World Wired Wallet
Juanita lives in a small town in the Philippines
and helps run her family’s building
supply business. When she needs to do
banking, she uses her mobile phone - a big
convenience since she often works at home
to care for a child with special needs. Her
older son attends college in a distant city, and
when he needs to buy books, she sends cash
by phone. In the past, she had to travel to a
branch to withdraw cash, then wait until his
next visit to give it to him.
Juanita participates in a pilot program run by a Philippine microfinance bank and Grameen Foundation, a Washington, D.C.- based nonprofit. Juanita and the other participants in the program use keypads on their older generation cell phones to communicate with the bank.
“Mobile technology has the potential to radically break the cost curve for providing financial services to the poor,” said Alex Counts ’88, founder and CEO of Grameen Foundation, which promotes microfinance and financial innovation to fight poverty. “Because banks using this service can operate much more efficiently, the poor have the ability to save and borrow, and they can do so at much better rates.”
For millions of people in emerging markets, mobile technology is bringing access to financial services for the first time. In developed countries, mobile also promises to increase access for the so-called unbanked and under-banked. Some 10 million households in the United States do not have bank accounts, often because they can’t maintain minimum balances.
For the well-to-do in developed countries, mobile technology is bringing a surge in new financial tools. Depositors need only snap a picture of a check with a smartphone camera — no visit to an ATM or bank branch required. Paying for parking doesn’t have to mean feeding quarters into a meter — a few taps on a phone will often take care of it. With Internet-connected phones or tablets, an investor can research a stock, track its movement, and, in seconds, execute a trade, anywhere, anytime.
The first commercial cell phone network was launched in Japan in 1979, and cell phones have been common in the United States since the 1990s. The spread of mobile to the developing world has occurred mainly in the past decade. Last year, the World Bank estimated that 75 percent of the world’s population had a cell phone, including 5 billion people in less-developed countries.
“Mobile phones are the most disruptive, broadest platform in the history of mankind,” said Rocco Fabiano, MBA ’82, president of Firethorn Mobile, a company now owned by Qualcomm and a pioneer in mobile banking. “If you consider how many people in the world are carrying mobile devices now, there has never been anything that reached so many people so quickly.”
A big leap in the developing world
While the impact of the mobile revolution
in financial services is being felt around the
globe, the most profound changes have been
in the world’s poorer regions.
“In developing countries, mobile networks have expanded much faster than land lines,” said Mark B. Milstein, clinical professor of management and director of Johnson’s Center for Sustainable Global Enterprise. “The confluence of technology and access has provided people a new way to engage financial services.”
In emerging markets, access is arriving by way of basic cellular phones — the kind prevalent in the United States before smartphones. These simple phones use SMS — short messaging service — which allows users to text information to a bank. By dialing a number and inputting a PIN, users can move money between accounts, pay bills, or send funds to another person.
Cellular phones have spread rapidly throughout the developing world in part because they do not require a costly infrastructure. They often work in remote areas that may not be served by landlines. The phones are cheap — as little as $10 — and the minutes are prepaid.
“In a country like India, even people who are pretty darn poor have mobile phones,” said Counts.
Even if you don’t have a phone, there is a good chance someone you know — a relative, friend, or neighbor — will have one. Some places have so-called “human pay phones” — entrepreneurial individuals with phones they rent to others in the community.
“This is a huge leap forward for the end customer in these countries,” said Avinash Eratapalli, MBA ’10, a vice president for mobile solutions at Citi transaction services. “To pay a bill in the past, you may have had to travel three or four miles and stand in a queue for an hour. Now, you can do it on your phone.”
Better than cash
Financial services by phone have important
advantages over cash, long the dominant format
for transactions in developing countries.
“Cash can be lost, stolen, burned, or accidentally destroyed,” Counts said. “In the United States, we don’t think much about losing change in a sofa or on an airplane. But for the poor, even a little bit of money is precious.”
When the poor need cash, they often have to travel long distances and are at risk of being robbed. Also, cash transactions are hard to track, increasing possibilities for fraud.
“Making money digital changes the game and makes it much more secure,” said Counts.
When a person in a developing country is able to open a bank account, saving money becomes easier, and qualifying for a loan becomes possible.
“Entering the formal banking system makes a difference in that a person can demonstrate their income and in the future apply for a microloan for a small business or a small consumer loan,” said Nicolas Beltran, MBA ’10, director of mobile financial services at Canada’s Scotiabank.
For banks, a new source of value
Banks traditionally have not sought the poor
as customers. Low balances and tiny transactions
often don’t cover the cost of servicing
“The banks don’t want a lot of poor depositors who clog lines at branches to withdraw tiny amounts,” Counts said.
