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Disrupting Payments: How Africa Makes Banking Look Arachaic

Disrupting Payments: How Africa Makes Banking Look Arachaic

A global, mobile solution for cashless remittances — that’s something Steven Sinofsky looks forward to.

Sinofsky is an executive in residence at Harvard Business School, a board partner at California-based venture capital firm Andreessen Horowitz, and an adviser at Box Inc., an online file sharing and personal cloud content management service for businesses. 

For the past 10 years, Sinofsky has spent time informally in Africa talking to residents, non-government organization and government officials.

Personal banking is an old-economy service that Africa is likely to skip, Sinofsky said in a report in Recode.net.

In the U.S., he said, our tech focus tends to be on the innovation going on payments between PayPal, Square and bitcoin. In Africa, almost no one has a bank account, and definitely no credit cards. But everyone has a mobile phone.

Sinofsky talks about the transformative nature of mobile phones in developed and developing markets. For those in extreme poverty, the mobile phone has been equally, if not more, transformative, he said.

From Recode.net.

The most famous mobile banking solution in Africa is M-Pesa (M for mobile, pesa is Swahili for money), which started in Kenya. People there use their phones to store cash and pay for goods. Similar solutions exist in many countries. Even in a place as remote and difficult as Somaliland, I saw these at work recently.

The island country of Madagascar has incredible beauty and an abundance of things not seen across Africa, including natural resources, farmable land and water, not to mention lemurs. Yet the country is incredibly poor, with a countrywide per capita gross domestic product of $400, which puts it in the bottom 10 countries in the world. On average, people live on $1.25 per day.


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Yet technology is making a huge difference in lives there.

Madagascar has three main mobile phone carriers. These are all prepay, and penetration is extremely high, even in the most remote areas. The country is wired with mostly 2G connectivity; there is some coverage at 3G, but it is highly variable. The only common use for 3G is for Internet access using external USB modems connected to PCs (usually netbooks) and shared.

People are anxious for more connectivity, but along with cost, the current state of government will make progress a bit slower than citizens would like.

A huge problem in this type of environment is safely dealing with money. Madagascar’s currency trades at $1 U.S. to 2,500 Madagascar ariary. When you live off of 3,000 or so a day, you’re not going to carry around three bills, so very quickly you end up with a brick of 100 Ar notes. What to do with all those? Where can you put them? How do you keep them safe? How can you even keep them dry in a rain forest?

Mobile “banking.” As easily as you can recharge your phone, you can add money to your
stored money account. You walk up to a kiosk — there are thousands of them — and in a series of text messages with the shopkeeper, you give her money and your phone gains stored value.

With iOS and Android fragmentation, how would these apps work, given what must be finite dev resources? The implementation of this is all through an old-school standard called SIM Apps or Sim Application Toolkit.

This set of APIs and capability allow the installation of apps that reside on your SIM. These apps are simple menu-driven apps that look like WAP sites. They are secure and controlled by carriers. Using this framework, mobile banking has reached unprecedented usage and importance in developing markets, particularly in Africa.

The scenario for usage is quite simple. You charge your phone with money, just as you would with minutes. When you want to buy something, you bring up the SMS app and
initiate a transaction. The merchant gives you a code, which you enter along with the merchant’s identifying code. You then type in an amount, which is verified against your current balance. The merchant then receives a notification, and the transaction is complete.

The whole system is safe from theft because of the connection to your mobile number, two-factor authentication and so on. There is no carrier dependency, so you can easily send/receive to any carrier, though the carrier has your balance. This isn’t an interest-earning savings account, but rather a transaction or debit account (of course, in the U.S., few of us earn interest on demand deposits these days, anyway).

You can also give and receive money from individuals. This is extraordinarily important, given how there can be distance between family or even the main wage-earning in a family. The idea of sending money around to family members is an incredibly important part of the cash economy of low-income people. This market, called “remittance,” is estimated to be over $400 billion in developing markets alone.

Life is easier and safer for those using mobile banking this way. You can count on your money being safe. You don’t need to carry around cash and worry about loss, theft, or water and weather destroying physical currency. You can easily deal with small and exact amounts. As a merchant, you don’t have to make change. It is just better in every dimension.

The carriers profit by taking a percentage of the transaction, which is high in the same way that check-cashing in the U.S. is high (and credit cards, for that matter). The fee is about two percent, which I am not sure will be sustainable, given the competition between carriers. I also think it will be fascinating to see how developed-market companies like Western Union evolve to support mobile payments, as they provide integration points to the developed-market financial systems. It is not uncommon to see a Western Union representative also offering phone recharge and mobile banking services.

In our environment, we would see this as a convenience, like a debit card. But in Africa, it is far more secure and convenient, because you only need your phone, which you will carry with you almost all the time, just as we do in the U.S.

I think the most interesting point of note in this solution is how it essentially skips over banking. If we think about our own lives, and especially those of the generation entering the workforce now, banking is most decidedly archaic. The whole idea of opening an account and dealing with a level of indirection which offers very little by way of useful services — it just feels like there’s a need for disruption.

Our installed base of infrastructure makes this very difficult, but in the developing world that challenge doesn’t exist. It isn’t likely that most people will graduate to full-fledged banking just as we don’t expect people to graduate from a mobile phone to a full-fledged PC.

It also isn’t hard to imagine this type of mobile banking taking off first in the cash-based part of the developed world, where today people pay fees to cash checks and buy money orders, absent a bank account.

The large numbers of check-cashing storefronts located near lower-income areas share much in common in some ways. One example is remittance. Many immigrants in the U.S. are the source for remittance funds going to developing markets. Seattle, for example, has one of the largest populations of Somalians outside of Northern Africa, and they routinely send funds back to their families. Today, this is a difficult process, and could be made a lot easier with a global and mobile solution.

I look forward to solutions like this for our own lives here in the U.S. We see some of this in service-by-service cases. For example, using Lyft is completely cashless. I can use PayPal at merchants like Home Depot. Obviously, we all see Square and other payment mechanisms. Each of these shares a common connection to established banking and plastic cards. That’s where I think disruption awaits.

Will this be bitcoin alone? Will someone, even a carrier, develop and scale a simple stored-value mechanism like that being used by billions of people already?

For myself, and no doubt for many reading this, this transformation is old hat. I’ve seen these changes over the past decade across many countries in Africa and elsewhere. Africa isn’t single-marketplace by any stretch. What is working in Madagascar, Kenya, Somaliland and others might not work elsewhere, or might not work for all segments of a given economy.

It is always worth a reminder how some changes can bring about a massive difference in quality of life.

Read more at Recode.net.