Picture courtesy of MicroSave

Question: MicroSave’s latest discussion paper on branchless banking in India portrays a decidedly optimistic picture. How did you arrive at this and what are some of the positive conditions you see?

Graham Wright, MicroSave: India has huge opportunity to leverage the potential of e/m-banking and build a cash-light economy. In addition to its cutting edge information technology industry and relatively dense population, the Government of India is clearly determined to achieve financial inclusion through digital money and is taking aggressive steps to see this happen.

The gradual regulatory evolution to support business correspondent network managers (BCNMs) and banks in their outreach efforts continues – and the results are beginning to emerge. While the emphasis continues to be on numbers, the targets are such that large scale outreach infrastructure is being built in a short time frame, with an agent covering every village with a population greater than 2,000. This, coupled with the government’s resolve to move to cash-based subsidy transfer and social security payments systems, will ensure transactions. Institutions such as the Unique Identification Authority of India (UIDAI) could greatly ease customer KYC and authentication, and the National Payments Corporation of India (NCPI) has already built a national switch for inter-bank mobile transactions. This infrastructure could play expanded roles as systemic back-bones that support different players and bring about interoperability.

Question: The services necessary for financial inclusion are much broader and so what are the anchor or lead products for building agent-based branchless banking systems in India?

GW: Two key products have emerged to support the growth of agent or business correspondent networks. First, there is a growing range of government payments that are being processed through e/m-banking channels. Specifically there are two main programmes that account for Rs.462 billion ($9.2 billion) in money flows in 2011-2012 alone. The National Rural Employment Guarantee Scheme (NREGS) supports the poorest households by paying them for 100 days of assured work each year, and the National Social Assistance Programme offers old age pensions, widow pensions, disability pensions and others. While only a limited proportion of these payments are currently being processed on e/m-banking platforms, the government is keen to make all these payments using e-money. Future government programmes, including monetising those currently delivered in-kind (e.g. fertiliser and domestic fuel subsidies), may well be paid through e/m-banking infrastructure. These G2P programmes could provide the transaction volumes for sustainable agent networks, the massive rollout of bank accounts and potentially the beginning of a cash light ecosystem.

Second, banks and BCNMs are harnessing the huge potential of domestic remittances from migrant labour in cities across India. For example, the cities of Mumbai and Surat alone are believed to be the temporary home to about 10 million migrant labourers remitting $10-30 each month. These remittances have created another anchor product for agent-based e/m-banking initiatives. The SBI Tatkal product in particular has seen spectacular success.

Question: The anchor products you mention are predominantly payments whereas financial inclusion is defined by the Government of India as a broad suite of credit, savings and insurance services. Why are payments seen as anchor services and would payments later lead to other kinds of financial services?

GW: These anchor products offer a great opportunity for unbanked customers to experience banking, and therefore have the potential to accelerate new product adoption and thus financial inclusion. And it is quite clear from all MicroSave’s analysis that BCNMs and their agents will need to deliver a variety of products to achieve profitable and thus sustainable operations – so we can anticipate a growth in the range of products offered.

But while electronic remittances  and transfer of benefits (EBT) are witnessing considerable consumer demand, the absence of a compelling value-proposition in basic no-frills savings accounts is keeping the customers, the agent network managers and the Indian banking system from realising the full potential of the agent-based banking model.  NFAs are limited in functionality (no ATM cards, no cheque books etc. and in many cases not even fully integrated with banks’ core banking systems), but are often sold as full services savings accounts by over enthusiastic frontline workers. Once banks move to develop and deliver client-responsive savings products (including the much sought-after recurring or commitment deposits), we can expect to see significant uptake.

Question: Financial inclusion has been largely seen as a responsibility for banks alone – and something that they are only undertaking because they are being strongly encouraged to do so by the Government of India. What might this mean for banks and financial inclusion?

GW: Globally, we are in the process of reinventing how low income people send and receive money in remote locations; how they pay bills and loans; and how they save and insure against emergencies; thus for increasing numbers of people, how they enjoy greater freedom and control over their financial future. MicroSave’s research clearly indicates that they are willing to pay for these services – so there is evidence of a business case for banks to do this on a profitable basis, and not just in response to government mandates. Indeed several banks in India are already thinking along these lines.  

