; (3) partnerships with rural banks, or countrysidebanks, as a payment channel for micro-financing,thereby extending the banks presence in the ruralareas; (4) G-Cash o Load, wherein our subscriberscan use G-Cash to purchase airtime; (5) a link to oneof the major banking networks, BANCnet, to enable

transfers from bank accounts to the G-Cash wallet;(6) integration into the POS (Point-Of-Sale) systemsof major retailers; and (7) an automated G-Cashmachine which is on pilot while awaiting approvalfrom our Regulators.

2) Why was the service launched?

Within GLOBE, our mission is to transform andenrich peoples lives through communications. G-Cash represents one of our major steps towards ful-filling this mission, providing a convenient andlow-cost m-Commerce service to our subscribers. We

saw a segment of the market that was underserved bythe formal financial system. With G-Cash, we haveminimized barriers to entry that we have seen inother m-Commerce implementations; for example,the requirement to have a bank account or a creditcard and high transaction fees, while still pursuingthe objectives of regulatory requirements.


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3) What are the most popular applica-tions from the service?

Te top three services are phone-to-phone transfers,retail purchases, and remittances. We are also seeing

increasing demand for bill payments.

4) How much revenue does the servicegenerate per month? Is it profitable?

From our registered subscriber base, the service pro-cesses approximately P3 million (US$56,164) intransaction value daily. At this early stage, our prior-ity objective is to build a strong community andecosystem of users, outlets, and retailers that wouldenable m-Commerce to thrive and become pervasive.Tat would be far more valuable over the longer

term.

5) What have been the primary ben-efits of the service, to both GLOBE andyour customers?

As regards the benefits to our customers, the best in-dicators come from feedback that we have receivedfrom them and our partners. Te main benefits aresafety, convenience, and low cost. Let me cite someexamples: (1) A parent residing in the provinces sendsa monthly allowance to her son in Manila. Sendingsmall amounts via G-Cash is ideal because the trans-

action cost is low.

(2) Our customers use G-Cash to pay their bills be-cause they do not have to go and queue up in thepayment centres. (3) Using G-Cash to pay for fooddeliveries has also been very convenient and safe forboth our customers and our fast-food partners. Iknow of several people, including myself, who wouldorder pizza to be delivered to their kids who are athome, and pay for the order via G-Cash while theyare still on the road or in the offi ce. (4) In the depart-ment stores where our partners have integrated G-Cash into their POS system, our subscribers and our

partnerscashiers do not have to bother with cash andsmall change whenever they use G-Cash.

On a bigger scale, G-Cash takes advantage of the ac-cessibility and availability of our network nationwide,and thus it provides a pervasive m-Commerce plat-form and extends the reach of services such as micro-financing. Further, because the service is availablethrough our international partners, G-Cash provides

an immediate link in the financial value chain be-tween our OFWs (Overseas Filipino Workers) andtheir families here in the Philippines.

6) Has it met your initial expectations?

Our numbers show that G-Cash is gaining accep-tance1 million subscribers and an average of P3million in transaction value every day. As I mentionedearlier, G-Cash now has around 400 partners cover-ing more than 3,000 outlets, and it is present in 16countries through 27 international partners.

7) What challenges did you face inimplementing the service?

Te initial challenges were in the areas of partner ac-quisition and regulation. We had to acquire partnersprior to launching the service, and because G-Cash isa new concept, its use and benefits are sometimes notimmediately evident. What is interesting to note,however, is that once we were able to demonstratehow G-Cash works, our partners themselves were theones who thought of service variations that make useof the G-Cash platform, and this is very evident inthe new set of services described earlier.

In the area of compliance to government regulations,we have to make sure that our procedures will comply with the Know-Your-Customer requirements, as

GLOBE is a covered institution under the AntiMoneyLaundering Act of the Philippines. We have presentedour procedures to the Regulators and we are happy tonote that these were found to be compliant. Ouragreement with the Regulators is that we would ad-vise them of any new type of service 30 days prior tolaunch. Moreover, we also have our capability to trackG-Cash transactions. G-Cash leaves a trail, cash doesnot.

8) How do you expect the service todevelop over time?

Tere are three areas of development planned. First,we will continue to expand our partner base for theexisting set of servicesretailers, utility companiesand other billers, banks, department stores, and re-mittance companies. Second, we have partners who

will, on their own, espouse the use of G-Cash withintheir ecosystemexamples are the rural banks andnational co-operatives that will continuously bringmembers into the fold of G-Cash user establishments.


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Tird, and most interesting, is that we will havepartners who will find new ways of using G-Cash.

Just one year after we launched the service, there wereseven new services that were spawned by our partner-ships.