Mobile banking reduces the bank’s cost of servicing customers by 50 to 70 percent, according to a 2012 study by McKinsey & Co. By lowering costs so dramatically, a bank can derive profit from a small transaction — especially when it is combined with hundreds of thousands of other such transactions.
The potential for growth is huge. Estimates of the number of people in the world who have cell phones but not bank accounts range from 1.7 billion to 2 billion.
“When people at the bottom of the pyramid started adopting mobile, governments and financial institutions in many emerging economies saw this as an opportunity to drive financial inclusion” Eratapalli said.
In 2010, Scotiabank launched a mobile banking program in 20 countries in the Caribbean. Adoption rates have been higher than expected, according to Beltran.
One of the most successful countries for Scotiabank’s initiative has been Haiti, where the bank partnered with a local mobile operator to launch Tcho Tcho Mobile, a mobile wallet service aimed at people who have not had bank accounts. Today more than 400,000 people have registered.
“In a country of 10 million people, this is a wide adoption rate,” Beltran said. “These customers are in the lower income tier and previously not qualified for a bank account.”
In Haiti, young people who live and work in the city use the service to send money to parents in the countryside. When the parents receive money on their phone, they can go to an agent — often a local shopkeeper — and get cash.
Is the program profitable for the bank? “The focus of Tcho Tcho mobile was not profitability, it was about promoting financial inclusion and helping Haiti rebuild,” Beltran said. “Through Tcho Tcho Mobile we’ve been able to provide Haitians with a service they needed and we’ve learned a lot about a segment of the population that we previously had not worked with,” Beltran said.
“By getting to know this segment and their banking behavior, we can design products to better serve them in the future.”
Making microfinance more efficient
While smartphones are ubiquitous in the
United States and other developed countries,
they are scarcer in less developed countries.
But smartphones are having an impact in
some emerging markets. In India, a small
company called Artoo uses smartphones
to make microfinance organizations more
Artoo works with microfinance companies to provide Android and cloud-based software for the agents’ smartphones. The agents take the loan applications on the phones, and then send the forms via the Internet to the home office. A process that took one to three weeks now takes two to five days.
“By improving the field agents’ productivity, they can give out more loans,” Nehemiah said. “It also makes the microfinance companies more efficient. By reducing their operating costs, we help them become more affordable to the borrower.” Nehemiah’s official title with the five-person company is “Rainmaker.” Her responsibilities are business development, sales, and client relationships.
Nehemiah sees a growing need for mobile technology in microfinance. “There are very few companies that develop technologies for enterprises that have a social purpose,” she said. “Most firms are either too expensive or they don’t understand the needs of these enterprises. We believe mobile technology has great potential. It is becoming more innovative every day.”
Will we pay for everything with smartphones?
With the proliferation of smartphones and
tablets in developed countries, financial companies
are racing to deliver innovative mobile
services. “In the developed markets, we have
had access to basic tools for some time, and
they work well,” Citigroup’s Eratapalli said.
“The challenge here is providing value that
didn’t exist before — leveraging the capabilities
The location capability of smartphones is a feature many players are eyeing. “Imagine you are walking by your favorite fashion outlet,” said Eratapalli. “The store would be able to send you an offer on your phone based on your previous purchase history.”
Many banks now offer remote deposit, which allows a customer to take a photo of a signed check and deposit it electronically. A similar service allows users to scan a bill and send the image to the bank, which pays the bill.
Several large-scale initiatives are underway to make mobile phones the dominant platform for merchant transactions, replacing both cash and credit cards. Banks, credit card companies, retailers, and mobile providers all are involved. Google entered the arena in 2011 with its Google Wallet smartphone application.
Experts say it is too early to know which, if any, of the mobile payment services will prevail. Despite some modest successes in getting consumers to pay for things with phones, users have not rushed to cut up their credit cards and ATM cards.
“It always comes back to what is your next best alternative,” Fabiano said. “Swiping a piece of plastic at point of sale is still not a very bad solution for a consumer. Moving that to your phone is not a dramatic improvement. This means adoption will be slower.”
A new tool for investors
In 2010, Bank of America launched Merrill
Edge, a service that provides a full range of
online investment services in conjunction
with standard banking. The service is aimed
at the so-called “mass affluent” — American
households with $50,000 to $250,000 in
Mobile has been an important part of the initiative, according to Alok Prasad, MA ’94, PhD ’96, head of Merrill Edge and managing director for Bank of America. He noted that in 2012, the number of clients using mobile services jumped 400 percent.
“It keeps our clients connected to the markets, even when they are away from their computers,” Prasad said. “For those who invest frequently, timing is an important parameter.”
Investment expert Jeff Parker ’65, MEng ’66, MBA ’70, agrees that mobile is an important tool for investors. “It’s like having a stockbroker in your hip pocket,” he said.