But banks are more comfortable with their traditional business models of low volumes of high value transactions – and, of course, India’s burgeoning middle class offers plenty of opportunity for growth and profitability using this model.

The dilemma is how to make the new ways of banking—by mobile phone, via card readers and enhanced ATMs, and with third-party agents who act on behalf of branch staff—either profitable or at least sustainable for the low income market. Every other industry has had to revise how they make money in new markets with new technology. Banking may finally be forced to as well. There may be no traditional “business case” for financial inclusion. The scope and needs of these customers are too different. This reality may ultimately persuade some of the banks to share risks, and rewards, with MNOs, the post office, global consumer brands, and technology service providers. Each brings new value and possible solutions that banks alone cannot solve.

Financial inclusion is not a burden on banks. It is indeed a business opportunity to be tapped perhaps by the State Bank of India, which prides itself in its efforts to reach rural communities, or by smaller private banks looking for new markets and the favour of the RBI. However it requires non-traditional approaches and a paradigm shift in outlook.

Question: Critical to the success of branchless banking is to establish a high quality network of agents. What has MicroSave’s work shown about these options in India?

GW: Our work with a wide range of BCNMs, MFIs, banks and MNOs has given us a clear understanding of what people look for in agents;  how commission and pricing structures affect both client take up and agent churn; how banks might set about deciding between institutional (BCNM-managed) and individual (bank-managed) agents; how best to manage agent and customer satisfaction within these systems; and the role that MFIs might usefully play within the financial services ecosystem of India.

Instead of playing to the same tune, I’d say that branchless banking actors are playing variations on a theme. Here we share a couple videos that describe two particular variations out of the many that exist.

1st Variation: One of the largest Brazilian commercial banks Bradesco has been targeting the mass market since its beginning, going so far as to build branches without doors to encourage anyone to enter. It’s no surprise then that Bradesco has always been trying to be as close as possible to its customers (which currently number 62 million) and to future customers. In this video, Marcos Bader, General Director at Bradesco, explains how technology and new business models based on the use of agent networks have helped the bank reach this goal. He explains many interesting aspects of their business, but what I find quite remarkable in particular is that 90% of all transactions at the bank go through alternative distribution channels. Marcos also lives up to the Brazilian stereotype by somehow finding a way to draw a parallel between branchless banking and soccer!

2nd Variation: Regulation usually defines what branchless banking players can and cannot do. Roar Bjaerum, Head of easypaisa at Telenor Pakistan explains in this video how the regulation in Pakistan was clear in its “bank-led” approach. But regulation also allowed telcos to take ownership in banks. In 2008, this is exactly what Telenor Pakistan did in partnership with Tameer Microfinance Bank, paving the way for a truly innovative business model in branchless banking. As Roar explains, the market has since taken off in many different directions, with some banks leading their own branchless banking business and some telcos acquiring microfinance licenses. We’ve written about and discussed the Pakistan market a lot, but here Roar describes the market from the perspective of someone working on the day to day business of mobile money.

In these two particular “variations on a business model theme” and in the many others that exist around the world, the challenge, as Marcos puts it, is “to define the boundary between cooperation and competition.” This is indeed the task at hand in order to produce a wonderful melody instead of discordant chords in our objective to reach the unbanked.

Watch the two videos we posted last week on OXXO and DD-DEDO here.

- Sarah Rotman

Ghana Market Seller (Photo Taken by Adam Jones)

I was sitting in a little room in the outskirts of Accra listening to a group of tomato sellers talk about the financial tools they use to manage their finances. As a part of CGAP’s work in Ghana, we have commissioned Bankable Frontiers Associates (working with Easy Errands, a Ghanaian market research firm) to conduct a market research study on the financial needs of low-income customers in Ghana. One of the first steps was to conduct focus groups throughout the country and listen to diverse groups of Ghanaians, including farmers, taxi drivers, traders and students, talk about their strategies for moving and storing money. They discussed bank transfers and drivers and the use of family and friends but more than anything, they talked about cash.

The trite expression ‘Cash is King’ is over-used in our line of work, but as I sat in that little room listening to these people whom mobile money services have spent millions of dollars trying to woo, I realized yet again that the biggest competition we face in scaling branchless banking is not a rival MNO or bank or even the expensive money transfer operators – it’s cash. (Read some recent posts on our blog about this topic here and here.)

