The mobile payment revolution

Travel to a rural village in any developing country and you're likely to encounter infrastructure deficiencies. Electricity, running water and sanitation are often rudimentary at best. However, walk down a rural main street and one modern convenience will immediately jump out -- mobile phones.

During the past decade, access to portable phones has taken off. According to the World Bank and the GSM Association, the number of subscribers in developing countries has risen more than 500% since 2000. Today, global mobile connections total 4.3 billion with about 67% in emerging economies.

Furthermore, a World Bank report found that the direct benefits of portable phone access include economic growth, job generation, productivity increases and higher tax revenue -- quite a list of gains from simply giving people a means to communicate.

But the potential of mobile phones is hardly limited to communication. "Mobile phones are increasingly becoming a popular tool for conducting financial transactions," wrote Celent analyst Prathima Rajan in a recent report. "They enable promotion of financial services in the most remote parts of the world."

Mobile phones have been used for consumer-to-consumer payments since at least 2004 when the Philippines' Globe Telecom launched G-Cash. Today, G-Cash offers services such as remittances, bill payments and microcredit, and together with Safaricom's M-Pesa in Kenya, which is the market leader in Africa, it dominates the market for mobile payments in the emerging markets. Together these two providers have nearly 10 million subscribers, which compares with Celent's estimate that there are close to 25 million mobile banking subscribers in the emerging markets globally.

Whatever the subscription numbers, payments by phone have ample room to grow. Using Celent's estimates, fewer than 1% of emerging market mobile users are currently signed up for payment schemes. But consumer money transfers is just the beginning; network operators and banks have their sights set on expanding the services into corporate banking and cash management.

Low-tech wallets

The existing mobile payment solutions are exceedingly simple. The popular G-Cash and M-Pesa services allow subscribers to transfer money using specially encoded text messages -- all users need to do is register with the service and, in some cases, install a special SIM card in their phone and off they go.

"Basically, having a mobile phone and being able to send an SMS is the only thing that is required," said Ron VanWezel, global product manager of emerging payment streams at Deutsche Bank. "The technology is relatively simple to adopt for the end user."

To transfer funds, a user sends a text message indicating the amount to be transferred and to whom. Once the transaction is completed, the party who transferred the money and the recipient will both receive SMS confirmation messages. Subscribers can then use these "mobile wallets" (or m-wallets), as providers call them, in banks, stores or post offices to buy goods or convert electronic credit to cash.

Text message-based m-wallets should not be confused with the near-field communications seen in many developed economies. The technology behind, and applications of, these "smart card" services -- for example Hong Kong's Octopus card or phones in Japan that users can hold near a sensor to pay a subway fare or buy a soda -- is different.

A study by the Consultative Group to Assist the Poor (CGAP) found that users of M-Pesa adopted the service because of its relative ease and lower cost compared to cash transfers. On a daily basis the service handles transactions worth approximately $1.96 million, averaging just $20 per transaction.

The natural evolution of mobile payments is into commercial transactions. G-Cash, initially targeted at the Philippines' robust domestic remittance market, is now being used in more than 6,000 outlets, including rural banks, schools and utility companies. Rizza Maniego-Eala, president of Globe Telecom's m-commerce subsidiary G-Xchange, said while the number of subscribers has held steady at about 1 million since 2006, transaction volumes are growing "exponentially".

"Our business-to-business initiatives, including branch-to-branch transfers and rural payroll, are driving G-Cash's growth," she said.

Existing technology is pretty much ready for commercial mobile payments. According to senior Celent analyst Red Gillen, some "B2X" -- mobile transactions originated by a business -- transaction enhancements are as simple as adding merchant IDs and invoice numbers to the current SMS-based platforms.

"The existing mobile wallet technology does not need a major tweak to include business transactions," he said. "However, to scale out, work is still needed to connect mobile transactions with businesses' back-end systems, such as accounts receivable or payroll."

"I have a very strong feeling that mobile [business] payments will really take off, because they offer a lot of value," added Gillen.

Mobile treasury

Imagine a network of distributors and retailers in rural China or India. Retailers predominantly transact with their customers in cash that they then use to pay distributors. The entire chain is cash-intensive, creating inefficiencies and security risks for everyone.

"Distributors hate cash," said Gillen. "Cash has a lot of handling costs, takes longer to process, often experiences some shrinkage while in transit and, when carried in large amounts, poses personal safety risks." Enter mobile payments.

The treasury benefits of mobile are pretty straightforward. "When you take in cash, it can take up to six days for the cash to be recognised for the corporate," said Deutsche Bank's VanWezel. "With mobile collections, transactions are recognised the next day on the corporate's account."

And, when connected with enterprise resource planning systems, mobile payments can be automatically logged, reconciled and settled on the company's books.