|Issue:||Latin America 2011|
|Topic:||Mobile Money Roadmap for Latin America|
|Author:||Alberto J. Jimenez|
|Title:||Mobile Payments, Leader|
Alberto Jimenez is the Mobile Payments Leader, IBM Corporation. Mr Jimenez has more than 12 years of experience in banking strategy and business development work, both as a consultant and a corporate practitioner. He has been part of the Financial Services sector as an industry analyst and a strategy consultant since 1998. Currently, Mr Jimenez leads IBM’s Mobile banking and Payments initiatives globally, and is involved in advisory and implementation projects across all geographies for both banking and telco clients. Previously, Mr Jimenez was a senior consultant with the Banking Industry for IBM Global Business Services. During this period, he was involved in a variety of strategy and operations projects for banking organizations in the US, Western Europe, Asia and Latin America. Prior to IBM, he was engaged in equity research and business development work for Prudential Securities, in Boston, US.
Mr Jimenez is a graduate from Harvard University and Emory University. In addition, Mr Jimenez sits on the Advisory Board of the Mobile Money Transfer Association and is part of the Schools Admissions Committee of Harvard University for the State of New York.
Using digital representation for stored wealth that can be redeemed later is not only an historical step – it is a disruptive technology that is upon us now and is likely to have a major impact. This technology converts ‘plastic’ (credit cards) to mobile money, but the bigger opportunity is replacing cash, i.e. the opportunity is in commerce – not just banking. To achieve wide adoption, mobile payments must be cost effective, through lower direct cost (transaction fees) and indirect cost (lost opportunity e.g. lost earning time). Service providers gain from this feature-rich electronic method of payment by obtaining precious insight into consumers behaviour, which is highly sought by commerce and advertisers. Users may have privacy concerns about that, but this could be overcome by better shopping experience and explicit discounts.
From the beginning of civilization, humanity has strived to find ways to facilitate commerce. Initially, we started using standards such as salt, gold and copper as units of conversion for trade. Very quickly we realized that carrying amounts of these materials was not efficient for larger transactions, and we started denoting numbers on coins or paper to represent amounts of value. This innovation introduced one of the key concepts behind modern currency – that it works not only as a unit of conversion but also as a promise of something that can be redeemed in the future. Hence the need to have only trustworthy entities issuing that currency – but that is a topic for a different article. This technique was prevalent for hundreds of years and is still widely used globally.
Late in the nineteenth century, another disruptive innovation came and we realized that we could use digital bits to represent value that was stored somewhere else (i.e. a bank account). This new technology significantly increased the speed at which value could be exchanged, which was as fast as the train or horse up to that moment. Unfortunately, this innovation from 140 years ago has still not reached global adoption and most retail transactions in the world still take place in cash.
Today in 2011, we are at the verge of a new historical disruption, one that is much more transformational than all the previous ones. Past innovations covered small portions of the world’s population and took literally hundreds of years to reach widespread adoption. Today, with over five Billion cellphones in the hands of the vast majority of the world’s adult population, the exchange of value using mobile phones is poised to be the biggest undisputed revolution in payments history.
According to the McKinsey Global payments map, in 2006, 93 per cent of transactions in Brazil, 98 per cent in Mexico and 99 per cent in Colombia took place in cash. Even assuming that those percentages have dropped by ten per cent in the last five years –a very optimistic view– most transactions still take place in cash and the majority of the population is still subject to the evils of it: cost, security, speed, availability, etc.
The Challenge of Building the Ecosystem
We recognize two very distinct opportunities in the market today. The first one is around the conversion of plastic transactions to the mobile device. This opportunity requires a coordinated effort from current value chain participants: Merchants, POS manufacturers, banks, processing networks, telcos and device manufacturers.
The second opportunity, which we strongly believe is a much larger one, is the conversion of cash transactions to the mobile device. Cash replacement is a big business opportunity, in terms of both volumes (number of transactions) and added value to the end user. It is also less threatening for some ecosystem participants(e.g. banks) as no one monetizes cash transactions today.
However, the creation of cash replacement ecosystems is a challenging task. Apart from the basic enablement tools at the device and back office levels, a sound strategy is required to coordinate ecosystem participants like banks, telcos, distribution partners, retailers, etc.
