Econ_May_05_2018

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The Economist May 5th 2018 7
FINANCIAL INCLUSION
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1
SPECIAL REPORT
it work has not been straightforward. Agents delivering the cash
would take a cut. Almost all Pakistanis have a digital identity
stored in a national database that helps themopen a bank ormo-
bile-money account. But giving BISP recipients debit cards linked
to this so they could get themoney froman ATM also sometimes
meant that middlemen took the cards, withdrew themoney and
skimmed a commission. Mobile money works better, but it still
usually involves a visit to an agent. The number of mobile ac-
counts held by women in Pakistan rose by an impressive 4m in
the 12 months to September last year, to 7.3m, but those held by
men increased by an evenmore remarkable 12m, to 25.6m.
Similar obstacles slowdown the move from “cash-in-cash-
out” (CICO) systems to those inwhichmobilemoney is accepted
for day-to-day purchases. (Easypaisa is largely an “over-the-
counter” system in which both sender and recipient use cash
and the digital money moves from one agent to another.) The
aimis to increase the number ofindividualmobile accounts, and
then ofmobile payments. But so long as other shops accept cash,
an individual shopkeeper has little incentive to accept electronic
payments. And a new study byMcKinsey finds that CICO is still
crucial to current businessmodels formobilemoney, accounting
for about 60% of profits (see chart).
Cash is here to stay. “It works quite well,” notes McKinsey’s
Ms White drily. Even in Norway, where digital payments have a
bigger share than anywhere else, 17% of all payments are still in
cash. But digital payments will become easier and more com-
mon. “Tap-to-pay” methods using near-field communication
technology that have taken off in Europe, and the EFTPOS (elec-
tronic funds transfer at point ofsale) machines ubiquitous in rich
countries, may be supplanted in many developing ones by an
app on a small retailer’s smartphone. In Pakistan, as in much of
theworld, this is likely to be one that can read a QR code. M-PESA
in Kenya, for example, is rolling out “scan-to-pay” aswell as “tap-
to-pay” services among itsmerchants.
Although cumbersome, electronic payments are possible
on a feature phone, and some such phones have cameras that
can read QR codes. But a smartphone makes them much easier,
raising another tension: between feature-phone-based services
and internet-enabled phones. In Pakistan the local subsidiary of
FINCA, a global non-profit microfinance network, has a joint
venturewith FINJA, a local fintech, marketingamobilewallet for
smartphones called SimSim. That seems perverse in a country
where smartphones account for only about a quarter of mobile
connections. As elsewhere, however, that proportion is rising
rapidly thanks to cheapChinesehandsets. QasifShahidof FINJA
argues that in the modern world those without a smartphone
lack a digital identity and are not really “included”. Designing
systems for them that rely on feature phones is “a ploy for people
to continue to belong to the have-nots”.
A final tension is between competition and the concentra-
tion implied by network effects. Rich countries have burgeoning
choices. Sit in a taxi in Singapore and thewindow is obscured by
stickers advertising different ways to pay for the ride—credit
cards, debit cards, stored-value cards and any number of smart-
phone apps. Shopcounters groanundertheweight ofall the EFT-
POS machines. But in frontier markets the brave pioneers ofmo-
bile money tend to become near-monopolies. M-PESA has 80%
of the market in Kenya. In Bangladesh the central bank has li-
censed 27 services, and Kamal Quadir claims a market share of
only 60% for bKash. But his network of 176,000 agents is hard to
match. As he says, “you need network effects and scale to be ef-
fective.” In Pakistan, Easypaisa and JazzCash, its biggest rival,
have amarket share of about 85% between them.
One way of both fostering greater take-up of digital finance
in the short term and mitigating the long-term risks of monopo-
lies is to embrace “interoperability”, allowing payments across
different systems. To this end the Gates Foundation has collabo-
rated with a number of fintechs, including Ripple, a highly val-
ued distributed-ledger developer, to create free open-source soft-
ware. The result, a systemcalledMojaloop (mojameans “one” in
Swahili), makes it easier to deploy interoperable payment plat-
forms. The idea is to ensure that the very poor will have access
whatever happens to the rest of themarket.
For now, intense competition inmost countries means that
disadvantaged consumers should indeed benefit from the rise in
mobilemoney. But competition is fierce in part because network
effects imply that the winner takes all. And as transferring mon-
ey gets ever closer to the goal of free, frictionless, real-time pay-
ments, what will matter is not so much the process itself as the
additional services the provider is offering. 7
CICOnomics
Mobile-money economics in emerging markets
2017, % of total baseline revenue
Source: McKinsey global banking
practice, March 2018
*Includes deposit insurance
†Includes net interest margin
Accounts nil
Cash-in-
cash-out
Transactions
Other
Total
Revenues† Profits Costs*
0 25 50 75 100 0 – + 25 25 0 25 50 75
BLOCKCHAIN HOLDS GREAT potential for improving
payment systems, but for the moment that potential re-
mains largely unrealised. In March Swift, a Brussels-based ser-
vice owned by 11,000 banks that handles more than half of all
cross-border interbank payments, said further progress was
needed before distributed-ledger technology “will be ready to
support production-grade applications in large-scale, mission-
critical global infrastructures”. But it is coming, and cross-border
payments are in its sights. Also inMarch, at Money 20/20, a pay-
ment-industry gathering in Singapore, Ravi Menon, managing
director of Singapore’s central bank, argued that one of the stron-
gest possible uses for blockchain technology is to “facilitate
cross-border settlements”. Many think that Swift’s current pay-
ment systemwill move to the blockchain in the long run. In 2016
ICICI, an Indian bank, and Emirates NBD of the United Arab
Emirates successfully tried out a networkbuilt by Infosys to han-
dle remittances from the Gulf to India. Ant Financial has pub-
lished49blockchainpatents,more thananyother companyany-
where. Stefan Thomas of Ripple says that 100 banks worldwide
are committed to deploying his firm’s “interledger protocol”
Blockchain and remittances
Not to the swift
Cheaper cross-border transfers are comi ng
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