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Beyond Paper: Mobile Money

by ChrisCook Wed Mar 17th, 2010 at 06:41:41 AM EST

This post arose out of my participation last week at the Digital Money Forum in London which I blogged as  Mobile Money.

I subsequently posted a response to another post concerning Peer to Peer lending on Phillip Blond's Disraeli Room blog on the Res Publica site. As a result, I was invited to cross post.

The Money 3.0 meme is beginning to get some traction - quite a few people appear to think that Peer to Peer Finance may be the way things will go....

Beyond Paper: Money 3.0 | ResPublica

Chris' report arose from the first post from ResPublica's Civil Society and Social Innovation Unit in its 'Future of Money' series. That post concentrated on peer-to-peer lending and loan sharking, engendered some thought-provoking responses and can be found here

It has been a long time since I attended an event as stimulating as last week's 13th Digital Money Forum in London where my contribution was to briefly outline a future Money 3.0 financial architecture where banks evolve from being credit middlemen to a role as managers of direct 'Peer to Peer' credit creation.

While predictions are difficult, particularly about the future, actual developments on the ground are proceeding at a phenomenal pace in the developing world. Speaker after speaker outlined how different countries are converging in their use of mobile phones for payments.

Where The Money Is

When asked why he robbed banks, Willie Sutton famously replied.....'because that's where the money is'. But in the developing world, banks are typically few and far between, ATMs are even rarer, and including alternative money transmitters like Western Union even rudimentary access to cash and payment services is difficult at best. Other banking services like credit are practically non-existent other than from local money-lenders at usurious rates.

Mobile telephone companies are moving into this financial services vacuum at a phenomenal rate. All of them establish networks of air-time re-sellers, typically local shops and agents, and users make pre-payments for mobile phone use. This in itself has had interesting side effects; one major African operator was obliged by an Central Bank to cease selling high value Phone Cards, because these were routinely being used as currency, and - to add insult to injury - holding their value better than the Central Bank issued notes.

A Ghanaian mobile payment provider outlined how conventional access to cash is available in Ghana from only around 2,000 locations, for a population of 23 million: whereas his network alone (with over 50% of the mobile phone market and over 8 million subscribers) already has, through its network of re-sellers, 300,000 points of presence, accessible to 90% of the population.

Using cheap and cheerful basic mobile phones even the least educated people can simply and easily make micro-payments to each other by text message or Bluetooth, and deposit and withdraw cash, via the network of agents.

While in other countries mobile 'Telcos' either partner with or even buy their own banks to facilitate micro-payments, this Ghanaian operator's shrewd approach is to work with nine banks initially, all of whom were queuing up for the aggregated 'micro' deposits.

In Colombia, a new service provider's business model is simply to bring a bank together with a Telco and the tens of thousands of local 'Mom and Pop' shops which underpin Colombia's economy. Perhaps the best known example is Safaricom's MPESA payment system in Kenya, which had 15 million subscribers by the end of 2009, and is now branching out into areas such as crop insurance.

Credit where it's due

The point I was making in my presentation was that there is no reason why the shop resellers who sell airtime - and who take in cash deposits and provide access to cash as part of the mobile money service - should not dispense with cash and receive and extend interest-free (but not cost free) credit from and to customers instead.

Such credit may be created and settled within a credit clearing union architecture. All that is required for this is a mutual guarantee agreement, similar to a credit union's 'common bond'; a service provider (banking as a profession) to set and manage guarantee limits and defaults; and an accounting system.

Such credit clearing has been routine between tens of thousands of Swiss businesses since 1934 on the WIR credit clearing system. More recently, in Ecuador, the FactoRepo system currently under development will enable VAT-registered businesses to discount their invoices directly with the Central Bank and thereby free up working capital. Neither Swiss Francs nor Dollars, respectively, actually change hands in these systems: instead credit obligations of businesses (trade credit) is simply used in payment of other obligations within a framework of trust, the WIR's being private, and FactoRepo's, public. The Swiss Franc and the Dollar are used only as the pricing reference or value standard.

Fast Forward

I believe that within a remarkably short time the developing world will be using mobile payment utilities at a minute fraction of the cost of the baroque and outrageously expensive bank-centric legacy systems in the developed world. It will only be a matter of time before such systems spread virally here, too.

The enabling factor for pervasive spread in the First World will be forms of credit and currency which are based upon a new approach to investment in the use value of land/location, and of energy, both of which are almost universally acceptable in exchange.