Based on the observation of the mobile payments ecosystems that have reached scale in Sub-Saharan Africa and South East Asia, a dense distribution network (for cash-in and cash-out purposes) is essential to building wide adoption. End users need to perceive that schemes provide them with the option to “cash-out” at any point without much effort.
Monetization Opportunities: Payments and Commerce, not Banking
In order to realize the full revenue potential of a cash replacement scheme, it is important to understand how current cash interactions occur. As opposed to the interchange construct, where merchants compensate the entire value chain (issuer, processor and acquirer), in a cash transaction, the payer bears the cost of the payment. What this means is that in order to facilitate the transaction, it is the end-user (the one originating the payment). i.e. the one who takes a bus, waits in line, pays a remittance charge or completes any other action required to make sure the cash reaches the recipient (another person, a utility company or a merchant).
The direct implication of this is that the end-user will be willing to pay on a per-transaction basis as long as the mobile payment is less expensive than the cash alternative. Less expensive in this context has two components: first component is the direct cost, of course. The second component is even more important: cost of opportunity. The following scenario describes the two types:
A woman without a bank account was paid her daily wages and now she has sufficient cash to pay her monthly electricity bill. Usually she uses public transportation to reach the electricity company collection centre and there she stands in a line with her monthly invoice and gets a receipt as proof of payment, then she takes public transportation again to travel back home. In this example, the direct cost is the fare of the public transportation; the cost of opportunity is much larger, and it includes the time she spends traveling back and forth from the collection centre, the time she spends in line and the potential risk of getting robbed and lose the cash. This cost of opportunity is easy to quantify because it represents lost wages, as it is common that low-income segments get paid on an hourly basis. This example also illustrates the rationale behind the willingness of end-users to pay on a per transaction basis that we have observed in several ecosystems in emerging markets.
The perception of how expensive the transaction is should be based not on absolute terms, but on relative ones. A 30-cent per transaction fee may sound expensive to someone that has efficient payments alternatives, but very inexpensive to someone that needs to give up six dollars of wages for two hours of lost work.
In addition to the direct revenues from end-users, data analytics is another category of income for providers. The use of data contained in mobile transactions is potentially larger than direct fees. A mobile transaction is unique in the richness of attributes it contains compared with traditional plastic transactions and of course infinitely richer than the complete anonymity of cash. Just to name a few examples, a retailer can understand the behaviour of a customer before a purchase, can identify the location of the actual transaction and can also understand the behaviour after the transaction.
This translates into massive amounts of data associated with these transactions and the possibility to derive business insights from it. These business insights can include information about what triggers a purchase, what additional items and services can be offered to the same customer based on his/her recent purchase or current location, in a city or inside a store. We believe retailers and other ecosystem participants will be willing to pay handsomely for these insights.
It is important to note that basic phones with no data plans, the ones that low-income segments carry today in Latin America, can collect and realize a smaller set of transaction attributes than smartphones with data plans. But given the trends in the market regarding the penetration of smartphones and data plans, this is going to be a short-term limitation.
Breaching privacy associated with the use of data to derive business insights is a real concern for some people and for regulators. However, we expect that providers will find mechanisms to “convince” end–users to explicitly allow them to access and process the data. This explicit authorization can come from direct compensation (i.e. lower prices for telco charges), or from the provision of improved service experiences based on this data (i.e. improved shopping experience at a supermarket). While it is clear that not all consumers will grant access to their data, a large portion of the population will be willing to share it if they are compensated.
Regional Outlook and Conclusion
At the regional level, the business opportunity in Latin America is unique. While South East Asia and Sub-Saharan Africa have several examples of markets with scale, at the time of writing this article there are no mobile payments schemes with broad adoption in the market in the Latin American region. Several factors may be contributing to the region lagging behind in this space, but we have no doubts that a handful of mobile payments services will reach scale in the short term.
It is no surprise that with over 60 per cent of the population in Latin America, and even a larger percentage of the economic output, Brazil, Mexico and Colombia present the greatest potential for providers looking to generate significant revenues in this area.
From the observation of markets with well-established schemes, it is clear that an ecosystem control point is adoption. Once a provider has reached market acceptance, it usually has the power to set the business terms that other ecosystem participants are forced to accept in order to play a role in the space.