The incredibly fast growth of the various types of mobile payments has caused considerable headache for many companies who have suddenly found themselves in the middle of the fray, even as their traditional line of business has nothing to do with financial services. Consider, for example, the Merchant Customer Exchange (MCX) — Wal-Mart’s mobile wallet initiative, which brought together the nation’s biggest retailers in an effort to build an alternative to the m-wallets developed by, among many others, Google and Isis. Oh, and Google is itself a technology company, while Isis is a joint venture of telecommunications providers, not banks. In fact, the m-payments offerings of traditional financial service providers — like Visa’s V.me or JPMorgan Chase, Bank of America and Wells Fargo’s clearXchange — are much less prominent than the non-bank-developed alternatives.
Yet, prominent though some of their offerings may be, the non-bank providers of mobile payments are all placed at a distinct disadvantage to their bank rivals. The issue is that most forms of mobile payments are regulated as financial services and, in order to furnish them, a non-bank service provider must either partner with a licensed financial service provider or become one. And that is not an issue to be taken lightly. In fact, The Telegraph tells us that one telecommunications giant was thinking about how to solve the dilemma for no less than fifteen years. But then, even that may not be the biggest obstacle to success. Let’s take a look.
Vodafone CEO Vittorio Colao explains his company’s predicament in an interview with The Telegraph:
I see that transferring money is an act of communication, and therefore we facilitate it but the more sophisticated these services become, the more it needs full banking [facilities] and full insurance.
In the early stages [of mobile payments], the issue is ‘Take money, give money’. That is our job. Then it becomes take money, give money and get a little bit of insurance and have a current account. That’s a joint job [between mobile operators and banks]. But then, it becomes a full banking job.
So what did Colao do?
We looked into [becoming a bank] for the last 15 years — very seriously. I even got a banking licence in Italy.
Now, it should be noted that there is no universal solution to Colao’s dilemma. In some countries his telecommunications giant has managed to get away with the job of providing financial services without having to either partner with a bank or become one. In others, it has not.
The Role of Central Banks
The most famous of Vodafone’s m-payments initiatives is undoubtedly M-Pesa — a money transfer service first offered in Kenya through a partnership with Safaricom — the biggest local mobile network operator of which Vodafone is a part-owner. As we have noted on several occasions before, crucial for M-Pesa’s success in Kenya has been the support of the country’s central bank. Here is what Wolfgang Fengler, the World Bank’s Lead Economist in Kenya, had to say on the subject:
The Central Bank in particular played a very progressive role and allowed “regulation to follow innovation”, while reassuring the market of its oversight. The regulator agreed that mobile money agents needed only limited requirements to enter the business, as they were not providing banking services, while the operator behaved as if it was regulated and periodically reported financial and usage data as Banks do.
It is unclear what M-Pesa’s fate would have been, had Kenya’s Central Bank been less supportive, but M-Pesa’s current pilot in India may give us the next best thing to replaying history. The Financial Times gave us a great overview of the current state of that project just a week ago and it is plain that the biggest differences between the early-stage developments of two projects are to be found in the regulatory environment.
As the FT notes, since announcing the launch of the pilot in India just over a year ago, Vodafone — India’s second-biggest mobile phone operator — has been signing up agents for M-Pesa and is now ready to roll it out nationally. However, unlike its Kenyan counterpart, India’s central bank — the Reserve Bank of India (RBI) — has decided that the mobile transfer of money M-Pesa facilitates actually is a banking service, not a telecoms one, and has required that Vodafone partner with a bank. And that complicates things quite a bit. As the FT explains, in order for a recipient of an M-Pesa transfer in India to receive his or her money, the customer would need to “go through a lengthy identity check, which many Indians may struggle to satisfy given the widespread lack of basic ID documents.” Of course, the Vodafone executives in charge of the project in India are telling everyone who would listen that these restrictions are not “onerous” and that the project will succeed, eventually, but then, what else could they be saying?
So, it seems that the requirement for mobile money providers to partner with banks — or become banks — is of a secondary importance to the success of such a service in an underdeveloped financial market. And, by the way, as The Telegraph notes, an M-Pesa-type of service is not well-suited to thrive in developed countries where consumers are reliant on bank accounts and other traditional financial instruments. Rather, of highest importance may be the classification mobile money services receive by the central banks. It is true that we don’t yet know how M-Pesa will fare in India, but it is difficult to imagine it enjoying the type of success it did in Kenya and Tanzania. What is fairly clear to me, however, is that if M-Pesa customers had to go through the type of identification process their Indian counterparts will be subjected to, the company would never have grown to even a fraction of its present size.
Image credit: Wikimedia Commons.