But only a mobile operator can provide the communications channel to users. This is an old insight; Ignacio Mas and Kabir Kumar articulated it in a CGAP Focus Note that was published in July 2008. Yet sometimes when I hear an announcement of a new partnership, policy framework, or investment in this industry, I wonder whether it has been universally understood.

Customers of mobile money services need a way to interact with the service so that they can initiate transactions. When these transactions involve cash, they will need to be carried out at a physical retail point. But when they don’t, it is necessary for the business case and to the consumer value proposition that customers be able to initiate transactions themselves, using an interface on the handset.

There are two requirements for this interface. First, if the service is going to advance financial inclusion, the interface must be accessible even on low-end handsets. An application that runs only on feature- or smartphones will not suffice. Second, this interface must be secure, because customers will use it to authenticate transactions with their PIN. Ordinary SMS does not clear this hurdle.

There are only two ways to fulfil these requirements. Either you can present customers with a menu using unstructured supplementary service data, or USSD, sessions; or you can embed an application on the customer’s SIM card. Both are widely used in mobile money deployments. (A third option, voice, is sometimes used to supplement these channels, but I’ve never seen voice used as the primary user interface for a mobile money service.)

The USSD channel and the SIM card are assets belonging to the MNO that have not been widely commercialized. That is, most operators do not sell space on the SIM to third parties, or allow them to use USSD sessions. (Why this is the case is the subject of another post.)

As such, if a bank or a third party wants to offer mobile money for the unbanked, they will need to persuade one or more mobile operators to agree to let them use the USSD channel or install and application on the SIM card, and they will need to negotiate a price for this access that does not break the business case.

There are only a handful of precedents for this globally. So when someone asks my opinion of a mobile money service that is going to be offered by a third party or a bank, or a regulatory regime that does not allow operators to offer mobile money services, my first question is, “Will the operators be providing access to the communications channel? And if so, how much will it cost?” They’re questions best answered sooner rather than later.

See Mapping and Effectively Structuring Operator-Bank Partnerships to Offer Mobile Money for the Unbanked for more on the mobile financial services value chain.

Surprised? You should be. The two services I’m referring to are MTN MobileMoney and Vodacom M-PESA. MTN Uganda and Vodacom Tanzania take responsibility for branding and marketing these services. They have set up and manage network of cash-in/cash-out agents. They provide customer care. And they selected and manage the technology vendors who supply the transactional platforms which underpin the service. Perhaps more to the point, they have made the significant investment that has been necessary to scale mobile money, and they will reap the benefits if mobile money is a commercial success.

Yet neither MTN nor Vodacom holds a license to offer a mobile money service from their financial regulator. Instead, their bank partners hold such licenses, and then authorize the operators to run the service under their regulatory umbrella. That’s because the Bank of Uganda and the Bank of Tanzania, like a number of other central banks in the developing world, do not issue payment or e-money licenses to non-banks.

This is a bit surprising. Consider two of the biggest names in payments globally, Paypal and Western Union. Neither is a bank. Rather, they are regulated (depending on the jurisdiction) as payment providers or e-money issuers.  A bank license, and the supervisory obligations that go with it, would be unsuitable for these players, because they, like mobile money providers, do not engage in the risky business of financial intermediation: converting customer deposits into loans. Money that they hold on behalf of customers and agents is entrusted to a regulated bank.

There are a variety of reasons why certain central banks decline to license non-banks directly. But the arrangement comes with its share of problems, to the detriment of operators and (more importantly) customers.

• First, it can significantly slow down the speed at which non-banks can launch services, because they must first find a bank partner that is willing to secure a license on their behalf. We know of operators who have been negotiating with potential bank partners for more than a year, in part because banks legitimately worry about taking on the risks associated with mobile money when operationalizing the service will be up to another entity.
• Second, it can limit the degree to which non-banks can forge effective distribution networks. By appointing banks to act as superagents to support agent liquidity, operators can improve the service level that customers experience at retail. But it’s often important to appoint multiple banks as superagents, particularly if an operator’s partner bank has a limited branch network in rural areas. But license-holding bank partners are sometimes reluctant to let their operator partner work with other banks.
• Third, it can slow the integration of mobile money into the broader financial system. M-PESA in Kenya has integrated with at least a dozen banks so that customers can easily move money between their bank accounts and their M-PESA wallets. Operators who are tied to a single bank may find that that bank wants to offer this functionality to their, and only their, customers—good for the bank, but not for customers of other banks.
• Finally, it can restrict the range of services that non-banks offer customers. We know of one operator which sought to offer a kind of bulk payment functionality to its mobile money customers, only to be told ‘no’ by its bank partner—which feared that the new service would cannibalize its own wholesale offering.

Most of the operators we know in this situation would prefer to be directly regulated by their central bank as an e-money issuer or payment services provider. Doing so gives regulators better visibility into and oversight over mobile money services, and makes it more likely that customers will have more services from which to choose in the financial services space. It’s a win for everyone involved.

