Mobile money - Linklaters · Africa). Vendors such as Comviva, Ericsson, Fundamo, Monitise and Obopay are key providers of mobile money platform solutions to these groups. Retailers

In the context of the under-development of the banking and payments value chains in emerging economies, there is an opportunity for non-banking players to take a prominent role in the MFS market. MNOs are key new entrants, with strong brand awareness, network infrastructure and distribution capability.

However, there are significant challenges to realising these opportunities for both MNOs and financial institutions. Some are risks applicable to entering new geographic or product markets, and others are specific to mobile payments, as financial institutions need to up-skill to understand the mobile space and MNOs need to understand the payment infrastructure and prudential regulatory frameworks. Other players, such as handset manufacturers with extensive retail and distribution networks, have also looked to slot into the MFS value chain, with mixed success.

Explosive growth in mobile ownership over the last decade, combined with limited access to financial services, is fuelling rapid growth in mobile financial services (MFS) across emerging markets. In many emerging markets today there are more connected than “banked” people. As a result, mobile network operators (MNOs), payment processors, device vendors, independent players and financial institutions are increasingly playing a key role in the provision of basic financial services – but this is only the start. By 2017, we estimate that the 876 million MFS users in the emerging markets will account for 86% of all MFS users globally, making this market worth $29.8bn to service providers.

As no single player can successfully offer a full suite of mobile financial services on their own, strong partnerships are essential to establish an effective MFS ecosystem in each market. Equitable incentives and revenue sharing contracts for each MFS ecosystem player, including MNOs, banks and retailers are critical to the success of mobile money.

IntroductionVery limited access to bank branch and ATM networks means that the majority of emerging market consumers operate purely in the cash economy. The “unbanked” bear a huge cost and time burden in managing their finances. For many people in rural areas, paying their electricity bill or receiving a remittance from a relative working abroad requires a full day, including a return trip to the nearest town’s bank branch, which can be 20–50km away. Sending cash is expensive and unreliable: bus or taxi drivers are the only option for many, and they often demand 10–20% commission on the amount, with few guarantees that the cash will reach its intended destination. By comparison, mobile transfers command a commission of approximately 5%.

The mechanics of emerging market MFS are designed to be simple at a basic level: a user registers with a service provider for their mobile money service, and a simple SIM-based application is downloaded to their device that contains their account, which works even with most basic phones. Then they can go to an agent with cash to credit their mobile money account. From there, should a user decide to send money to someone or pay their electricity bill, they simply select an option on their phone menu. The recipient of the funds receives an SMS to advise them of the funds’ arrival in their account, which they can then withdraw from their local agent. The MFS provider, in partnership with a bank, does the clearing and settlement of transactions for the accounts of both end-users and individual agents.

0

5

10

15

20

25

30

MFS revenues in 2012 ($bn)

Forecast MFS revenues in 2017 ($bn)

29.837

0.858

Figure 4: Mobile financial services in emerging markets: TMT market growth forecast

Mobile money:banking on partnership

20 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile money

$29.8bnRevenues from mobile financial services in emerging markets will be worth $29.8bn to service providers by 2017.

Interoperability arrangements are set to give a massive boost to an already vibrant supply side, and tap into the huge latent demand from a population where just one in five adults has a bank account. In addition, a facilitating regulatory regime led by Bank Indonesia, which brokered the interoperability agreement, is another positive factor for future market developments. This fertile context will lead to a rapid growth of mobile money adoption in the next five years, with users reaching 52 million and transaction volumes reaching $42bn, generating service revenues of almost $2bn by 2017.

With the major factors that are holding back other markets addressed effectively, operational execution is the key risk for Indonesia in the future. While Telkomsel, Indosat, XL, BlackBerry and others now have many of the pieces necessary for success in place, they still need disciplined execution to ensure this fledgling market evolves to its full potential.

Country focus:

IndonesiaInteroperability in action After market leader Kenya, Indonesia has one of the most vibrant mobile money markets in the world, with services in operation since 2007, when Telkomsel launched Tcash. Since then Indosat launched Dompetku, and XL (Axiata) launched XL Tunai services. More importantly, non-telco players have entered the market, led by Bank Andara’s AndaraLink service, which is a B2B service aimed at micro-finance institutions (MFIs). Bank Andara’s aim is to provide mobile payment services to the country’s 50,000 credit union co-operatives and around 2,000 rural community banks. In February 2013, BlackBerry, in partnership with Monitise and Bank Permata, launched a commercial pilot of BlackBerry Messenger Money (BBM). BBM is popular in Indonesia, and BBM aims to facilitate peer-to-peer payments between BBM users who often trade goods using its messaging platform.