Cash is far and away the preferred method for storing and sending money in Ghana, no matter how inconvenient. One tomato seller, Charity, wraps her cash in no less than six black plastic bags and hides it in the back of her refrigerator, underneath her tomatoes and meats, so that the rest of her family does not suspect it is there.  A timber seller, Emmanuel, told us he keeps his cash under the carpet in his living room. When asked whether the cash does not form a noticeable bulk, he replied with a big grin, ‘That’s why I spread it all around so that people walk all over my cash but have no idea it is beneath their feet!’

From the stories I heard, people are tied to cash for two main reasons. First, they trust cash and its tangibility. Several focus group participants complained that ATMs ‘swallow cash’ and many worry that the wrong amount will be in the bank if they leave their money there. Second, in a country with limited financial infrastructure, cash still offers the greatest convenience.  The tomato sellers travel to Burkina Faso to purchase tomatoes, often starting work as early as 4:30am. Since no banks are open that early, they carry significant amounts of cash – as much as $7,000 each. They do not feel secure carrying so much cash, but they feel they have no other options.

Some people have experienced such crises with cash that they have switched to safer methods. Mary, a baker, lost her mother in a car accident while she was carrying a significant amount of cash from Accra to Kumasi to purchase goods. When Mary traveled to the scene of the accident, she was told that the money had been taken by the first people to arrive on the scene (who at least did help take care of some of the accident victims). Now Mary refuses to travel with cash.

However, many people are still loyal to cash, despite personal experiences with its shortcomings. Adelaide, a sales assistant in an office, was robbed on her walk home from the office a few months ago – while carrying a month’s salary she had just received. Despite losing a whole month’s income, she still does not want to receive a direct deposit of her salary since she does not trust the bank. She’s not sure the money will really be in her account when it should be and prefers the certainty of hard cash.

Aside from trust and convenience, one more explanation of the allure of cash came from George, a store owner: “When I have cash in hand, it gives me power and authority.” Bestowing power and authority on top of everything else – cash truly is king and will be a difficult sovereign for branchless banking providers to topple.

- Claudia McKay

One agent. Five mobile money services (Photo taken by Ben Lyon of Kopo Kopo near Geomaps Centre in Nairobi)

In our work on interoperability, we find that there are some questions that we are unable to adequately address at the platform and agent levels alone. For instance, the opening of USSD gateways by mobile operators may allow customers of one operator to access services of another operator without either platform interconnection or agent sharing.

We identify two interoperability scenarios related to the mobile handset:

1. Customers can access their account through any SIM on the same network. For instance, one service in East Africa allows its customers to access their service from any handset as long as it is on their network.

2. Customers can access multiple accounts on one SIM. For instance, SMART in the Philippines allows customers to access SMART Money on their SMART SIM, as well as access accounts with various banks through different enabled interfaces.

Allowing customers to access their account via other SIMs or other accounts via one SIM increases the potential size of the market and increases customer convenience. In the latter case, providers may fear that customers will readily switch to another provider. MNOs run the risk that another service accessible to their subscribers will cannibalize their own service. Providers with large market share, in particular, may be less inclined to allow customers of other services to access their accounts. In addition, number portability has made it easier for customers to switch telecom providers.

Mobile money and the link between the mobile phone number and mobile financial services are supposed to help retain customers. Even if providers permit access to other services, they may use pricing, marketing and other features to try to keep customers from churning (e.g., make it hard to find the other service on the menu).

The government promotion of number portability is even more important when accounts are linked to mobile numbers. For instance, can customers take their mobile numbers to another provider if their mobile number has also become their financial account number? The bundling of the financial service with the underlying technology to provide that service may be considered restrictive on competition.

Governments are also looking into fair pricing and the availability of USSD gateway access by mobile operators. More secure than basic SMS as a bearer channel, USSD is still the preferred option for services that are MNO-agnostic. Governments are monitoring the anti-competitive practices of MNOs that have known to block USSD gateway access, price it too high, switch it off arbitrarily, or simply delay access to potential competitors, especially banks and third-party providers. In one market, the government has mandated that mobile operators make their USSD gateway available even to their competitors. Regulators may want to permit customers to change their MNO without having to change their bank account and vice-versa.

