Hanging on the line

Apr 16th 2015 |

Mobile payments are making significant headway all over the world. Gartner predicts that 245.2 million people will make a mobile payment in 2013 (an increase of nearly one quarter year on year) making global mobile payments worth US$235.4 billion (up 44% from last year).

Cash is still widely used in Latin America but collecting in remote areas is expensive and dangerous. The region has more mobile phones than televisions or even people but 60% of the population remains un-banked. Lack of security makes companies eager to reduce collection costs and risks. Similar conditions have given birth to spectacular growth of mobile payments in other emerging markets such as Kenya.

However, with the notable exceptions of Paraguay, Colombia and Haiti, where there has been some progress, this has not been the case in Latin America. Treasurers who were expecting mobile payments to be the cure for cash handling challenges have been disappointed. Juan Pablo Mojica, Nestlé’s Latin America treasurer is one of them. “We have operations in 22 countries including the Caribbean islands. The problem is big,” he says. Many of Nestlé’s clients are small shopkeepers in isolated areas who pay the company in cash.

Mobile phones could allow for easy, secure and cheap cash transfers. Some schemes don’t even necessitate having bank accounts. So, why hasn’t electronic money replaced cash collections in Latin America yet?

The region is rich in diversity. Existing bank infrastructure, incentives and the lack of enabling regulations are some of the common factors that have delayed the uptake.

What mobile payments?

First of all cash remittances, rather than mobile payments were the primary and most successful product within the range offered in East Africa, Paraguay, Haiti and all countries where there has been mobile money adoption. “In some African countries the only technology available was mobile phones and it became the way to make payments,” says Mojica. “Here there is a banking infrastructure.”

True, infrastructure for remittances and other financial services are more widely spread in Latin America than in some parts of Africa.

Additionally, the growing network of ‘corresponsalías bancarias’ (where banks use retailers’ branches, like supermarkets or pharmacies to receive payments, among other transactions) offers high levels of financial access in some countries, although that does not necessarily translate into financial inclusion. This may inhibit mobile payment growth.

In the report ‘Mobile Money in Latin America’, Camilo Tellez and M Yasmina McCarty state that clients receiving remittances may have a mobile wallet but if the transaction is done through an agent, they tend to cash out the full balance of any monies received. They have no incentive to store money in their phones, “making it difficult to introduce e-wallet based money transfer or payments.”

Educating customers to make other types of transactions using their mobiles is one way to overcome the challenge. A Mobile Money for the Unbanked (MMU) survey found that the majority of successful mobile wallet solutions are offered by mobile network operators, rather than banks.

Why have carriers not taken the lead in Latin America?

The region’s bank sector has been lobbying successfully to stop carriers from offering mobile financial services. Governments have refused to give mobile operators a monopoly in this market, forcing them to make alliances with banks.

Banks often charge for services and have been slow to encourage lower-cost mobile payments. For instance, banks in Mexico charge customers both to take out money from ATMs and if they use a rival’s ATM.

Mobile payments can only be cheap if there is critical mass, and that hasn’t yet been achieved. To tackle this, some providers are making alliances with governments and other agencies which regularly send payments to large numbers of people (such as social benefits).

The large number of competing technologies and business models hinders development. The market still needs consolidation. “In the future, only two or three models will prevail. The successful ones will have to talk to each other to achieve the scale needed,” says Sergio Ramos, commercial director at Transfer Banamex (a Citibank and America Móvil joint venture).

Once customers start using their mobiles as true electronic wallets, making peer to peer payments in stores, shopkeepers will then have mobile money available to pay to the companies that supply them.

“If people start buying our tortillas with their mobile phones, we will be able to collect electronic money from the shopkeepers,” says Fernando Rosales, corporate treasurer at Gruma, a globalised Mexican food company.

Consumer trust and incentives

Often, the un-banked prefer to stay that way. A cultural change needs to happen in order to achieve mass adoption. Winning consumer trust is a major challenge, both from the point of view of security and ease of opening accounts. Some agents have simplified the process, removing bank branches as a potential impediment. Accounts can be opened at convenience stores or by simply sending a text or data message.

Incentives are important too – and not only from banks and carriers. Corporates themselves may have to use them to promote the use of electronic money. “We collect 60% in cash. We offer discounts to customers that pay with electronic money. We also ask the banks to do their bit by offering prize draws,” says Rosales.

