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"The use of mobile telephones to deliver basic financial services to the financially excluded poor represents an unprecedented opportunity. With mobile phones now in the hands of billions, including those at even the lowest income levels, the world is poised to bring unprecedented numbers into the formal economy," according to the World Economic Forum's The Mobile Financial Services Development Report 2011.
"The mobile phone's ability to serve as a universal banking platform can provide stability in the lives of those with very limited means, while unlocking new efficiencies in underserved segments of developing economies."
With mobile penetration in Latin America approaching 100%, and some countries having long passed that watermark, coupled with the overall limited reach of banking services, mobile banking seems a foregone conclusion for the region. But it hasn't really caught on yet, as other regions such as Africa and Asia really embrace it.
BNamericas spoke to Alberto Jiménez, mobile payments leader at IBM, regarding the worldwide trend and what it will take for Latin America to jump on board.
BNamericas: What would you say are the overall trends for mobile banking?
Jiménez: We've created a type of classification for mobile financial services - mobile banking, mobile payments and finally mobile commerce. Different people see this in different ways, but we've been working mostly in the second and third areas, payments and commerce. In that context, we see two trends on a global level.
First are the initiatives that are more relevant for emerging markets, where we're trying to replace cash. The cell phone is understood as an instrument that can do this.
The other trend that is less relevant in the short term for emerging markets is the replacement of plastic - debit and credit cards - with the mobile phone. Our clients are usually interested here in ecosystems where the majority of them have smartphones and data plans. That's where you can use the processing power and the networks to collect information and carry out NFC.
In terms of technology, to replace cash, this isn't via NFC but via remote payments, where the transactions go over the cellular network and not via near-field.
BNamericas: But in emerging markets, cash reigns…
Jiménez: Agreed. McKinsey publishes its Global Payments Map, and in 2009 it estimated that 93% of all transactions in Brazil took place in cash, 98% in Mexico and 99% in Colombia… and it's hard to offer efficient payment methods to people who don't have access to a formal bank account.
BNamericas: But these solutions are really taking off in Asia and Africa. What's happening in Latin America, and what's missing in the region for the implementation of mobile payment?
Jiménez: The World Bank closely follows mobile money and mobile payments for the low-income segment. Nearly 160 pilot programs have been launched on a global level, but there are only five that have scale - defined as at least 1mn active clients - with cases in Kenya with M-Pesa, two operators in the Philippines, another in Uganda. And IBM is the platform behind the largest ecosystem of those - M-Pesa, with 14mn active clients, the most of whom are low-income, who are exchanging nearly US$550mn a month.
And these aren't over smartphones; they're basic devices that don't have data plans.
Unfortunately, none of the programs of scale are found in Latin America. There are a number of pilot programs and some services in operation [in the region]. The GSM Association just published a paper on what's happening in Paraguay, for example, with Tigo. But there are no mobile payment ecosystems with scale today. Even so, we're optimistic; with the two biggest operators in the region and the big Mexican and Brazilian banks, we think there will be one or two markets with scale in the region in the next 24 months.
BNamericas: Specifically regarding mobile payments, there's been a good amount reported on the case in Haiti, with the provision of services following the earthquake that struck that country…
Jiménez: That's right, and it's due to various things happening at the same time. In the macro sense, there were very special conditions - high mobile penetration, low banking penetration - as well as organizations like global NGOs that offered grants and subsidies to those [operators] that launched the service in the market. The Gates Foundation provided two grants for an operator to provide the service. However, the scale is still small.
And with regards to expanding banking services, with this you're not really "banking" the people. You're getting to the point where individuals see their devices as a transactional mechanism. With that as a base, it's easier to offer traditional financial services such as savings, credit, or insurance. But in general, mobile payments make the exchange of money much more efficient, without necessarily providing banking services. It's like a stepping stone to financial services.
BNamericas: Do you see the grants in Haiti as meaning that mobile payments aren't profitable for a company unless there's some additional backing or outside incentive?