How important are interoperability questions at the customer–level? With the increasing use of feature phones and smart phones, what should policy makers expect to emerge as new challenges to interoperability at this level?

- Kabir Kumar & Michael Tarazi

Take OXXO as an example. OXXO is the largest convenience store in Mexico (comparable to 7-Eleven in the US) opening a new store every 8 hours…yes that’s 8 hours!  7.5 million people come through their stores every day, most of whom are looking for things that a normal convenience store would offer…food, snacks, paper goods, etc. But OXXO is diversifying its products to offer its wide customer base the “convenience for everything you’d need in life any time of day.”

In this video, Aiko Fujimura, Manager of Financial Services for OXXO, explains how this added convenience extends now to financial services offered through the OXXO e-wallet. She admits that there are certain challenges. “It is easy to sell soda and snacks, but not as easy to sell financial services.” Training a huge network of employees and convincing people to trust the store with their money are two issues OXXO is currently facing.

Few companies have the scale of OXXO, but convenience stores and other retail outlets are still being used to build up branchless banking agent networks. In this video, Johannes Kling of the agent network company DD-DEDO talks about the role that convenience stores play in Colombia in expanding the outreach of banks. As he explains, Colombia is still very early on in the growth curve when it comes to branchless banking. But as we all know, a strong agent network is one of the early pieces of the puzzle in building a branchless banking ecosystem.

Next week, we’ll share two more videos from more traditional players – a bank and a mobile network operator – but each with an interesting take on their new business model to reach the unbanked.

- Sarah Rotman

Agent exclusivity revolves around the ability of a customer of one provider to use the agent of another provider for cash-in and cash-out services related to that customer’s account. Non-exclusive agents can expand financial access by providing more access points to a greater  number of customers, while limiting the rise of a dominant actor which could ultimately reduce competition. But as with platform interoperability, regulators are cognizant that prohibiting exclusive agents could deter private actors from entering the market. What service provider would invest in identifying, training, and equipping agents if competitors can piggyback off their investment?

To be clear, when we speak of agent exclusivity, we are only referring to the cash-in and cash-out services performed by agents – not other services (where permitted) such as customer enrollment, related KYC, and processing of loan documents. Agents providing only cash-in and cash-out services are often called “cash merchants”. We distinguish the cash merchant services from other services because cash merchant functions arguably present less risk to the financial service provider since agents typically transact against their own accounts. Think human ATMs.

We identify at least four different ways to share cash merchants:

1. Cash merchant serves account holders of the financial service provider it represents and provides cash-out services to non-account holders in what are called off-network transactions.
2. Cash merchant provides cash-in and cash-out services not only to account holders of the financial service provider it represents but also to account holders of other service providers.
3. Cash merchant represents multiple service providers and services the account holders of all, but does it through multiple agent accounts.
4. An independent cash merchant services account holders of all service providers but through a single agent account provided that the mobile payment platforms are interconnected.

Each of these cash merchant sharing models has different requirements concerning platform interoperability, regulation, and liquidity management. And some are more financially inclusive then others.

Interoperability at the Agent Level

In our opinion, agent interoperability is possible even when there is agent exclusivity, as long as platforms are interconnected as is the case with interoperable ATM networks. For instance, as shown in column two in the figure above, agents can remain exclusive to one provider but with platforms interconnected and relevant business rules established, agents can cash-in or cash-out for any account holder across the interconnected platforms, using their agent account with one service.  As shown in column four in the figure, platform interconnection is also a prerequisite along with agent non-exclusivity in what could be another vision of agent interoperability – an agent servicing multiple account holders across multiple networks through a single agent account.

Even in cases where exclusive agent arrangements have been prohibited, private operators often find ways around it. In one jurisdiction, operators monitor the number of transactions conducted by a specific cash merchant for their account holders and if they sense the cash merchant is favoring a competitor, they will cancel their agency agreement.

