For the last three or four years, one of my focus areas as an analyst at IMS Research has been mobile financial services.  Within this category I include mobile payments, peer-to-peer transfers, international remittances, bill payments, banking, e-purses and related services.  Much of the interest and focus in the international press focuses on near field communication (NFC), a very short range protocol that can be used for contactless payments in a mobile handset.  Using NFC, the envisioned scenario is one where you or I, as the end user, can simply swipe our phone over a contactless reader in-store to make a payment instead of using a debit/credit card or cash.  NFC is perceived as a “cool” new technology, and in many ways it is, since it has a futuristic feel and appeal to its use.  However, there remain a number of significant barriers to the mass market deployment of NFC-enabled mobile phones and services.  And it will take a little while for all of these to be resolved.

One of the things to have most caught my eye over the past two or three years is how parts of the market have not waited for NFC to come about.  Instead, people have looked around at alternative solutions, many of which are based on existing, everyday functionality common to all handsets.  What I particularly like and admire is that this has largely been done in order to enhance the lives of those subscribers who do not have access to alternative means of payment and/or financial services.

In many quickly developing markets around the world, notably in Africa and parts of Asia, consumers and businesses have been offered financial services via their mobile handsets.  In many instances this is the first opportunity that they have had to access any financial service, mobile or otherwise.  In parts of Africa, natural geographies, large-scale rural areas and the practicality of installing a fixed line communications network mean that a sizeable proportion of the population does not have access to the Internet and related on-line banking services.  Additionally, quite often, personal or physical access to banking premises is also limited.

However, the investment made in expanding mobile network coverage, combined with innovative business models that drive down the costs of mobile phone ownership are overcoming these barriers.  To demonstrate this, at the end of last year IMS Research’s On-Line Cellular Database showed that there were 385 million mobile connections in Africa, forecast to rise by 23% to 472 million  by the end of 2009.  Furthermore, this growth is set to continue, with approaching close to one billion connections reached in 2014.  With close to 600 million users being added in this six year period it can be seen why Africa is such an important market.  It is with this provision and extension of financial and data services that mobile communications is most benefitting a large proportion of the African population.  It allows them to be more connected, better informed and better able to make business and personal decisions.

As mentioned, helping to drive this growth are new business models, helping to offer low cost mobile phones and efficient services to everyday people.  Part of this has come about with shared usage of mobile phones and agent networks.  These have provided the local contact and reach for the new services.  Originally a market development of innovative individuals who spotted a business opportunity, agent networks were then adopted by several MNOs and third party service providers.  Now they are a recognised part of the business eco-system in Africa, providing people the ability to deposit and withdraw funds, exchange air-time and make use of central services.  As such, agent networks are a key enabler for mobile services, particularly those of a financial nature as they provide the local access and contact that is missing with low banking penetration.

Another key development that can be attributed to the African market is the movement, transfer and exchange of pre-paid air-time as a means of currency.  Originally, as mobile penetration started to increase, end-users would trade pre-paid air-time as a means of alternative currency.  This met a need for a means of electronic payment, which for many people had not been previously possible without access to bank accounts and credit and debit cards.  It was also seen by some as a more secure and reliable way of completing a lower value transaction than paying with cash.  This kind of innovation has led to the development of more formal mobile financial services as a number of companies saw this starting to gain some traction with end-users and looked to replicate this.  In turn, these companies have promoted and enabled the provision of services that allow for more recognised forms of payment and electronic transactions between end-users, and consumers and businesses, using mobile phones in place of cash, cards and cheques.

Companies such as Fundamo, based in South Africa, and Safaricom / Vodafone, based in Kenya, led the way to develop and deploy mobile financial services.  One of the largest advantages that these services offer to the average user is that the reach and coverage of mobile networks is far beyond those of traditional banking methods and fixed line communications.  This allows a much greater proportion of the population to have access to these services.   Furthermore, the services offer a variety of implementations, the simplest of which can reside on the user’s SIM card and employ SMS for sending and receiving instructions, updates and authorising and confirming transactions.  This makes these services very user friendly, employing simple and familiar features, which increases usability and acceptance.  The fact that these services do not require any downloads, complicated application installations or high speed data connections also helps to make them available to as wide an audience as possible.

