This is the second of three-part series of blogs titled “Mobile money”. The authors explore and explain all about mobile banking and how it can make a difference to the rural population.
Many mobile money payment schemes around the globe are treating remote payments and money transfers as the entry point for the unbanked. There is an underlying hypothesis that the need to make payments and transfers will lead people onto transactional savings accounts, and these in turn will lead them to more structured savings and credit products.
There are four main reasons why remote payments and money transfers may be a good way to kick-start a mobile money system. First, because mobile payments are completed in real-time, customers can test the system by calling recipients after sending the money. Trust can be built up experientially rather quickly: “I see that it works, I don’t really need to understand how it works.” Savings and other financial services require building trust over much longer periods of time.
Second, mobile payments address a key pain point of people living in a cash economy. The need for remote payments is often large, whether it is spurred by migrant labor remittances, informal support in networks of friends and family, entrepreneurs’ commercial transactions, or bill payments. And there is a degree of immediacy about the need, since people must make such payments with some regularity, and each such occasion represents an opportunity to try the new service. People need only be convinced to switch from current alternatives rather than to form new financial behaviors. Moreover, the benefit of the new payment mechanism relative to the alternatives (in terms of fees, proximity and convenience, delays in availability of funds at the receiving end, service reliability, etc) is readily apparent to users, which creates a willingness to pay for the new service.
Third, a focus on remote payments allows the mobile money provider to market more intensively among senders, who tend to be richer, more educated and financially aware, and more likely to be urban. This group is more easily addressed by normal marketing channels, and can be counted on to pull their poorer, more rural relatives whom they send money to, into the service. In other words, the provider can direct the marketing dollars to the higher-end customers, and let viral marketing do the job on poorer customer segments.
Finally, servicing customers’ gamut of electronic transactions is a way of capturing relevant information on customers’ habits, which may be useful to subsequently market appropriate products to them and evaluate their credit risk. Tracking payments may be the beginning of creating financial histories for poor people.
Of course, every market is different and what works in one context may not work in another. It’s incumbent upon the scheme operator to conduct market research to understand what service solves such a big pain point that potential customers are willing to try the new system today. In any case, we should not lose sight of the fact that the big opportunity from mobile money schemes is to fulfill people’s broad set of financial needs, not just to effect payments. Mobile money schemes should evolve from handling payments to driving full financial inclusion.
So what is the relevance of money transfers in the Indian context? The Institute for Financial and Management Research (IFMR) and the RBI College for Agricultural Banking recently interviewed 274 domestic migrants and their families along four migration corridors to estimate the total cost (in fees, travel costs to/from the payment outlet, bribes, etc.) of sending and receiving money through India Post, banks, informal hawala networks, and other payment channels. The full report will be published in November 2010. Their preliminary findings suggest that the most common mechanisms used by poor Indians to send and receive money – post offices and informal hawala agents – are also the most expensive – up to seven times more costly than transferring money directly through bank accounts. Giving poor Indian households a safe and convenient way to send and receive money would not only make their lives easier, but could be the “hook” needed to integrate them into the formal financial system.
[Read the first part of this series here.]