Constructing new cash ecosystems through mobile money

This is the third of three-part series of blogs titled “Mobile money”. The authors explore and explain all about mobile banking and how it can make a difference to the rural population.

– By Ignacio Mas-Ribo, Deputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation

It sounds paradoxical, but the success of a mobile money scheme depends on how well it can handle physical cash. This is particularly true if it is aimed at the unbanked, for whom everything happens in cash. They need bridges between the cash economy in which they live today and the electronic money world that they are being wooed into. Those bridges are the retail stores acting as business correspondents (BC). How well those bridges work –how reliably these stores are able to meet customers’ liquidity needs, on-demand, conveniently near where they live and work— will in the end determine how customers judge the convenience and trustworthiness of the mobile money system.

Mobile money doesn’t make the cash problem go away, but it does make it a lot more tractable. BCs pool the cash requirements of the community they serve, and there will be some netting locally as deposits and withdrawals offset each other to some extent.  Moreover, the BC model turns the resulting net cash handling problem into a revenue-making opportunity for local businesses.

The liquidity of the system will depend on three things: (i) how matched customers’ cash in and cash out needs happen to be; (ii) how much support the stores get in managing their liquidity; and (iii) how incentivized the store is to hold an adequate stock of both cash and electronic value at all times.

The degree of cash in/out matching is likely to depend very much on the location of the agent (rural vs urban), by day of month or seasonally (payday, school fee due dates), and even by time of day (market traders cashing out in the mornings to retrieve their working balances and cashing in at the end of the day for safekeeping). In a recent study of 20 agents of M-PESA in Kenya, we found a large diversity of cashflow profiles. Mobile money providers can to some extent affect the overall degree of cashflow matching through appropriate product design and marketing, but that will never be perfect. For instance, we know that rural populations tend to be both net savers and net recipients of remittances; thus, local marketing can stress one or the other service depending on the net cash flows in the region.

An efficient BC channel structure is one which makes working capital available to stores, and provides them with a convenient way to buy and sell electronic money for cash. Typically an aggregator will either set up store routes to collect or deliver cash directly as required, or else will make available one or more bank accounts into which stores can deposit excess cash or which they can draw on if they are short of cash. This cash logistics ecosystem needs to be mapped across the territory – no simple task.

The incentive structure for BCs needs to result in enough reward at the end of each day to justify the extra staff time, working capital balances, security risk and trips to the bank that are involved with the BC business. To get the store to actively promote the service with its customers and maintain adequate liquidity, this is likely to have to be upwards of, say, USD 3 per store per day. If we want the transactions to be cheap enough –say USD 0.05 per transaction—this requires the store to conduct upward of 60 transactions per day. (All these are illustrative figures and will vary by country and location.) In the end, volume is what makes mobile money work, not only at the aggregate scheme level but also at the local, individual store level.

In the early days of a new mobile money system, most transactions are likely to begin and end in cash. Therefore, mobile money is about building a new cash merchant channel; the mobile phone is an instrument that enables the transactions to occur securely through this channel. It’s only later on, once people are used to storing value and paying for goods and services electronically, that the mobile phone becomes a channel in its own right.

In my two previous blog posts in this three-part series on mobile money I stressed the importance of marketing and branding, and the need to define an early use case that will drive an immediate willingness to try in customers’ minds. But that creates a set of customer expectations –on convenience and liquidity— which need to be fulfilled when the customer is at the local store and eager to transact. That’s where sorting out the cash challenge comes in.

[This concludes our three-part series “Mobile Money”. Read the first part and second part of this series.]