Some mobile solutions do not even require accounts. Electronic wallets can be linked to a mobile phone account and the funds/ credits of all users are pooled in one common account under a bank’s custody. The bank is also in charge of processing individual transactions.

However, not having an identifiable client associated with an account could open the door to fraud. The ‘know your customer’ (KYC) rule is key to mitigating this risk. Carriers say they know the client, the account being associated with a SIM card means they already have the client’s basic information.

Updating the regulatory framework

Regulation is key to success. Opening bank accounts with minimum information requirements, or with carriers directly, only works in those countries where regulation has been updated to allow it or where there is none. This was the case both in Kenya and Paraguay where legislation followed developments.

Local law and practice differ widely across the countries of Africa. “In common law jurisdictions, which fit the bill for instance in Kenya, the absence of laws are often more fruitful ground for the development of mobile payments. In civil law jurisdictions (which predominate in Latin America), players may feel that what is not expressly regulated is not allowed,” says Camilo Tellez, technology and business model innovation manager at the World Bank’s Consultative Group to Assist the Poor (CGAP). Companies are scared of launching and then having the service shut down. “This happened to Tigo, (a mobile services company that has successfully spread the use of mobile money in Paraguay) when they launched in Bolivia.”

Now governments are providing more legal clarity and the private sector is starting to move. Mexico, Peru and Colombia are among these. Argentina, though, is very restrictive and client acquisition costs are prohibitive.

Aldo Mendes, the deputy governor of the central bank of Brazil, says the country intends to create the basis to promote payments and the use of virtual accounts as “there are more mobile phones than people. The idea is to promote financial inclusion not by traditional means and bank branches. The mobile network has coverage of the entire country.” Enabling laws are in progress.

Chile is also working towards a more supportive regulatory environment. “Regulation has been the main obstacle here,” says Rodrigo Solis, country manager Chile at Kuapay, a mobile payments application provider. “A carrier is not allowed to provide financial services without a bank license.”

This is about to change. Legislation for top up cards is being updated so users can make payments and other transactions with their mobile phones.

Perverse incentives

Finally, physical cash is a serious competitor for mobile money, especially where taxes on financial transactions exist as it perversely encourages the continued use of cash. Colombia is a case in point. Although gradually being phased out, there is a financial transaction tax levied on any movements on a bank account. “Being paid in cash is good business for us,” says one treasurer. “We receive a million dollars in cash every day. With that I pay my suppliers without paying the tax.”

Even so, Colombia is one of the most active countries in promoting financial inclusion through the use of mobile money, having changed other regulations and created a special financial institution to this end.

Throughout the region, once the market consolidates and the right regulation, incentives and customer education are in place, the future could be rosy for mobile payments. Governments know the benefits that mobile could bring where financial inclusion is a priority and are working to adapt their regulatory frameworks. Banks are aware of the competition telecoms can give them among the unbanked sector and are now finally developing solutions for the segment. Credit card and software companies are also working on multiple projects throughout the region. Watch this space.

Managing your cash on the move

Treasurers are also being offered mobile solutions to allow them to authorise and initiate payments from their mobiles. But many are still cautious, security being one of the main concerns.

“I don’t feel comfortable executing operations on a mobile, mainly because I consider it’s still in a development phase and I wouldn’t like to have security or system problems. It would involve a big change in our company procedures, but I see a lot of value in this since we are in the process of centralising cash management,” says Victor Zegarra, treasurer at Andrade Gutierrez, a Brazilian infrastructure group. “Bank account signatories travel frequently, it would be great to be able to authorise operations securely and efficiently from a phone anywhere in the world. In our case, we need two signatures to authorise any bank operation. This gives more security to the process, but we always need to have two people available.”

Mariano Tannenbaum, treasurer at Arcos Dorados in Argentina adds: “I would use it once the security is proven and after validating it with our audit department.”

A treasurer from one of Chile’s largest companies says that he would be ready to approve payments through his smartphone, “But only by accessing SAP and from there generating the payment instruction via a host to host connection. I would not use the phone to initiate the payment in the bank portal. When I send a payment I want to make sure I validate the custody chain and the accounting and other processes.”

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