Parker is managing director of the Parker Family Limited Partnership and a partner at GrandBanks Capital, a Boston venture capital firm. He said mobile solves what had been a long-standing problem for investors — orders filled late or not at all.
“Today, if I go on Fidelity’s website with a phone or an iPad or a laptop computer, and I decide to buy a stock, sometimes the order is filled by the time I finish the keystroke,” Parker said.
Prasad said that while he believes mobile is important, Merrill Edge considers it only one channel in a broader approach to serving clients. “You can interact with us in different ways in the same week. Today you may walk into a bank. Tomorrow you may take a picture of a check and deposit it. The next day you might check your balance on the computer.”
Barriers to growth
While mobile financial services have grown
rapidly in recent years, there are obstacles
that could slow its advance, according to
“These are new services, and doing financial transactions in a virtual way may seem quite different to some people,” Milstein said. “There may be trust issues because virtual money is not tangible. You can’t hold it.”
Security is another concern. Like computers, mobile devices can be hacked or stolen. With many people conducting business and using their phones on open wireless networks, the possibility of security breaches is real.
To protect against hackers, banks are adding safeguards to mobile applications and mobile systems. Customers are advised to choose strong PIN numbers and change them often. Future security measures could include biometric identification, such as voice recognition or fingerprinting.
“The reality is that a phone is much more secure than a piece of plastic,” Fabiano said. “Studies have shown that if you lose your credit card, you won’t realize it for 11 hours on average. If you lose your phone, you realize it in about eight minutes.”
Phones also are better for detecting fraud because of their location capability, according to Fabiano. When someone uses a phone for a transaction, the bank can know precisely where the phone is and whether this is a place the phone’s owner can be expected to shop.
“An exciting time”
According to some in the industry, the key
to advances in mobile will be coordination
among the many interests involved.
“There are several players from different industry segments that need to come together to drive mobile commerce adoption at scale — mobile operators, phone manufacturers, payment networks, banks, merchants,” said Eratapalli. “One of the key challenges is development of standards and business models that drive coordinated participation from all these players.”
Fabiano agrees. “It’s a very complex ecosystem, with a lot of entrenched incumbents who have competing interests. To the extent there has been slow adoption, most would agree it has been due to the challenge of navigating that ecosystem.”
The shift to mobile finance means adding new players to the current mix, including handset manufacturers and carriers, and these new players are looking for profits, according to Fabiano. “Either an existing participant has to be displaced or you have to add expense, and consumers are not going to accept additional expense,” he said.
Eratapalli believes this challenge will be resolved as value is added to mobile transactions, perhaps leveraging the phone’s location capabilities.
Despite these challenges, the potential remains strong for mobile to grow, according to Fabiano. “It is an exciting time,” he said. “We are seeing a democratization of the financial services industry.”
Milstein also sees many benefits as mobile financial services spread around the world. “It doesn’t miraculously solve all of the problems of financial services for everyone, but it improves access for many people,” he said.
While cash remains the dominant method of payment throughout the world, MasterCard
President and CEO, Ajay Banga, emphasized the misperceptions around
the cost of cash and the value of electronic payments when he addressed Johnson
students and faculty as a Distinguished Global Leader Speaker on March 4.
“Cash is only a friend of the rich man, cash is not a friend of the poor man,” Banga said, citing costs involved in printing and securing currency. In fact, the cost to society of using cash is between .5 and 1.5 percent of the GDP annually. During a fireside-chat-style conversation on the question “Do you believe in a world beyond cash?” Vrinda Kadiyali, Nicholas H. Noyes Professor of Management and professor of marketing and economics, challenged Banga noting, “A common misperception, and arguably to some extent true, of going cashless is with credit cards, retailers have to pay interchange fees, consumers have to pay annual fees, and if they don’t use their credit cards responsibly they have high interest rate charges.”
Countering the argument, Banga highlighted that there is a common misperception that cashless equals credit cards. Even in the U.S. there are more debit cards than credit cards, and retailers pay lower interchange fees — the charge for accepting electronic payments — with debit transactions than with credit purchases, but don’t necessarily pass the savings back to consumers.
While 85 percent of the world’s retail transactions are conducted with cash and
checks, each country is different. Fifty percent of retail transactions in the U.S. are
made with cash; that figure is 99 percent in India. Only in South Korea and Scandinavia
are electronic payments more common than cash, and that is because the
governments actively pushed the evolution of society away from being cash-reliant,
according to Banga.
The growing popularity of mobile devices is also driving the shift to electronic payments. While devices like the Square have created payment mechanisms on mobile phones, Banga said the industry needs to overcome many obstacles before smartphones are commonly used as payment devices.
“It will take a long time for consumer behavior to change, for people to adapt to it, and for the infrastructure to be built for it,” Banga said.