Newsletter - sign up here
Search Webster
Webster's pieces from The Oldie
Webster's Webwatch

Pay by phone

November 2010 


If you’ll forgive me, I‘d like to wander away from the Internet and discuss another example of digital life: the astonishing growth in using mobile phones to move money around.  It is transforming the economics of the hard-up areas of the world, and is another example of how an instant communication network can provide terrific opportunities to rattle the complacent status quo.

Behind it all is the advance of mobile phones in even the poorest areas.  You may not be aware that money can be transmitted by mobile phone, but believe me, it is becoming very big business, especially in areas where most people have little money and no bank account.  in India, for example, some 600 million people have mobile phones (the population is 1,180 million) but fewer than 400 million use a bank.

So, imagine a man from a remote village who goes to work in the city, and wants to send money home.  His family don’t use banks (he may not have an account himself) and anyway the closest bank to the village is three days away; the post is not safe (especially for cash) and trusting his money to someone who just happens to be travelling that way is very unattractive.

However, most of the villagers have mobile phones, and they trust the providers.  So, our city worker gives his cash to a local agent (perhaps a mobile phone shop) to be credited to his mobile phone account.  He then sends a text which transfers the money to his mother’s mobile phone account; she can then take her phone to a rural agent and be paid out in cash, or she can text some money to a local trader’s account, or pay her rent, or anything else.  

It’s all terribly simple, costs the mobile phone company almost nothing (the infrastructure for sending texts is already there) and involves them in almost no extra financial risk.  The agents can be anyone; often they are local retailers, who deal in cash anyway, so have the readies to hand.  It’s self financing; the person sending the money pays a small fee which is divided between the agents.  What’s more, it encourages more and more people to use mobile phones, so the phone companies love it.

It’s not just used for sending money home; some workers are now being paid this way (including the Afghanistan Police force) and the system dramatically reduces the incidence of fraud, ensures the workers get the money sooner and provides, for the first time, a reliable audit trail.  

The system knows no barriers of distance, and is more or less instant, or as instant as makes no difference.  The statistics are persuasive, too:  one of the systems, M-PESA , which is backed by Vodafone and only really operates in Kenya and Tanzania, already has over six million customers.

A similar system, Mobile Money, has been launched by Nokia, the giant phone manufacturer.  It’s not hard to see why; the majority of mobile phone users worldwide don’t have bank accounts, but I bet that every one of them will need to move money around sooner or later.

Now, think a step further: if this works for mobile phones, it will work using an internet connection.  Once the internet becomes as accessible as a mobile phone networks (not far away, I promise) someone will invent an equivalent online system, if they haven’t already.

There are huge implications for the banks.  They are lazily used to having the unfettered use of our money whilst they grudgingly (and slowly) move it between themselves, but the cash in the mobile phone system moves instantly.

Furthermore, as many of the local agents are newsagents, corner shops and the like, they will simply be re-circulating the money they have recently received from their retail customers.  The cash will never even get close to a bank, and banks will therefore not have a chance to charge anyone for anything; they won’t like that at all.

None of this is new; traders have always found ways of establishing trusted networks to transact business.

However, it is good to think that the still slothful and overweight banks are being taken on at their own game and found wanting.

Maybe we should all buy shares in mobile phone networks; the banks will want to buy them all soon.