A paradigm shift needs to occur in order to determine how the poor might be profitably brought into the banking sector.
One of the issues Africa is struggling with is access to formal financial services for its citizens. Risk averse bankers, unsuitable financial products and high bank charges have been rightfully blamed for it. Poor people with irregular income and informal businesses have often no choice but to make use of informal financial services, which are usually several times more expensive, compared to formal ones. Formal financial services are usually only extended to those that have regular monthly salaries or have collateral. A critical issue to overcome is that of asymmetrical information. Someone without a bank account approaching a bank for a loan is likely to be rejected unless collateral is at hand. The bank has no transaction history with this person and hence does not know anything about the applicant's creditworthiness. Business plans are also often hard to compile for un-banked entrepreneurs since their businesses are mostly cash based and lack accounting sophistication.
Mobile banking is seen as one solution to this problem. It has been around for quite some time in several African countries. However, the existing offerings are added services, making the mobile phone an additional channel to operate on an existing bank account. These services are not geared towards the inclusion of the poor and un-banked.
Instead of adding a mobile phone as an additional channel to an existing bank account one should think of adding a bank account to an existing mobile phone, therefore pushing the access frontier considerably. Each mobile phone number on an operator's network could be the account number. The balance on the account is the airtime credit which can be used to talk and send SMSs, or to pay someone in airtime. Currently mobile operators already maintain a kind of bank account for each of their subscribers. When airtime is purchased these accounts are credited and when calls are made or SMSs sent, they are debited. These systems could be extended to cater for add-on financial services.
Accepting airtime as currency
Airtime is already being used in several African countries as a form of currency. In most cases it does not substitute cash but complements it. Often the absence of any alternative for transferring money over long distances has led to airtime becoming a cash substitute. Remittances from family members living abroad, transferred as airtime is the latest fad. The person abroad purchases airtime online and this airtime is then immediately transferred to the receivers phone. The receiver can then either use the airtime, or sell it on, or purchase goods with it. This points to the crucial success parameter for airtime being accepted as an alternative to cash. Airtime needs either to be convertible backwards to cash or it needs to be widely accepted as an alternative currency.
Parallel currency airtime
If one could use airtime to pay for anything one needs, one would not need to convert it back into cash. If people could pay for day-to-day shopping with airtime they would build up a transaction history. If salaries could be paid in airtime the loop would be complete. Airtime would move in this closed loop and liquidity is increased by new airtime being bought by mobile users and reduced by airtime being used to make calls. The key success factor for airtime to be accepted as a means of payment is that it must resemble cash, i.e. there are no transaction costs for the end user and it must be widely accepted. The operators will not change airtime back into cash. However, a vendor might convert airtime to cash by selling it to someone that needs airtime.
Airtime cash convertibility
The second approach to make airtime backwards convertible to cash is a bit more complicated. Three obstacles need to be overcome to allow for that:
- If airtime is convertible to cash then selling airtime would equal accepting deposits and mobile operators would require a banking license.
- Value is lost in the distribution channel for airtime. Mobile operators pay resellers a commission for selling it. The value lost in the distribution channel is about 20 percent. That is for every 10 US$ airtime sold the operator receives only 8 US$. If the operator would buy the airtime back it would make for a 2 US$ loss.
- Value added tax is charged on the airtime.
The value-added tax obstacle could be overcome by negotiating with the receiver of revenues to treat the VAT part of bought back airtime as input VAT. This would usually not be possible since private individuals are not registered for VAT and hence cannot issue VAT invoices. However, it should be possible to get to a special agreement for airtime given its potential for poverty alleviation.
The issue of value loss in the distribution channel is trickier. It could be addressed by selling airtime through the current distribution channel without commission or purely electronically (anyone accepting airtime as cash can also sell it for cash). The selling of airtime through retailers would need to be incentivised differently.
The third obstacle for making airtime convertible to cash could be overcome by mobile operators obtaining bank licenses. This would place them in the jurisdiction of a second regulator, the financial sector regulator. Alternatively banks could co-operate more closely with mobile operators or become virtual network operators themselves (like Virgin in South Africa which does not own any mobile infrastructure).
Regulating co-operation between banks and mobile operators
The telecommunication and financial sectors are both crucial for economic and social development, and both have usually only a few players (oligopolies) and need to be regulated in the public interest. In future not only will banks and mobile operators be required to cooperate more closely together, but regulators will have to do that as well.
Who dominates this relationship between banks and mobile operators will tend to determine the kind of business model that emerges. At one extreme, the network operator can dominate or own the whole value-chain. When this happens the resulting business model may be open to more banking institutions, but will almost certainly exclude other network operators. At the opposite end, when the banking institution dominates, the resulting model tends to be more open to other network operators, but less so for other banking institutions.
The middle ground may involve a partnership of almost equal responsibility by both partners or even an independent third party, who then deals with both banking institutions and network operators. The current value being generated by both mobile operators and banks in Africa makes a partnership between them unlikely. A third party who is able to understand the dynamics of a volume based, small margin business is more likely to succeed.
Finding a middle ground is critical for Africa, primarily because multiple institutions need to collaborate to make mobile payments successful through more open businesses models. There are entrenched positions and interests that various parties would like to protect:
- Network operators want more influence since they control a key piece of the infrastructure
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