Jiménez: Not necessarily, but it definitely helps. Creating scale isn't easy, and it takes time. We see this as an important source of income for operators and banks, in the medium term.
BNamericas: What about regulations in the region? Would this be one of the barriers to the entry of mobile payments?
Jiménez: It's not as much a barrier as in other regions. In the regulatory ambit, there are two extremes. One, such as in the Philippines, is where the telco acts as a bank; it can handle deposits. The other is extreme would be India, where the government is protecting the bank licenses upfront. Latin America is in neither of the extremes; the regulation is fairly moderate. In countries like Peru, Mexico and Brazil, there have been definition of standards - this is important for industry development.
The barriers are more in the carriers figuring out the issue of how to associate in the ecosystem - how a telco and a bank can work together. I'd say that's the main barrier.
BNamericas: Some countries like Chile and Brazil are beginning to see some movement in the MVNO space. Do you see this as an enabler in defining the bank-telco relation?
Jiménez: Yes, we're following MVNOs in Brazil in particular. We don't see it as a necessary factor for banks to enable mobile payments to use that model, but we do see it as a facilitator in the absence of reaching agreements with telcos.
I think the message is that we believe there is a type of agreement that can be reached that provides balanced benefits for telcos, banks and the other actors. This isn't a zero-sum game if you strike that balance.
BNamericas: IBM recommends an on-demand cloud solution for its mobile payment platform. Why?
Jiménez: The word that best describes the benefits of IBM's mobile money cloud is "flexibility." It's a central platform that reduces the initial investment needed in capex for a telco or bank looking to get into this space. It's a pay-as-you-go model that moves into opex to enable ecosystems. We understand that companies might have doubts about this and may not want to make large upfront investments.
Fundamentally, mobile money cloud connects a number of sources and destinations. You can receive government subsidies, international remittances; your employer can pay your salary. But it also gives you options as to where these funds go, connected to basic service providers - water, electricity, telephone - or even to governments for the payment of fines. It puts the user's funds on a central platform.
BNamericas: What would you say are some of the weaknesses or threats for this platform?
Jiménez: I don't know about the platform. There are other threats that worry me more about the ecosystem, such as the large investments some of the big regional players are making. I think those investments don't necessarily have clear returns, and that may affect innovation and adoption. So it's more a risk on the ecosystem level.
BNamericas: The end-users' trust in these platforms is a big issue. On the other hand, telcos and telco services often lead the list of consumer complaints in the region. How can that gap be bridged?
Jiménez: In our experience in other regions, we've seen that the ecosystems that have gotten scale have had certain characteristics. One of those is trust, which is specifically reflected in liquidity. If you're a poor person in a rural area and you have US$100, and you deposit those US$100 in your mobile wallet, you need to rest easy in knowing you can later easily redeem those US$100. The person needs to know that those funds aren't "trapped" in the ecosystem or difficult to get out. So the user needs to see the system as liquid.
The other issue has to do more with the technology. We've seen that in some ecosystems, the general system sometimes isn't reliable - that the money was sent but never received, then you make a complaint about it but no one answers you. That person is a client lost forever. The platform needs to work all the time, every time.
Security is also an important issue regarding trust - in that nothing will happen if I lose my cell phone, that no one will have access to my funds.
Previous to his role as IBM’s global leader for mobile banking and payments initiatives, Alberto Jiménez was a senior consultant with the banking industry for IBM Global Business Services. And before joining IBM, he did equity research and business development work for Prudential Securities. He has more than 12 years of experience in banking strategy and business development.
Jiménez is a graduate from Harvard University and Emory University. He sits on the advisory board of the Mobile Money Transfer Association and is part of the Schools Admissions Committee of Harvard University for New York state.
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This year IBM celebrates its 100-year anniversary. In 2010, at nearly 427,000 employees strong, it realized global revenues of US$99.9bn and net income of US$14.8bn.