9) What are your goals for the servicein terms of subscriber numbers andfuture new applications?

We expect 2025 percent of our subscribers to even-tually be registered with the service. As for futureapplications, I think there are numerous possibilities.Quite recently, we had a contest called G-nius,

whereby schools formed teams to develop proposalsfor new uses of G-Cash. Tere were several new ideasthat came out of this contest, and what surprised usmost was the level of understanding that the partici-pants had on the potential of G-Cash. Te winningproposals were all technically feasible, and we believethat this is a very good indicator of the new variantsin uses of G-Cash.

10) What do you think were the criti-cal market conditions necessary for asuccessful launch?

Tere are a few. First, the Philippines is an SMScountry. People were very much at ease in using theservice. Second, our other services like Autoload

Max and Share-A-Load have paved the way for easyacceptance. In both services, airtime value is trans-ferred over the air, and in a way G-Cash was a pro-gression in transferring another form of storedvalue. Tird, we have a segment of the populationfor which financial services are not easily accessible.G-Cash is our effort to reach this segment of thepopulation. Fourth, there is a need for safe but low-cost money transfer services. G-Cash has enabledour partners to provide such services without theneed for them to put up expensive infrastructure.Last, but not least, is the receptiveness of our regula-

tors. We work closely with our Regulators to ensurethat our G-Cash procedures address regulatory re-quirements and concerns.

11) Do you believe a similar service

could be replicated in other countries?

Yes. In fact, we have received some serious queriesover the past few months. We believe the service canbe replicated, particularly in areas where there is a

widely dispersed population with a need for low-costfinancial transaction delivery.

2.4 INVESTMENT ANDPROFITABILITY

While neither network would confirm the exact costs

of implementation, both indicated a quite modestcapital requirement and a very satisfactory impact onoverall company performance. Te comments made

would suggest a capital cost of less than US$5 millionbut this figure may not reflect the true cost, given theefforts of the two companies to develop the facilities.

2.5 CUSTOMER CHURN

Both networks confirmed that the introduction ofthe service had stabilized network churn to a remark-able extent. One estimate placed normal prepaidchurn at around 3 percent per month but for those

who were also users of the m-Commerce services, thechurn rate was only 0.5 percent per month. Te re-duction is understandable given the features of theservice and the necessary investment that the cus-tomer makes in the service. While customers can read-ily withdraw their cash balances in the system andrelinquish cellular service altogether, there is arguablylittle benefit in doing so, the down-side being the need tokeep their prepaid account live. In many markets, thatcost is quite low so it is to the customers advantage toremain connected.


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Other Systems . 25

3.1 FUNDAMO IN SOUTHAFRICA

Fundamo is a South African based company special-izing in the m-Commerce sector. It is not an operatorof such services but in co-operation with other com-panies, it provides m-Commerce solutions.

Te company claims to be able to meet all require-ments ranging from bank-hosted systems to those

where the network operator essentially functions as abank. Its clients include MN Banking in South

Africa as well as Celpay in Zambia and the DemocraticRepublic of Congo.

In discussion with Fundamo, it confirmed that atypical initial implementation would cost in the rangeof US$3 to 5 million and be profitable from around25,000 users. Its experience in the African marketssuggested that mobile monthly ARPU was impactedby approximately US$2 for the users of the servicebut it would appear that in their experience there canbe a wide range of transaction rates.

Fundamo also confirmed the importance of the

banking regulatory issues in planning the introduc-tion of a service and the need to carefully plan theresources needed to launch a successful m-Commerceservice.

3.2 SAFARICOM IN KENYA

Safaricom is the Kenyan mobile system operatingunder Vodafone and Kenya elecom ownership. Aspart of the Vodafone stable,the company has joined

with another Vodafone operation,Vodacom inanzania,to investigate and develop a micro-finance

service, to be trialed initially in Kenya. From the in-formation supplied by Safaricom, the service is cur-rently in embryonic form but is expected to providefeatures largely in line with those offered in the othermarkets studied.

As in those other markets, the project involves both anetwork (Safaricom) and a bank (Commercial Bank of

Africa) and in addition for the purposes of the trial

3. OTHER SYSTEMSservice, it includes a lending institution specializing inlending into the target market (Faulu Kenya). Teinitial emphasis of the trial service is on facilitatingFaulu Kenyas activities but not to the exclusion of theother opportunities offered by the service.

Initial trials of the service, branded as M-Pesa, areunderway with a selected group of around 250 users.Even with the very limited range of services currentlyavailable, the company reports some encouraging re-sults as follows;

ransaction rate approximately 0.6 per user perday and likely to be rising as customers becomeaccustomed to the features

Average transaction value US$14Average cash deposit US$19.60Average transfer between users US$4.50

Average cash withdrawal US$3.80.