Mobile operators are directly licensed to offer payment services by central banks in a number of markets around the world, including the Philippines, Malaysia, Thailand, and Indonesia. To read more about how regulators in those jurisdictions make sure that customers’ money is safe, see Nonbank E-Money Issuers: Regulatory Approaches to Protecting Customer Funds. And for more about the relationship between banks and operators when it comes to mobile money, see Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked.

Developing M-KESHO

The M-Kesho Story So Far and Way Forward

To offer customers more sophisticated financial services, however, Safaricom elected to partner with Equity Bank, which has an illustrious history of serving the base of the pyramid in Kenya. Together, Safaricom and Equity bank designed and rolled out M-KESHO, which allows customers to access a savings account, credit, and insurance all from their M-PESA menu.

At the recent MMU working group in Kuala Lumpur, John Staley, director of shared services at Equity Bank, and Waceke Mbugua, head of M-PESA marketing, shared with the group how they worked together to forge M-KESHO.

What is M-KESHO?

Equity Bank and Safaricom Before M-KESHO

After float holding, operators are most likely to turn to banks to handle license acquisition, regulatory engagement, and compliance. This is because in many jurisdictions, mobile operators are not allowed by their central bank to acquire a payments or e-money license themselves. Instead, they ask a bank to secure the relevant regulatory approvals, and then operate under that approval. It makes sense to turn to a bank to take on this role, since banks already have a banking license, a relationship with the regulator, and an existing compliance function.

But here’s the confusing part….

From a commercial perspective, the bank in this example can be thought of a supplier of regulatory functions (engagement, license acquisition, and compliance) to the mobile operator. But from a regulator’s perspective, the image is reversed: he is likely to view the bank in this situation as the party which has outsourced a set of operational activities required for running a mobile money service to the operator. And he’s likely to think of the service as “bank-led”, even if, from a commercial perspective, it’s the operator that’s performing most of the activities in the mobile money value chain, making business decisions, and taking the financial risk of offering mobile money.

This arrangement is quite common. But that doesn’t mean it’s particularly well liked, by operators, banks, or even regulators.

- At least one operator we spoke to has found its aspirations to extend the functionality of its mobile money service foiled by the bank holding its payments licence; the bank, fearing that the new functionality (bulk payments) would encroach on one of its existing business lines, declined to propose the new functionality to the regulator.

- Banks are not accustomed to performing license acquisition, regulatory engagement, and compliance for a service that will be operated by another entity; when a bank acquires a banking license, it generally intends to conduct core banking operations itself. This is not the case when a bank secures a license so that another company (the operator) can offer customers a mobile money service, and this arrangement can cause strains. For example, banks are justifiably nervous about putting their reputation with their regulator on the line by extending their regulatory umbrella to include a mobile operator, one which may not have the same perspective on and processes for enforcing an anti-money laundering policy.

- Regulators can be left without a clear understanding of risks entailed in a mobile money service if they lack direct oversight of its operations, which can sometimes occur when the service is, practically speaking, run by a mobile operator and not the license holder.

These problems are eliminated in jurisdictions where mobile operators are eligible for direct licensing by regulators—not as banks, but as payment service providers or e-money issuers. In these countries, the same entity that owns the service from a commercial perspective holds the license to operate from the relevant financial authority.

Take, for example, Commercial Bank of Africa (CBA), which is the institution which held the combined value of all agent and customer accounts for Safaricom’s M-PESA, the most famous mobile money service in the world. For CBA, the M-PESA float account is simply a deposit account—albeit a high-transaction-volume one, on which it earns very significant transactional revenues. In this case, the operator-bank relationship is simple—CBA provides a service to Safaricom—and consequently straightforward to manage….

Alternatively, an operator can be a service provider to a bank or a third party that carries out bulk of the activities required to offer mobile money for the unbanked. An example from this end of the spectrum is WIZZIT, a mobile money service in South Africa. WIZZIT contracts with mobile operators to use make use of the USSD channel so that customers can initiate transactions on their handsets, but it carries out the other activities in the mobile money value chain itself.

Of course, more complicated partnerships arrangements can be devised. We conclude “Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked” with a case study on easypaisa, a mobile money service in Pakistan that is run by a virtual organization composed of staff from and Tameer Microfinance Bank and Telenor Pakistan (which owns a majority stake in Tameer). Carefully allocating segments of the mobile money value chain between Tameer and Telenor has allowed both institutions to play to their strengths.

But contracting across firms can be time consuming, particularly when hammering out new kinds of commercial arrangements, and it introduces coordination costs. That’s one reason why some operators opt to own the bulk of the mobile money value chain themselves, and contract with banks only to perform those functions they cannot themselves (such as float holding). Whether or not this kind of relationship should be called a partnership is a semantic question. But it exposes a real tension between a desire to fully leverage the assets and capabilities of a bank on the one hand—which would require a complex agreement and might be prone to stresses—and a desire for control and/or simplicity.