Compared to traditional banking access and services, mobile is a much lower cost solution.  Many of the mobile services offered are pre-paid and do not require large up-front or annual fees to be paid in order to open a bank account.  Instead, they employ a per-transaction fee; deducting a commission whenever a transaction is made or when money is withdrawn from the mobile account.  Compared to international alternatives for remittances, such as Western Union, the level of commission charged is much lower, again aiding take up.  This again helps to open up the service, reducing the financial barriers that affect many and making it more accessible to a much greater proportion of the audience.  An additional indirect benefit that mobile payments and banking have had is that of increased security.  Compared to cash, which is easily stolen, or magnetic stripe cards which can be copied, mobile accounts offer an inherent security; either requiring a PIN or form of ID in order to authorise a transfer or to withdraw the funds from an agent.

By understanding the local requirements and tailoring the services to those people most in need of access to financial services, such African entrepreneurs have opened up the market.  Data published earlier this year stated that a ten percent increase in mobile phone penetration increases a country’s GDP by 0.6%.  If taking mobile payments and banking into account then I think that the benefits are much greater than this, with particular regard to quality of life.

Encouraged by these initial launches a number of additional companies, such as Mi-Pay and more recently Monitise, both based in the UK, have entered the African market for mobile financial services.  Additional incentive had been provided by grants from the International Monetary Fund (IMF) and The (Bill and Melinda) Gates Foundation which are actively promoting and encouraging the launch of mobile financial services in Africa and other emerging markets, supported by the Consultative Group to Assist the Poor (CGAP).  These groups, and African MNOs, have been very active in launching these services.  MTN and Zain announced in 2009 that they were launching and expanding their mobile financial services, in partnership with some of these application developers.

Some of the largest industry names are now getting in on this act.  Last month, Nokia announced the launch of Nokia Money following a significant investment in Obopay earlier in the year.  One of the markets in which Obopay is already active (separate from Nokia’s activities) is India.  Combine this fact with the strong presence that Nokia has in the low-cost mobile phone market and I would not be at all surprised to see a similar mobile money service launched in African markets.  With its brand and level of recognition it would see this as a market of high potential and I would not be surprised if other high profile companies were to try and develop this market too.

These success stories aren’t without any potential drawbacks.  There are technical barriers to be overcome; the big one is the issue of interoperability.  There are a growing number of mobile financial services in Africa which use different platforms.  These do not typically interact with each other, a fact that can be overcome when a bank account is the central “link”.  However, if not, in the future there will need to be interoperability in order to further the development of these services and local economies.  A larger initial problem may be interoperability between operator’s networks.  In order to maintain interest and help to promote uptake of these mobile services the end users will want to be sure that their family, friends and business partners can send and receive transactions with themselves.  If there is any doubt regarding this then user uptake and acceptance will be hindered.

Part of the reason that these services have been able to flourish is that there is typically less regulation and restriction on the type of company that can set itself up as a “bank” or facilitator.  Additionally, international and domestic authorities will become increasingly aware of the need to tie in mobile services with national or central banks in order to maintain stable economies.  This is less of an issue where the mobile service ties into a bank account but it is more critical for standalone mobile accounts that service the unbanked population.

In part, it is this regulation that has stifled the uptake of such services in typical mature markets, but there is also the fact that there is less of a raw demand for such a service.  However, developers and operators in these regions have seen how Africa has developed and implemented simple, user friendly services that would be as easy to use on any phone as another.  These companies are now looking to follow this method and plan in order to launch and/or increase interest in similar services in these markets.  As far as I am aware, in a mobile context, this may be the first time that I have seen more mature markets adopting and following developments in the emerging African nations.  As such, I think that it could provide an interesting tipping point with more developments to come in the future as the African markets continue to grow and develop, designing services to meet their own needs as well as those of others.