Smartphones and Mobile Money: Is the Conventional Wisdom Wrong?

There is a wide consensus that smartphones will change how financial services reach poor people. I agree, but there are three components of conventional wisdom that call for more critical examination.

The conventional wisdom holds that smartphones:

• Will become relevant for the majority of low-income consumers only after many years  
• Will introduce more competition and diminish dominance of large players, such as telcos.
• Will greatly improve the user experience.

Let us re-examine each proposition in turn.

1. Will become relevant for the majority of low-income consumers only after many years

Smartphone penetration remains low for most of the world’s poor and handset prices outstrip low-income purchasing power. But the trends are strongly pulling in another direction with prices dropping to $30-40. New handset manufacturers like Xiaomi are growing aggressively.

Perhaps more importantly, with Average Revenue Per User (ARPUs) very low in most markets, the search is on for new revenue and selling data packages is seen as the next big opportunity. This has led to new auctions on 3G broadband, and mobile operators are pushing data packages alongside airtime minutes.

Mobile operators are also aggressively pushing smartphones. For example, Telenor Pakistan, offers a handset loan. In addition, Myanmar could be an indication of things to come. As one of the few rapidly expanding markets, it is reported that more than half of new mobile users in Myanmar are starting with smartphones.

GSMA predicts that just over 60% of connections in low income countries will have a smartphone by 2020. This would include substantial portions of low income segments. One underestimated element of smartphones is their use by multiple users. A smartphone may be used as a community television or access to internet for the whole family. With smartphones, one’s account nolonger needs be linked to a single phone number, but rather users could access multiple accounts through a single phone. Business models could emerge that use smartphones or tablets as community banking devices.

Finally, a brief technical detail worth noting. Android (Google) devices can download apps when nearby to each other, which could reduce reliance on direct downloads from an application website. This could greatly speed adoption.

Revision: smartphones will be relevant quite soon.

2. Will introduce more competition and diminish dominance of large players, such as telcos

Globally most mobile money schemes rely on USSD protocols for communication, which requires consent of mobile operators. Using data bundles over smartphones allows providers to interact directly with consumers without the direct involvement of the mobile operator. This allows non-telecom companiessuch as Matt Flannery’s startup lending company Branch (branch.co) to deliver financial services directly to the end consumer; the telecom service in this instance is a “dumb pipe”. Moreover, data on end client’s behavior is no longer with the mobile operator who has no visibility into the relationship between a provider and end client. The conventional wisdom holds that this will usher in a range of new players.

However, there are forces that may slow the opening of greater competition. First, cash in and cash out networks remain essential links to services for poor people. Mobile operators in many markets are likely to retain some comparative advantages where they can issue mobile money accounts and manage a large agent network. Another possibly anti-competitive force is the new zero-rated applications (for example, being able to use Facebook) where the data used to support applications is paid for by the application supporter rather than the consumer. This should speed the use of new applications. But mobile operators are most likely to provide this kind of zero-rated service more preferentially to companies that do not compete with the telecommunications other revenue, thus possibly charging higher rates to mobile money competitors. Moreover, those with the long time horizons and deep pockets to subsidize the use of their applications tend to be very large companies such as Facebook, which may also diminish the role of smaller start-ups and tilt the field towards these larger players.

Revision: there are powerful forces that may continue to limit competition

3. Will greatly improve the user experience

Smartphones bring a rapid leap forward in usability from a basic handset, like moving from a landline phone to a laptop computer. Many, including some of us at CGAP, are predicting it could be a similar step-jump for poor consumers to access financial services. I strongly believe such improvements are possible and we are examining how more intuitive user interfaces could be made more useful to low-income and illiterate users.

That said, the creative use of smartphones for low income mobile money has been relatively un-imaginative so far. A glance through user interfaces for mobile money at the Android app store reveals a series of graphics and user interfaces not so different than my online banking site.

All the literature points to major problems with understanding mobile money through text or numeric menus. This could be greatly changed if there is an investment in more use of icons, graphics and intuitive tools. Voice memos and prompts could link users to their more intuitive oral worlds. Recent efforts to better understand how poor people deal with basic numbers and text show how little we understand how poor people navigate finance. The new effort My Oral Village highlights how illiterate people think about numbers and what this means in terms of how they manage their finances.

Revision: there is great potential for smartphones to improve the user experience but a need to invest in making entire user experience more attuned to needs of poor consumers.

Let me sum up. Smartphones will be much more relevant more quickly than we originally expected. We ought to be thoughtful about harnessing the power to promote competition and to make interfaces better suited to poor and illiterate people. This will require thoughtful investments and nuanced policy to harness the potential of smartphones to the advantage of the world’s excluded.