Indonesia has more than 1 million active mobile money users currently, the majority on Telkomsel’s Tcash platform. Although each player has a much larger number of registered users, activity has been low. Telkomsel’s CEO recently indicated that only 6% of the 12 million customers registered for the Tcash service are active users. Lack of interoperability, combined with a fragmented mobile market, has been a key reason behind the low activity in the user base. In this context, the May 2013 announcement that Telkomsel, Indosat and XL are moving to offer interoperability, so that users of individual services can send and receive money to any service, is hugely significant.

Due to the lack of an existing payments value chain, some mobile operators with sufficient market share have been able to create effective payment networks in emerging markets with comparatively little partnering. As these operators diversify into new products, regulation catches up, and new entrants try to gain a foothold in these markets, cooperation among competitors, banks and retailers will be key to secure continued growth.

Julian Cunningham-Day Telecommunications, Media and Technology Global Sector Co-leader

21

57%of the world’s MFS users in 2017 will come from emerging Asia-Pacific regions.


Source: Ovum/Linklaters.

Market size and growthWe forecast explosive growth in MFS over the next five years, with MFS transaction values reaching $623bn by 2017. With typical MFS commissions of up to 5% of transaction value, the market will be worth $30bn to TMT service providers by 2017.

57% of the world’s MFS users in 2017 will come from emerging Asia-Pacific, led by China, India and Indonesia. This will be followed by Africa with 20% of MFS users, where we expect Kenya to be joined by Nigeria, South Africa and Tanzania as major MFS markets. Led by Brazil, Latin America will be the next largest region with 11% of mobile money users, followed by Eastern Europe with 7%, and the Middle East with 5% of the total MFS users. Operational execution presents a significant risk across all markets, with India’s financial services regulatory framework proving challenging as well as general interoperability issues across India, China and Brazil.

There are currently 167 live mobile money services in the emerging markets, with another 107 announced and set to launch this year. However, we are at an embryonic stage of adoption, with only a handful of countries that can be considered established successes for mobile money services, including Kenya, Madagascar, Uganda, Paraguay, Philippines, Tanzania and Thailand. We estimate that there were only 70m active mobile money users in the emerging markets at the end of 2012. Of those, Kenya accounted for more than a fifth.

MNOs dominate the supply-side field, accounting for more than two-thirds of the current deployments, with growing

Table 3: Risk forecast for foreign investors – Mobile money: top five emerging markets

Low to medium risk

Market Key risks Risk outline Risk forecast

China Interoperability

Operational execution

Interoperability: Without a dominant bank or MNO, market share is fragmented and uptake is limited.

Operational execution: Managing the network of mobile money agents requires a new skill set for operators.

Cloudy

IndiaRegulation

Interoperability


Regulation: Restrictive regulatory regimes that constrain non-banking models by requiring partnerships with banks and restricting service offering.



Moderately rainy

IndonesiaOperational execution


Sunny

BrazilInteroperability




Sunny

KenyaService quality Service quality: Significant service outages have impacted

customer confidence.Cloudy/sunny

Low risk

Low risk

Medium risk

Medium to high risk

Low to medium risk


1

China

151.3mMobile money users

$5.82bnMobile money revenues

Mobile money: top five emerging marketsSource: Ovum/Linklaters. All figures projected for 2017.

3

Indonesia



2

India



5

Kenya


$880mMobile money revenues

Low risk High risk

competition from services led by banks (e.g. Bank Andarra in Indonesia), device vendors (RIM and, until recently, Nokia) and independent players (e.g. Wizzit in South Africa). Vendors such as Comviva, Ericsson, Fundamo, Monitise and Obopay are key providers of mobile money platform solutions to these groups. Retailers will be a critical supply-side constituent going forward, and in emerging markets many will take on the dual role of both mobile money agent (performing cash in/out and banking transactions) and accepting payments for their goods and services from end-users.

Senior TMT leaders who participated in this study expect mobile money to account for 5–12% of their total revenues in five

years. However, the margins on mobile money services are currently thin, and will remain lower than core telecoms services for some time. This is a result of current low transaction volumes, as well as the fact that the bulk of the revenues on payments and transfers are paid to agents as commissions. Margins will grow as transaction volumes grow, and players layer additional payment, savings, loans and insurance products on top of basic services. The biggest jump in margins will come from the reduction in cash in/cash out activity (i.e. lower agent commissions), when users become accustomed to receiving funds directly into their mobile money account, as well as paying retailers directly.

