Telecoms Vodafone, MTN Fill Banking Breach in Africa

No Bank Account? No Problem. Consumers in Kenya, Uganda, Middle East and India Rely on Mobile Money

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Imagine if, in order to pay the kids' school fees, you had to give a fistful of dollars to a bus driver who was heading in the general direction of your neighborhood, and trust him to deliver the money safely.

That's how life has been for millions of people in developing countries who don't have access to bank accounts. So it's easy to see why mobile money -- which allows the "unbanked" to make financial transactions using SMS -- has taken off so rapidly.

Subscribers take cash to an appointed agent. The money is loaded onto their account and can immediately be used to send cash.
Subscribers take cash to an appointed agent. The money is loaded onto their account and can immediately be used to send cash.
In Kenya, where Vodafone launched the first mobile money service, M-Pesa, in 2007, 68% of adults used mobile money in 2011, according to a survey by the Gates Foundation, the World Bank and Gallup.

Many mobile-phone operators in the developing world are investing in mobile money. It brings in extra revenue and -- just as importantly -- breeds stickier relationships in a fickle market where pay-as-you-go customers often hold SIM cards from several different operators at once.

Mobile money is based on SMS rather than smartphone technology. Subscribers take cash to an appointed agent, and the money is loaded onto their account. To pay with via SMS, the subscriber enters the code of merchant and the amount he or she wants to pay. The merchant then receives an SMS saying the customerhas paid the bill. It can immediately be used to send cash, and to pay for restaurants, shops and other services, or it can just act as a normal phone credit.

M-Pesa (pesa is Swahili for money) started out as a project by the U.K. government, which hoped that the ability to convert cash into e-cash would be a driver for social and economic change.

"Banks traditionally have to set up a branch. All mobile operators have to do is put up a tower -- the relationship with the customer is already in place," said Chien-Wen Tong, MEC's regional director of mobile marketing and digital projects for EMEA.

The service is becoming so ubiquitous in the Middle East and India as well as much of Africa that it's not just the "unbanked" who use it. Michael Joseph, managing director for mobile payments at Vodafone, is based in London and uses M-Pesa to pay his staff in Kenya. However, the average M-Pesa transaction is just $30.

Mobile operators say they are not a threat to traditional banks. "We do a service to the banks by serving the unbanked," said Christian de Faria, group chief commercial officer at African telecom company MTN.

Mobile operators are now finding ways to provide insurance and even credit to their customers, which requires help from a bank. So banks are becoming crucial to mobile money, but they don't get to have a direct relationship with the customer.

Western Union recently joined forces with MTN in Uganda to launch a mobile money-transfer service, and in the process gave away 10,000 Western Union-branded mobile phones. Western Union has agreements with 11 mobile operators and an additional 17 in the pipeline.

"I see people with mobile phones who don't even have wallets. They live on a dollar a day, but somehow they've got a mobile device, which they use to enhance their lives," said Gregg Marshall, global head of sales and business development for Western Union Transaction Services.

More sophisticated versions of mobile money -- backed by banks rather than telecoms -- are finding their way into developed nations. But it's not happening at the pace you might expect. The proliferation of ATMs and widespread access to the net mean that the benefits of mobile banking have less impact in the developed world.

Barclays recently introduced Pingit, an app that links bank-account details to one's mobile number, so that payments of up to $500 can be sent between users in the U.K. A TV push by Bartle Bogle Hegarty led to 120,000 downloads in the first five days. But users indicate that the need to register, and then remember strings of passwords and verification codes, make it all seem like too much effort.

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