Agent exclusivity raises competition concerns for regulators. Take as an example M-PESA which now has more than 20,000 agents throughout Kenya. Competitors have argued that Safaricom used its head start to tie up the supply of potential cash merchants, effectively exercising a monopoly and limiting competition. But how should Kenyan competition authorities evaluate this claim? Have competitors really exerted enough effort to secure their own cash merchants or are they simply wishing to capitalize on Safaricom’s efforts? And how would the available pool of cash merchants be defined? How long should regulators wait – and what market indicators should they ascertain – before they mandate the shared use of cash merchants? And what model of sharing cash merchants should they mandate? Is there a business case for sharing agents and if not, what should regulators do to avoid limiting competition?

These are just a few of the questions that regulators and providers are trying to answer.

- Michael Tarazi & Kabir Kumar

Today they release the third piece of research on the payments market, specifically on the topic of market segmentation. Our guest authors are Vicky Hausman, Yana Watson, Matt Shakhovskoy and Lorenzo Bernasconi from Dalberg.

With a year of operations under their belts, providers of mobile money services in Haiti are looking to move from a push for rapid expansion to a strategic pursuit of profitable markets. The industry’s kick-start came from a $10 million prize pool supplied by the Bill & Melinda Gates Foundation. Now as the prize mechanism nears its completion, the focus is shifting to sustainability based on supply and demand. For providers of mobile money services, we believe that a successful strategy will depend in large part on market segmentation.

The Haitian economy, though poor, is dynamic and resilient, and mobile money could fit into it in many different ways.  Establishing possible uses through research and then offering a mix of services to suit distinct groups of customers will be key to the industry’s long-term viability. Studying and prioritizing these groups through segmentation will help companies to collect the highest return on their investment.

Segmentation is particularly important in nascent industries like mobile money, since identifying early adopters and low-hanging fruit can create opportunities to grow quickly and achieve economies of scale. While it isn’t an easy process, especially in a country where data on markets are hard to come by, it can insure against wasted effort and unprofitable investments. We recommend starting by estimating the size of different segments, then prioritizing them based on the costs and rewards to serve them, and finally planning a strategy to capture the segments that present the highest returns.

To see how we prioritized the segments in Haiti and to read a profile of one of the most promising – the agricultural value chain – see our report here.

Charley Johnson is a Presidential Management Fellow at USAID. Priya Jaisinghani is a Senior Advisor to the Administrator and Director of the Mobile Solutions team.  Prior to her work at USAID, Priya helped launch the Gates Foundation’s work in financial services from 2005-2009.  

Two years after the earthquake, Haiti is rebuilding not just brick by brick, but click by click.

The earthquake left behind a government in rubble, an economy in shambles, and a people living in makeshift camps, coping with enormous loss. Against this backdrop, the possibility of progress lives not just in the resilient spirit of the Haitian people, but also in the simple power of their mobile phones.

In June 2010, USAID and the Bill & Melinda Gates Foundation launched the Haiti Mobile Money Initiative (HMMI). This program leveraged the private sector and the ubiquity of mobile phones to bring financial services to Haitians, 90% of whom didn’t have access to a bank account before the earthquake destroyed nearly one-third of the country’s bank branches, ATMs, and money transfer stations. Put simply, mobile money gives Haitians access to banking without building a single bank.

It worked.  In January 2011, one year after the earthquake, HMMI awarded Digicel and its partner bank, Scotiabank, a “First to Market” Award of $2.5 million for “Tcho Tcho Mobile.” Five months ago, HMMI awarded mobile operator Voila and their bank partner, Unibank, $1.5 million for “T-Cash.” While verification is still underway, data reported by the industry indicate that there are nearly 800,000 registered users.  Moreover, there are over 800 agent locations now available to serve clients. In a country where there are fewer than two bank branches per 100,000 people, this represents a near doubling of accessible financial services.

These numbers are significant, but what do they mean for the people of Haiti? Why should we care about the growth of mobile money in Haiti and the rest of the developing world?

First, mobile money accelerates access to financial services for the 1.8 billion people with access to a phone but not a bank. It allows people to safely store and send money to friends and family in need. Today, 15 million Kenyans, or 70% of the country’s adult population, use Safaricom’s mobile money product, M-PESA to manage their money. Five years ago, only six million Kenyans had access to basic financial services. This is a vast improvement when the alternative is sticking money in a jar or under a mattress. Payments also become the rails upon which other financial services—savings, remittances, credit, and insurance—can ride. It allows the poor to reclaim a sense of stability and security in a world often characterized by uncertainty and vulnerability.

