by Uyen Tran - Technology, Trends/Challenges -

MICROFINANCE PAPER WRAP-UP: The Role of Mobile Operators in Expanding Access to Finance, by Ignacio Mas and Jim Rosenberg for the Consultative Group to Assist the Poor (CGAP)

Written by Ignacio Mas and Jim Rosenberg for the Consultative Group to Assist the Poor (CGAP), released May 2009 as a brief, 4 pages, available at:

http://www.cgap.org/gm/document-1.9.34485/Mobileoperators_Brief.pdf

Banks and mobile operators have two different perspectives on mobile banking. Banks view it as a way to enhance services to existing customers.  Mobile operators, on the other hand, focus more on reaching the mass market and unbanked. This brief seeks to answer the question of whether the company that owns the mobile network, the mobile operator, needs to provide financial services. It assesses the capacity and incentives for mobile operators to provide financial services. The authors conclude that mobile operators do not necessarily need to “own” the financial services associated with mobile banking.

There are several options for mobile operators to participate in financial services delivery.

  1. The mobile operator can offer basic services where it can provide secure communications services to financial service providers, enabling transactions. Thus, the mobile operator will be in the role as an intermediary, relaying messages between the provider and customer. It can also provide “mobile wallet services,” which manage the flow of transactions between accounts as directed by the mobile customer.
  2. The mobile operator may also host the accounts of third parties and authorize transactions on their behalf. A third-party institution keeps the float, but account management is delegated to the mobile operator.
  3. The mobile operator may issue accounts where value can be stored before or after the transaction.  These are prepaid or electronic money or mobile accounts where basic transactional deposit accounts are accessible from a mobile phone.
  4. The most comprehensive option would be to provide mobile banking capabilities.  This would go beyond making and receiving payments and customer management of accounts.  This would entail using a broader range of products like credit and insurance.

The brief examines the advantages and core strengths that mobile operators have in providing financial services, advantages that banks may not possess.

  1. Network of physical retail outlets.  Mobile operators do business with a greater number of customers than banks. Thus, they have a greater number of retail outlets.
  2. Secure electronic transaction capture capability. The mobile operator can offer a customer service platform that is both secure and user-friendly because of the mobile operator’s control of the subscriber identity module (SIM) card. SIM cards identify a user on mobile telephony devices.
  3. Transaction processing platform. The platforms for processing prepaid mobile billing are simple since they do not need to support a high level of customer reporting like monthly statements or regulatory reporting.

Next, it explains the incentives for mobile operators to offer financial services.

  1. Additional revenues.  Mobile operators can charge transaction costs.
  2. Churn reduction.  Mobile operators can reduce “churn”, or customer turnover, if regular users of payments services stop switching mobile operators once they are familiar with how the service works and have a bank account linked to their mobile phone number.
  3. Branding. A mobile operator can augment its brand positioning based on customer service and innovation if it were first-to-market in providing financial services.
  4. Distribution cost reduction. Mobile operators incur substantial costs collecting revenue from their customers. This could reduce distribution of prepaid cards.

Finally, the brief explores the risks associated with mobile operators providing financial services. Mobile operators possess vulnerabilities in offering financial services.

  1. Breaches in data and transactional security. Accounting errors, fraudulent transactions, and breaches in data privacy could expose the mobile operators to huge liability and damage to reputation.
  2. Operational focus. Its management’s core focus is its communications business. Adding financial services may distract and stretch the abilities of smaller mobile operators.
  3. Additional regulation.  Accompanying the ability to provide financial services is compliance with financial regulation.  Mobile operators may incur increased costs to comply with financial regulations, adding to the oversight they already receive.
  4. Customer care costs. There could be an increase in customer care calls that could wipe out service profitability from service delivery.

By Uyen Tran, Research Assistant

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