Posted by Ignacio Mas, Independent Consultant

Remote payments usually are the beachhead for mobile money as it struggles to create a role for itself alongside cash in developing countries. It’s easier to create customer awareness, induce customer experimentation, and generate customer willingness to pay when you are addressing situations in which cash presents the biggest pain points – sending money home, paying bills at distant and busy utility offices, travelling with or delivering larger stashes of money.

But that’s a limited market. Those are not daily occurrences for most people. And in many markets, especially outside of Africa, the reality is that people already have decent domestic remittance or bill payment mechanisms – through networks of pawnshops in the Philippines, courier companies in Colombia, or Hawala in Afghanistan.

Now mobile money providers are itching to get into the merchant (i.e. in-store) payment space. That’s where you can drive daily as opposed to monthly usage, so that’s where the volume is.

Of payment volumes and value

Much of the discussion on mobile retail payments centers on pricing models (merchant fees, interchange, potential cannibalization of P2P pricing), usability issues (customer convenience, speeding up transactions at the store), and acquiring strategy (how to roll out devices at stores and at what cost). These issues arise because cash is a much stronger competitor here than in a remote setting: paying some cents and waiting some seconds for an SMS confirmation are an irrelevance when you are sending money halfway across the country, but can tax people’s sense of fairness and patience in a retail setting. The less value people and stores see in electronic payments the larger these issues will loom.

But treat these as hygiene factors. Imagine that you could buy half a kilo of rice at any corner store from your mobile wallet at no cost and as conveniently as you flash out a banknote. Still, the fundamental question remains: why would you take out of your pocket your mobile phone rather a banknote?

There is only one robust answer to this question: I want to pay electronically because electronic money is what I have. The only reason why you and I are likely to pay with a card next time we go to a restaurant is to spare us having to visit an ATM before going to the restaurant. But if our mattress was our bank, we’d look at it differently: we’d want to pay at the restaurant with cash to spare us having to visit the bank branch to deposit the cash we’d need to fund a card payment. It’s converting the money – not paying it – which creates the real cost and inconvenience.

And here’s the rub with mobile money. Most people’s accounts are empty or have very little value. Cash is what they have. If that’s the case, why would they want to pay electronically in situations where cash is easy to pay with? The daily merchant payment opportunity will remain largely unaddressable unless people start seeing value in storing their money electronically.

Of payment chickens and eggs

We are frequently told that retail payments present a chicken and egg problem: there is not much point in people getting cards if stores don’t accept them, but stores won’t want to get terminals if their clients don’t have cards. The solution: flood the market simultaneously with cards and terminals. It takes a big push to flip the market to electronic payments.

Mobile money providers have taken this to heart. Since customer accounts are what they have issued in large numbers to-date, now all they need to do is to go on a merchant acquiring spree. The happy balance will be struck, and torrents of retail payments will be unleashed.

For sure there is a chicken and egg situation between issuance (cards in customers’ hands) and acquiring (terminals in merchant outlets). But keep in mind that issuance and acquiring refer only to the linking of payment instruments to accounts. But what can possibly be the significance of linking a payment instrument to an empty account?

Here’s where the experience with mobile money in developing countries differs from the experience with debit cards in developed countries. When debit cards were first issued in developed countries, they were linked to accounts that had balances in them. Cards fell in the hands of people who had a natural long position in electronic money, and hence had an in-built bias towards paying electronically. Electronic storage of value preceded electronification of retail payments. Not so with mobile money in developing countries.

So just as there is a tension between electronic issuance and acquiring, there is one between electronic payments and storage of value. But these are two very different problems. The former tension, between the deployment of cards and terminals, truly is a chicken-and-egg problem that needs to be solved simultaneously. Issuance will not be successful as long as acquiring is not successful, and vice versa.

But the second tension, between payments and storage of value, is not a chicken-and-egg problem and needs to be addressed more sequentially. For all the reasons I have mentioned, if you get people to store value electronically it will lead them to naturally want to pay electronically (if only the issuance and acquiring chicken-and-egg problem is solved). I would find it extremely hard to make the argument backwards: that people’s desire to make small payments electronically when they go to the corner shop will lead them to want to save larger balances electronically. People’s savings decision is driven by larger questions of sense of control, safety, and manageability of money, not by fine points of convenience at the corner store. We must change the metaphor here: retail payments are the tail that can only marginally wag the savings dog.

By the way, just getting people to be paid electronically more often (per the other ongoing mobile money gold rush: G2P) won’t do the trick while their practice is to withdraw any incoming money immediately and in full. The money has to stick in the wallet, and for that to happen mobile money needs to have more money management tools and behavioral hooks that connect with people’s mental models and make them feel more in control of their money.

So here you have it: the savings dog is where issuance chickens and acquiring eggs come from (sorry!). We can no longer neglect the savings agenda of mobile money. Savings may not be hugely profitable by itself, but it is the engine that fuels retail payments. And credit too, since savings and payment behavior ought to be primary inputs into credit scoring models.

Image credit: GSMA

Ignacio Mas is an independent consultant. You can learn more about his work here.

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