Second, it also serves as the lynchpin in government efforts to improve transparency, mitigate corruption, and enable responsive government. Take Afghanistan as an example. When the Afghan government started paying government employees and police officers through mobile phones, the employees thought they had received a nearly 30% raise. Instead, they were paid what they were supposed to be paid for the first time but without middlemen taking a percentage as it passed through their hands. These payments can also be quickly disbursed and tracked, which engenders accountability and responsiveness across government.

Third, mobile money helps unlock the private sector to create sustainable fee-for-service models. In Kenya, 700 innovative businesses exist because they integrated with M-PESA to lower transaction costs enough to profitably extend critical services to people in remote areas. In agriculture, UAP Insurance and the Syngenta Foundation partnered to offer farmers index-based insurance using M-PESA to collect small premiums and issue payouts. In health, Changamka Microhealth Ltd. is using M-PESA’s bill pay function to help expectant mothers save for maternity health care. In water, Grundfos LIFELINK leveraged M-PESA to create a fee-for-service model whereby rural communities access safe water and pay for it using M-PESA.

It is no doubt going to take time and effort for Haiti to follow in Kenya’s footsteps. And it is certainly true that mobile money cannot transform a country by itself. We still need the bricks. We still need the human ingenuity and resilient spirit evident all across Haiti. But two years after the earthquake, we’re making real progress, click by click.

Learn more about USAID’s work in Haiti:

• http://haiti.usaid.gov/
• http://www.miamiherald.com/2012/01/11/2585138/haiti-a-country-undeniably-on.html

Platform-level interconnection is what most people have in mind when they think of interoperability in branchless banking. When we speak of interoperable platforms, we are referring to platforms that permit the transfer of funds from one mobile account to the mobile account of another service provider. This is similar to being able to send money from your bank account to your sister’s account at another bank. Or it is similar to being able to send a text message from your phone with your mobile network operator to your friend’s phone on the network of a different mobile network operator.

These “cross network” transactions should not be confused with “off-network” transactions which many mobile network operators claim to be platform interoperability. Off-network transactions make it possible for account holders to send money to anyone, whether they hold an account or not. For example, you send money from your mobile account to your friend, who doesn’t have an account, and your friend cashes out at your service provider’s agent. While off-network transactions can be beneficial for low-income users, we believe they are not as financially inclusive as cross network transactions. Off-network transactions require recipients to cash out, whereas cross network transactions make it possible for recipients to store received funds, on-send them or use them to make payments.

We identify different ways platforms can interconnect. In basic terms, platforms can interconnect: (1) directly (as the two ATM networks, 1Link and MNet, did in Pakistan) or (2) indirectly where a third-party entity which is either owned by providers, owned independently, or owned by the government interconnects platforms (as POS networks are currently doing in Brazil). The way in which platforms interconnect impacts pricing and efficiency of the payment system and potentially the ultimate value to customers.

Regulators ultimately want interoperable payments platforms, but are often torn about how best to achieve them. Permitting exclusive platforms can ultimately allow first movers or large actors to dominate the market, with the possible result being limited competition and artificially high prices. However, mandating interoperability too early in the growth of the market may discourage actors from entering the market due to concerns that competitors could “piggyback” off of large start-up investment. Several middle paths are available, such as temporary periods of exclusivity or requiring interoperability ex-ante in the regulation but not enforcing it until the market had matured. But how long should regulators wait and how can they enforce it if the market drags its feet?

Of course regulators would not have to struggle with these questions if service providers voluntarily interconnected. But as far as we can tell, businesses rarely initiate interoperability in financial services, even if it is technologically feasible, unless regulators intervene. A key question is whether there is mutually beneficial pricing that would encourage them to do so. In mobile money, service providers with a large share of the voice or mobile financial services market (or the anticipated market share in new markets) have no real incentive to interoperate, hoping instead to capitalize on their more developed infrastructure down the road. This is particularly true when market actors are using financial services to differentiate their product from the competitors and reduce churn.