Financial services providers’ ambitions are less defined in financial and more in strategic terms. Their objective is to ensure lower cost expansion into the currently “unbanked” segment, as well as removing the threat of being disintermediated from the newly emerging mobile money ecosystem. Indeed, as one financial services leader revealed: “There is no money in payments for us – but we need them in order to sell other higher-margin savings and loans products.”

23

4

Brazil


$981mMobile money revenues

Go-to-market strategies: monetising mobile money Despite tremendous untapped demand from the mass “unbanked”, success for service providers is far from a given. Only a small fraction of the mobile money services available today are achieving meaningful adoption. We have identified three key elements for TMT players to consider, which we believe are the keys to successful market entry and service growth:

1. Use partnerships to bridge expertise gaps: All market entrants lack the ability to offer a comprehensive mobile money service on their own. The emergence of mobile financial services has forced key players into unfamiliar waters. Telcos are learning about financial services; banks have a lot to learn about mobile devices and services; and both players are being drawn deeper into retail services. Strong collaborative partnerships are therefore essential to the success of every player. To address their inevitable expertise gaps, as well as gain critical local knowledge, telcos need the banks to provide the financial services expertise, payment clearing and settlement services and, as the service evolves, bring higher- margin savings, loans and insurance product expertise. Banks need telcos’ communication and distribution networks, particularly in rural areas.

Partnerships, however, do not come naturally to either telcos or banks, with both sectors accustomed to dominating their respective communications and banking value chains. As a global MNO leader told us: “Partnership mentality is not in our DNA, and we have lots to learn in this respect.” Hence there have been a number of African and Asian telco-bank partnerships that have come under pressure over issues such as customer control, revenue share and future service evolution.

2. Get localisation right – and keep it simple: A key criterion when choosing a partner is whether they can bring local knowledge. This not only helps with navigating the local regulatory space but also with bringing appropriate products to market and gaining essential information on critical issues such as: local income distribution, major remittance corridors, bank network reach and effectiveness, and retail market dynamics.

There is growing market acceptance that initial mobile money services have to be simple to understand. Only once users get comfortable with these “foundation” features, are they ready to consider more advanced payment and banking features, as illustrated in Figure 5.

3. Balance competitive customer fees with appropriate agent commission: An effective network of mobile money agents able to process cash in/out functions and other mobile money transactions is emerging as one of the key elements of players’ go-to-market strategies. Building, incentivising and managing a network of motivated agents is the foundation of customer growth – until the services mature and all transactions are done with few or no cash in/out transactions, which is currently the most expensive element of the mobile money value chain. This point is still some time away for many services, and until then, as one MNO told us: “It’s essential to consider how you keep both the end-users and the agents happy at the same time.”

Setting the right level of customer fees, and the resulting cut for agent commissions, is a critical balancing act for mobile money players. Low commissions are great for users, but offer little incentive for agents, and the flipside is true for consumers, as some mobile money pioneers have discovered to their cost. For example, this lack of commission incentive led to fading interest in promoting Smart Money by agents, and Smart’s service adoption began to stagnate. In late 2012 Smart Money raised its commissions in order to redress this issue. Meanwhile, Orange Ivory Coast found that fees of up to 8% kept agents very happy with potential commissions (in addition to offering healthy margins to Orange) but users considered them too high, and ultimately demand was muted until it reduced its fees.



Only a small fraction of the mobile money services available today are achieving meaningful adoption.

Figure 5: Mobile money product evolution strategies

Foundation features

Evolution features

Maturity features

> M-cash account> Cash in/out> Airtime top-up

& transfer> Domestic P2P

money transfers> Bill payments

> Merchant payments> Bank account access

& transfers> International money

transfers> Salary transfers> Government transfers

> Credit/loan origination> Savings> Insurance> Proximity (NFC)

payments

Customer confidence and trust

For financial institutions and payment processors, the penetration of mobile phone use provides an opportunity to access markets which would have been uneconomic to address, but it also means that these players are facing competition in products which they would traditionally be able to dominate.

Sarah Parkhouse Partner – Financial Regulation

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$623bnis the predicted value of mobile financial services transactions by 2017.

Documents

Mobile money - Linklaters · Africa). Vendors such as Comviva, Ericsson, Fundamo, Monitise and Obopay are key providers of mobile money platform solutions to these groups. Retailers