But that is another story, and awaits the further decomposition of our terminally dysfunctional financial system of 'Zombie' banks.

STOP PRESS...and specially for Sven,there's Nokia Money.

Nokia to pilot m-commerce project in India

The handset leader has tied with YES BANK and would pilot the project in Pune, the decision will fillip the m-commerce in India

I am not breaking the terms of any NDA in revealing that the Nokia research centre in Nairobi is involved in these developments. Basically Nokia is working on how to support the next billion new users.

One technology that is very interesting is Cognitive Radio. Bit of a Smart Grid really. Most connected mobile devices operate within a narrow frequency band. With GSM it might be anything in the 800 - 2100 MHz range, in different networks. This is all prime air estate as almost all radio frequencies are already licenced, But, and this is the crucial point, not all frequency bands are fully used at all times. Networks are designed for peak use - and even peak use can be dealt with locally by putting in more nodes temporarily e.g. a 60.000 capacity stadium music performance from a big band might generate thousands of uses of the network within a short time period.

What Cognitive Radio will do, when it works and when it is licenced, is to allow suitably equipped mobile devices (not yet existing) to connect to the network over a range of frequencies, or channels, as they are available. The network would decide (smart gridwise) at which frequency it will let you connect OR charge you a premium for bandwidth during peaks.

The problem is adjacent channel interference. GSM uses the mind boggling Gaussian minimum-shift keying (GMSK), a kind of continuous-phase frequency shift keying. But I'm sure the boffins will come up with something.

You can't be me, I'm taken

by Sven Triloqvist on Wed Mar 17th, 2010 at 07:45:59 AM EST
This blog post by Dave Birch - who founded the consultancy which holds the Digital Money Forum, and liked my Money 3.0 meme enough to ask me along to present it as a scenario - is really thought provoking as to the potential for good (and of course, bad) of Mobile Money.......

Digital Money: Information rules OK

Forum friend Bob Hettinga sent me a copy of a paper on Computer-Mediated Transactions (18th January 2010) by Hal Varian of Google and I enjoyed reading it on a recent train ride. One of the points that Hal (who you may remember from the early days of cyberspace with the book "Information Rules" written by Hal and Carl Shapiro) makes is that computer-mediated transactions generate information that manual transactions do not and he suggests that using this information might be one of the key areas of competition in the future. I think this is spot on (which is why I am drawing your attention to it, obviously) and I have mentioned before about the opportunity to use payment-related information to generate additional value for customers and merchants alike.

This was echoed a couple of days later at an Evershed's "Thought Leadership Dinner" that I was invited to. Shashi Verma from Transport for London gave a very interesting after-dinner talk in which he mentioned that the use of information had not been part of the business case for migrating from cardboard tickets to Oyster cards, yet analysis of Oyster information is now a crucial process that saves literally hundreds of millions of pounds every year by directing expenditure more efficiently. Very small changes made to train timetables, for example, using the anonymised journey data from Oyster, can reduce average journey times or overcrowding in ways that simply could not have been predicted.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Mar 17th, 2010 at 07:59:50 AM EST
[ Parent ]
the use of information had not been part of the business case for migrating from cardboard tickets to Oyster cards,

These cardboard tickets were also electronic. What data does the Oyster card provide that couldn't have been obtained from the earlier tickets?

by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 17th, 2010 at 08:13:50 AM EST
[ Parent ]
The Oyster allows you to look at all the trips made with a particular card, whereas the carboard ticket just tells you about the single trip it was used for.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Wed Mar 17th, 2010 at 08:20:22 AM EST
[ Parent ]
I can see how it could help in setting prices, but how would it help for scheduling trains?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 17th, 2010 at 08:23:13 AM EST
[ Parent ]
You can correlate the times of trips there and back? Say, if I take my morning commute half an hour earlier you expect me to take my return trip also half an hour earlier, or something? Or maybe an hour later because I work longer on some weekdays than others?

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Wed Mar 17th, 2010 at 08:31:22 AM EST
[ Parent ]
Note the reference to anonymity.

It is the ability of the card to track real time movements of people collectively - ie the flows past the readers and therefore cardholders' presence shortly after on platforms - which is useful, I think.

I have noticed on the Tube that trains often seem to terminate early (to shuttle back), and re-route on an ad hoc basis - eg at an intersection like Camden Town on the Northern Line - far more than they used to.

I suspect that sophisticated analysis of people flows from Oyster data may be driving this traffic management.