Smaller market actors however may want to interconnect their services to compete with larger players. This is similar to how smaller banks made their ATMs interoperable in order to compete with the larger banks’ ATM networks. But in new mobile financial services markets, there may not be enough small actors to take on those that have a market lead. In heavily fragmented markets, perhaps service providers would find greater benefit from interconnecting. But this would then defeat one of the primary purposes to enter the market in the first place – reducing churn of voice subscribers. Still, it could permit them to overcome stagnant growth or could prove to be a cost-effective way of entering new markets.

It may be that the mobile financial services markets are still too young for interoperability – forced or voluntary. What do you think – can interoperability ever be achieved without government intervention? If not, why? And if so, what should regulators do and when?

- Michael Tarazi & Kabir Kumar

Sarah Rotman blogged recently about yet another breathless announcement about the imminent arrival of the cashless society. She said and we agree that “cashless seems a bit naïve; cash lite seems more realistic although still a big challenge.” The very first part of the challenge is actually to visualize what a “cash lite” world looks like. Is it simply an ill-defined way station on the road to cashlessness, or is there a meaningful state or goal that goes with it?

We think the latter, and for us the defining characteristic is not the amount of cash (let cash do what it will!), but the availability of alternatives for the bulk of the population. It’s freedom from cash, not absence of cash. We have coined a word which encapsulates key elements of a cash lite society: LiFi (see baptismal paper here). Like WiFi, which provides retail connectivity at the edge of the internet cloud, LiFi is about connecting people to an electronic payments grid which provides Liquidity with Fidelity. WiFi is open, general-purpose broadband; LiFi is secure, special-purpose narrowband.

A LiFi world is therefore one in which every person has an electronic store of value which they can easily use to make and receive payments in real time. Just like in places with reliable on-grid electricity, we can turn on a light on-demand, knowing that it will work and that the cost of flicking the switch will be small in relation to the benefits.

Because there is no precedent for cashlessness by fiat and cash can be counted on to still be an option for a long time to come, the key challenge of LiFi is getting people to trust and want to use the LiFi payment mechanism…because it is robust, because it is safe and because it is useful. All these attributes take time to demonstrate to the satisfaction of risk- (and change-) averse users. A LiFi approach recognizes that in two ways.

First, transactions are electronified gradually, starting with those for which cash presents the biggest drawbacks. Such payments are larger (cash handling puts you at risk), remote (cash is costly to move), or business- or government-related (cash leaves no record). In contrast, in a dash to cashlessness, providers often focus on in-store merchant payments as the key battleground. But these types of electronic payments will always be difficult to push from the outset because acceptance of electronic money in every store everywhere requires both customer willingness to switch and a strong business case for the merchants.

Second, LiFi payment mechanisms need to connect to “last mile” liquidity sources (networks of stores acting as cash merchants or agents, ATMs and branches), so that the electronic money sent or received via the payment grid can be exchanged for cash conveniently and reliably.

The LiFi strategy is indeed to infiltrate cash: make cash more efficient by supplementing it with an electronic remote payments capability and propagating cash merchants in remote villages and neglected neighborhoods. Use of cash will be slowly relegated to the edge of the network – and eventually we can push it over the edge.

To achieve this, the payments grid in developing countries has to function more like a utility. Business models and even regulation have to change to recognize this. This does not imply that running the grid must be a government function—private utilities may be more efficient in many cases—but the effective oversight of such a grid falls to payments regulators.

In enabling LiFi, regulators will need to consider much more carefully tradeoffs between competitive approaches and scale efficiencies. They will have a strong interest in ensuring that the grid provides new customers with the support they need to address questions and problems as they arise—in other words, putting the “Fi” in LiFi.

In a LiFi world, transactions costs are reduced and convenience is enhanced. The payments grid provides the essential “wiring” to support the emergence of new generation business models—from private schools and hospitals collecting fees for service, to e-commerce vendors in developing countries selling downloads. Unlocking this wave of entrepreneurial energy to address some of the developing world’s pervasive needs seems to us to be one of the most compelling features of a connected LiFi world.

To be sure, in every country, there are challenges in reaching this state. However, ongoing advances in mobile data technology have already enabled pervasive connectedness. A LiFi world ought now to be on the horizon for forward-looking policy makers and regulators.

- Ignacio Mas & David Porteous