The Biggest Mobile Payments Story You’ve Never Heard
As we move into 2014 – yet (again) the year when many say mobile payments are destined to gain traction – let’s look at some key developments in the space. No, I’m not talking about the newest pilot participant in ISIS or whether Apple will be the new sheriff in town. Instead, let’s look to the south to where the foundation is being laid for mobile payments to take hold in a few Latin American countries.
Peru is likely to produce the most interesting developments in calendar year 2014 as its new real time, retail payment system rolls out in the second half of the year. In response to recent legislation that requires interoperability for mobile payments, the new rails are being built by the bank consortium that operates check and ACH clearing in the country. Peru also created the new category of “Electronic Money Issuing Firm,” those who convert physical money to electronic money and store it on an electronic device. Qualifying E-Money providers can have access to the new real time system to make low-cost, interoperable payments to other mobile phones.
Traversing over the Amazon to neighboring Brazil, that country’s new mobile payments legislation is incredibly ambitious in its scope. As we described in a previous post, the legislation covers much more than mobile payments. The main feature is the creation of a payments institution that would allow non-banks to offer payments services and to do so on a relatively equal playing field. And by relatively equal, I mean direct access to the domestic payment rails and settlement at the central bank in exchange for being supervised as a payments institution.
Brazilian legislators didn’t stop there, they also required that all payments (again, not just mobile payments) be interoperable and low cost. That means that every telco, bank or other payment provider will need to be able to quickly and efficiently exchange payments with each other. Notably, Brazil does have a faster payments system operated by the bank consortium Câmara Interbancária de Pagamento that could potentially be utilized for transacting mobile payments but the law doesn’t require it be used. Of course, Brazil is a larger and more complex business environment that will now need to figure out how to retrofit potentially tens of millions of mobile payments into the payment system. It will be interesting to see how the bankers’ respond to the new environment.
Not to minimize the Brazilian need to provide affordable financial services but the Peruvian challenge is much, much greater. Only 20 percent of Peruvians have bank accounts and even fewer have a debit card (14%). Those in outlying geographic areas have little to no access to financial services. The Peruvian government is rightly working to use mobile payments to overcome these deficiencies.
Brazil has similar goals. It has a much bigger territory and remote areas are poorly served. However, most municipalities now have at least one bank correspondent or agent operating in a retail environment to provide basic services (deposits and withdrawals, bill payment) on behalf of a bank. Overall, more than 50 percent of Brazilians have a bank account and over 40 percent have a debit card.
Both governments want to leverage mobile payment to reduce the amount of cash in the system. Being able to make payments to any friend, family member or business, regardless of the bank or telco offering the service, should be critical step in making mobile payments more attractive.
Mexico and Costa Rica have both recently announced steps to make receiving payments easier – as easy as giving out your phone number. Costa Rica’s central bank operates the national payment system and, starting in the second quarter, the Banco Central de Costa Rica will add the feature to associate a mobile phone number with a bank account number. Similarly, in Mexico, banks will soon be required to associate a mobile number with a bank account number (or debit card number in some cases) if the customer requests it. Payments directed to a mobile number must receive the same treatment as payments to an account.
While these developments are much smaller in scope, they can be seen as an initiative to encourage both consumers and banks to transition into mobile payment usage. Will this help make consumers more comfortable with mobile payments? Or motivate banks to offer mobile payments and not just mobile banking? Maybe it will make having a bank account more attractive for entry level users for might otherwise not see enough utility to pay for a bank account. Also, even if you were comfortable sharing it, having to give out your 18-digit account number is not a simple act on a mobile phone. Will using the phone number make mobile payments more attractive?
Collectively these measures enable banks and other players to offer mobile payments but they can’t compel the market to provide mobile payment services. Instead, these developments focus primarily on improving payments infrastructure and functionality . Lacking still is the rest of the ecosystem composed of consumers, merchants and billers. Their participation is essential to solving the chicken and egg problem of emerging payments. Even more important to the imperative of financial inclusion is the need to create what one thoughtful colleague calls “digital liquidity,” the sufficient confidence in the mobile ecosystem that encourages a user such to leave her money on the phone and not to cash out all value as soon as it appears.
The lack of digital liquidity has been a glass wall of sorts for the mobile payments schemes in Africa that have so far not been able to fulfill either their payments or financial inclusion potential. In Kenya, for example, M-Pesa users are more likely to cash out funds than to pay them to a merchant in exchange for a purchase or store money on the phone. Soon we’ll have some real world observations on whether interoperability (Brazil, Peru) and ease of use (Costa Rica, Mexico) will make mobile payments more attractive.