A Diary from Bruce McF or DoDo on this might be interesting.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 17th, 2010 at 10:49:05 AM EST
[ Parent ]
But you could have done that with the old electronic cards. Your other message about telphone switches makes me wonder whether the problem was more mundane - maybe the old electronic system involved thousands of lines of undocumented code in some obscure dialect of PL/I or COBOL, which you didn't get close to unless it was absolutely neccessary. So the data was there in the old system, but unusable.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 17th, 2010 at 11:39:05 AM EST
[ Parent ]
It wouldnt be that much of a problem if it was Written in COBOL, it's a very straightforward language. it has a very undeserved reputation for complexity.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Mar 17th, 2010 at 12:03:36 PM EST
[ Parent ]
Yes, but they've probably pushed anybody who knows it into early retirement long ago...
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 17th, 2010 at 12:04:35 PM EST
[ Parent ]
there is that(Says the qualified but vastly out of practice COBOL programmer)

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Mar 17th, 2010 at 12:08:19 PM EST
[ Parent ]
Plenty of practicing Cobol and Fortran experts in Russia though...

You can't be me, I'm taken
by Sven Triloqvist on Wed Mar 17th, 2010 at 12:33:52 PM EST
[ Parent ]
use of information had not been part of the business case for migrating from cardboard tickets to Oyster cards [2003]

That statement is preposterous. What was the "business case" for building a new payment system, if not optimizing price structure of existing, zone-rated transit? Kewl factor? I think not.

Our examples so far have involved switching costs, like those to Bell Atlantic of replacing switches worth billions of dollars. Do not be misled: even when switching costs appear low, they can be critical for strategy. A million customers, each of whom has switching costs of $100, are just as valuable, collectively, as a single customer whose switching costs are $100 million. The point is that you must compare any switching costs to revenues on a per customer basis and add up these costs across your entire installed base to value that base. These principles apply equally to customers who are businesses or households. [Shapiro and Varian, 1999: 108]

Diversity is the key to economic and political evolution.
by Cat on Wed Mar 17th, 2010 at 09:33:40 AM EST
[ Parent ]
Quite. Although many carriers burnt their fingers with 'push' services a few years back, leading to a greater focus on 'pull', the marketing people are still salivating at the thought of individual profiling so they can sell an individual more stuff.

OTOH many of the technical capabilities that get built into any technical network system in order to make it more profitable, tend to be 'misused' by subscribers. Many, especially young people, 'game' systems to reduce their own costs. And when there are enough smart 'gamers' (i.e. millions), they do a better job of 'balancing' the system than a hundred engineers sitting around thinking what customers might want to do. Often these new capabilities do end up being profitable for the carriers, but not in the way they planned.

You can't be me, I'm taken

by Sven Triloqvist on Wed Mar 17th, 2010 at 10:28:42 AM EST
[ Parent ]
re: carriers

My choice of excerpt was semi-incidental. The internet revolution fantasy slathered on revenue maxing strat in that book is unavoidable. Still Oyster is a volume tool.

A characteristic common to telecom and mass transit enterprises is, both are general utilities.

Another is rate structure being a function of distance between origination and termination of service per purchase per person. That is, both producers meter length of service by zone transited, regardless of mode or payment method.

The problem then facing bureaucrats masquerading as civil engineers of unified transit operations is usually, fundamentally, revenue collection. The value of information lies not in "individual profiling" or idiosyncratic preferences. For none would argue, mass transit riders could, did, and do easily "game" a rudimentary system of "information" required to calculate price of passage.

Particularly bus fare.

I've seen it with my own two. Ridiculous situation. Not even in NYC, still a coin and paper subsidized operation, bleeds like that. omg. Marginal rate of recovery of losses attributable to that division of the London metro system alone had to make the case for installing Oyster readers.

Passenger car congestion notwithstanding,

It takes £1.8 billion (US $3 billion) to keep London buses running, but riders only pay £1.1 billion (US $1.8 billion) in fares [probably an improvement YoY since 2003], creating a 40 percent subsidy at the expense of motorists. The London Underground subway system is more efficient with £1.8 billion (US $3 billion) in fares collected to cover £2.4 billion (US $3.9 billion) in expenses, meaning riders only enjoy a 25 percent discount at the expense of drivers. Read more...

Diversity is the key to economic and political evolution.
by Cat on Wed Mar 17th, 2010 at 12:50:09 PM EST
[ Parent ]

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