Given that the service is primarily aimed at the mi-cro-finance operations of Faulu Kenya, the usagelevels are impressive in spite of the very small numberof customers in the trial.

3.3 MTN BANKING INSOUTH AFRICA

MN Banking is a joint venture between StandardBank and MN Networks. In its operation, based on aplatform largely supplied by Fundamo, MN Banking

operates as the prime service provider, responsible forsign-on, marketing and distribution, leaving MNNetworks to be the carrier for the service.

Because of its 50 percent ownership from StandardBank, MN Banking is able to operate under theumbrella of Standard Banks licence. Tis arrange-ment has significant benefit for any service provideras the alternative is for the service provider to obtaina banking licence and in some markets that could bediffi cult.

At the present time, the company reports that ap-proximately 150,000 customers have logged onto theservice, but actual user numbers are understood to besomewhat less than this. Noting that service com-menced in August, the level of interest is very encour-aging.

It was also noted that MN Banking provides aMasterCard debit card as part of the service. While


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the use of the card initially appears to be low, thecompany reports a very significant increase in usageas the users become familiar with the service.

As the only example of a joint venture company

handling the overall service, the companys views onthe arrangement were sought. As to be expected, theadvantages related to the management and opera-tional aspects with specific mention that the jointventure led to the creation of a new company with anew culture, unafraid to make innovative changes.Recognizing the unusual nature of the m-Commercebusiness and how its demands are foreign to normalnetwork operator and bank activities, the arrange-ment may prove to be one well worth considering inestablishing a service.

3.4 CELPAY IN SOUTHERNAFRICA

Celpay was originally established as a wholly ownedsubsidiary of Celtel, the MSI mobile operation onthe African continent. However, in March 2005 it

was sold to First Rand Bank of South Africa. Celpay was originally the m-Commerce service set up by

Celtel in Zambia and subsequently the DemocraticRepublic of Congo. Under the Celtel banner it wasproposed to establish the Celpay service in each ofCeltels markets in Africa. Following the purchase,First Rand Bank has made no comment on its plans

for Celpay other than a general statement suggestingthat the Celpay concept is the way of the future.

From a high-level analysis of the Celpay system, it isapparent that it operates with the same range of fea-tures as found in other markets. It is understood thatthe existing implementations of Celpay utilize theFundamo system.

Te Celpay service does not incorporate a debit cardbut as it is now owned by a bank; presumably theprovision of a card if necessary as well as the acquisi-

tion of a banking licence will not be diffi cult inwhatever markets Celpay may operate in. Its currentmarkets would not benefit from the provision of adebit card.

It is presumed that under its new ownership Celpayis independent of network operators.


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Discussion of The Various Implementations . 29

4.1 MOBILE NETWORKIMPACT

One factor to come through all the systems discussedabove is that they are all very similar in terms of theimpact on the mobile networks. Invariably use ismade of the SMS feature available in all the networks

and from the experience to date, the added load fromthe service is easily managed and unlikely to result inany significant loss of capacity. Even where the SMStraffi c levels are quite high, the impact has been toutilize a second digital channel for SMS traffi c. In theonly case where this has occurred, the need resultedfrom high textingtraffi c rather than the m-Commerceapplication.

Based on the stated loads being experienced in thePhilippines networks, the provision of the m-Commerceservices is capable of generating a healthy revenuestream for the network operator, but more importantly,it may create an additional incentive to take up mobileservices in the developing markets. Although the addedcustomers are unlikely to be volume users of the mobileservices, they will still contribute in a material way tothe operatorsnet earnings.

While not encountered on the study, it is equally pos-sible to utilize the WAP features of the mobile net-

works as a transport medium. However, from apractical point of view, this solution is likely to be lessattractive due to the relatively low profile of WAPservices in the emerging markets. On the other hand,

the SMS features are widely utilized in most marketsand their use in the m-Commerce application makesfor an easily understood product. Te use of the SMScapacity also utilizes an existing feature of all networks

while a WAP application may involve some networksin further development.

It should be noted that all the networks involved inthe study were GSM-based. Te applicability of any

4. DISCUSSIONOF THE VARIOUS

IMPLEMENTATIONS

of the solutions to a US-CDMA based network hasyet to be verified

4.2 CUSTOMER FEATURES

In terms of customer features, the offerings can bebroken down into two categories: those where a debitcard is issued and those where there is no debit cardissued. However, in making this split, it is importantto recognize that the issuing of a debit card is morelikely to be a matter of central bank policy than anytechnology issue for the chosen implementation.

Disregarding the debit card issue, all the systemsstudied had similar customer features. While not allsystems included every feature, there seem

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