The first step is to understand the components of the mobile money value chain—that is, what needs to happen for mobile money to be offered to customers? There are lots of ways that a value chain can be visually depicted. In our version, activities which create and deliver the mobile money service to customers are shown along the bottom, while support activities—those that are required in order to carry out primary activities—are shown in horizontal bands along the top. In the article, we discuss each of these activities in detail.

The mobile money value chain

How do we work out which entity is best positioned to take on these activities? By evaluating their existing assets and competencies. After all, a basic tenet of corporate strategy is that companies should seek to perform the activities which they are uniquely well-positioned to perform. From our conversations with banks and mobile operators in the developing world, the following picture emerged:

The assets and competencies, relevant to mobile money, of banks and mobile operators

Our research indicates that operators and banks who are aligned, and candid, about their respective strengths and weakness are the ones most likely to have built healthy relationships. The reason is simple. As Nadeem Hussain, the CEO of Tameer Microfinance Bank, put it, “In operator-bank partnerships, each entity has to have the trust to let the other do what they do best.”

US Secretary of State Hillary Rodham Clinton
Welcome note on the Mobile Money Policy Forum: Partnerships for Financial Inclusion in Africa.
Nairobi, Kenya, 1 December 2010.

To shed some light on the issues that can complicate bank-operator relationships, the MMU team is today releasing a new article called “Mapping and Effectively Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked.”

The article is written not just for banks and operators that are in the process of forging agreements with each other; it has also been designed to be useful to operators and banks that are already working together to offer mobile financial services for the unbanked, providing ideas for how roles and relationship structures can be refined in order to promote cooperation.

In the first part of the report, we indentify the comparative advantages that banks and operators bring to mobile financial services. We then describe the mobile money value chain, taking an in-depth look at the activities that need to be performed. For each activity, we ask the question: given their unique strengths, is a bank or an operator best positioned to perform it—or is it best outsourced to a third party?

In the next section, we focus on the nuts and bolts of contracting between banks and operators, describing the range of arrangements that currently exist and documenting some emerging best practices. We also include a checklist of important considerations when banks and operators come together to negotiate, or re-negotiate, their working model.

Two case studies conclude the report. The first features Safaricom, which launched M-PESA with a very simple arrangement with Commercial Bank of Africa but which took a totally different approach when it came to developing M-KESHO, a bundle of more advanced financial services, with Equity Bank. The other is about Telenor Pakistan and Tameer Microfinance Bank, which have created a virtual organization to run the mobile money service called easypaisa.

Over the next few weeks, I’ll be posting a few reflections on the subject of operator-bank relationships on this blog. For now, though, we invite you to read the article and to share your thoughts on it, either in the comments section on this post or by e-mail to mmu@gsm.org

Mapping and Effective Structuring Operator-Bank Relationships to Offer Mobile Money for the Unbanked.

It’s a broad question that the MMU team intends to help answer in the next couple of months.   Because a good deal of ambiguity remains on the value that each stakeholder can bring and the roles they each can play in deploying mobile money, we plan to address other core issues, such as:

• What are the strengths that each party brings to the table?
• What functions and activities can each party own, and which ones can be jointly developed?
• What types of regulations must parties consider that influence the nature of the partnership?
• What principles guide the sharing of costs and revenues?

Though it’s still early, we have some ideas, substantiated in part from conversations my colleague Neil Davidson and I recently had with banks and mobile operators in Kenya and Uganda. As expected, parties do best when they focus on their respective core competencies: mobile operators are strongest driving customer-facing activities such as branding and distribution; banks, meanwhile, are understandably well-positioned in dealing with liquidity management and regulatory engagement.

Importantly, both stakeholders must have a genuine commitment to shaping an alliance that brings mutual benefits. If a partner is not fully satisfied with the negotiated agreement, the partnership – even if initially agree to – will eventually unravel. In launching M-Kesho, for example, senior management at Safaricom and Equity Bank spent many months ironing out a solution which each stakeholder was genuinely content with.

Crucially, what this also shows is that it is possible for banks and mobile operators to compete and cooperate at the same time – a phenomenon in academic circles called “coopetition”. Equity Bank fiercely competes with Safaricom on everything from retail agents to money transfer services to customer loyalty.  But it has neither stopped them from having their own branches as M-Pesa agents, using its ATMs for cashless M-Pesa withdrawals, and jointly developing a sophisticated savings product with Safaricom.  Their approach has shattered an understandable but misguided belief that many still hold in mobile money: that the relationship between a bank and mobile operator is an “either-or” proposition between competition and collaboration. The reality is that both are possible.

I’ll provide an update in a few weeks as we learn more.  In the meantime, if you’re a bank, microfinance institution, or mobile operator who has tangible experience in dealing with some of the above issues, we would be keen on hearing your perspectives.  Additionally, if you would like to see the report touch on a specific topic that has not been mentioned above, I welcome your ideas at asaxena@gsm.org