Most of us have heard the saying:  “It takes a village to raise a child.”  Within the mobile money and digital payments sphere, it takes an ecosystem.  An ecosystem of financial institutions, merchants, government entities, and, of course, consumers.  This blog describes how a thriving ecosystem is needed to build trust and liquidity to prevent consumers from immediately “cashing out” when they receive mobile money.

Brief look at the predominant M-Pesa use case:  Person-to-person transfers (P2P)

M-Pesa in Kenya is recognized as the most successful Mobile Network Operator (MNO)-driven mobile money in the world.  With Safaricom holding about 80% market share of the wireless service market in Kenya, it is not surprising they have been able to build a strong agent network and generate positive network effects.  That said, M-Pesa is also far more convenient and less expensive than prior methods for transferring money there.

Late last year, CGAP blogged on Ten M-Pesa Myths stating that most M-Pesa consumer use cases are for P2P transfers or mobile top-ups:

“Although a broader ecosytem is growing to facilitate usage of M-PESA at merchants and to pay school fees, for example, it is still primarily used to send and receive money, buy airtime top-ups and as a transactional storage account.”

Another CGAP blog with the provocative title, “Better than cash, or just better cash?” reminds us there is MUCH physical cash involved with M-Pesa at both ends of P2P transactions:

“Indeed the predominant practice the world over is for senders to deposit the cash just prior to sending it, and for recipients to withdraw the cash immediately and in full. From the customer perspective, it’s a cash-to-cash service, and who cares what happens in between as long as the cash gets there.”

Another way to think about this is that for the P2P use case, M-Pesa enables a much more cost-effective and fast vehicle to transfer physical cash between people.  Yes, cash is still king… in Kenya and many other countries.

How to incent consumers to keep their money digital

It takes a thriving ecosystem in order for a consumer to feel comfortable keeping their money in their digital bank account vs. immediately cashing out.  An “open-loop” model with multiple issuers bringing in consumers and multiple acquirers to bringing in merchants is of paramount importance.

Consumers with a new digital cash account at their bank need to feel confident that—although they can get physical cash out from POS terminals in stores, or from ATMs, or from banks—there is no good reason to do so.

This confidence will be earned over time.  It will NOT happen quickly as there is much evidence many people and cultures feel comfortable with some cash in their pocket (or under their pillow). 

The right strategy for ultimately replacing the need for physical cash should be to, first, infiltrate it.  Make it so easy for consumers to go in and out, that eventually they do not bother going out any more.  If consumers can also earn interest by keeping their money in their new bank account… or elect to receive valuable offers from merchants whom they frequent, then more people will want to keep it digital.  Again, this will take time.

Ignacio Mas, an independent consultant, agrees with this strategy and blogs about taking down the barriers of existing—and typically incompatible—MNO-driven mobile money initiatives.

With government agencies supporting the country’s new digital cash initiative by sending, for example, pension payments or health care benefits in digital format—directly to the consumer’s bank account.  These types of programs will provide much needed liquidity into the system.

Another critical element is merchant acceptance.  Acquirers are needed to sign up merchants so consumers know they can keep their money digital, and it will be accepted as a means of payment.  And compatibility with existing POS machines makes it much easier for merchants.

The new digital cash system needs to be as “open” and inclusive as possible while, of course, not sacrificing security.  Multiple issuers, multiple acquirers, any mobile service provider, any mobile phone, any user interface, any POS terminal, any ATM, etc.

This new digital cash payment type should also be not only for P2P, mobile top-ups, cash in/cash out and bill pay, but also for in-store purchases, P2M, and eCommerce/online purchases.  Existing MNO-driven mobile money solutions have not reached this level of inclusiveness.

Yes, it does take an ecosystem to “raise” a successful digital cash project.  Let us know what you think.