You Can’t Go Cash-Lite on Empty Accounts: E-money vs. Cash

People will not have a preference for paying for goods at stores with electronic or mobile money if they do not hold electronic money balances in their account. If they accumulate and keep the money they need to pay for stuff in cash, they are likely to pay for it in cash. I’m amazed by how often this simple logic is overlooked.

Getting people to reach for their bank card or mobile phone at the store check-out requires giving them good reasons to store their money electronically. But there are powerful reasons why so many people in the informal economy don’t think it’s such a good idea to keep their money in a single, liquid account: it goes against the grain of how they budget and discipline themselves. Indeed, most banking systems that I visit –whether bank- or telco-led, whether cellphone- or card-based – look rather anemic to me. Most people just don’t keep much money in there (median balances of less than $20 or even $10 aren’t unusual), and they may make a payment once or twice a month. These accounts may be useful to people from time to time, but it’s hardly transformational stuff.

So far, mobile money schemes have gone for the low-hanging fruit of a few remote payments for which cash is truly a dismal option, such as sending money home or paying an electricity bill. In Kenya, domestic remittance services were paltry, and M-PESA stepped into a huge market gap with roaring success. In other countries, a range of players have already captured that space (networks of pawnshops in the Philippines, courier companies in Colombia), and mobile money looks much more like a solution looking for a problem.

The best way I can think of for mobile money providers in places like the Philippines and Colombia to claim the space now ‘owned’ by pawnshops and courier companies is to help people accumulate electronically the money they need to send, i.e. help in events leading up to the payment. If money is accumulated electronically, of course it will be sent electronically.

But even in Kenya, in order to electronify a much broader range of daily payments, those made face-to-face, providers need to crack the savings problem. And that means incorporating into their service the kinds of tools and tricks that people use daily to plan their financial lives and build discipline. If mobile money providers want to capture people’s money, first they need to capture electronically how people think about their money. In this paper I describe how mobile money can be easily adapted to become a tool that tries to do just that.

The business case argument for caring about saved balances is therefore three-fold: more float, more transactional revenues as people look for outlets for their electronic money, and fewer cash in/out commissions to be paid out to agents as electronic money gets recirculated more.

When discussing electronification of payments in developing countries, the instinct is often to prime the acquiring (merchant) side. But the case for a store to want to pay a payment provider a commission for the privilege of not touching cash on a few sales seems thin to me. Unless, that is, customers push them to it; then the store will weigh the merchant discount of 1-5% against a possible loss of 100% of the sale if people are unable to buy things because they don’t have enough cash in their pocket or, worse, they start taking their custom elsewhere. The pressure to accept electronic money has to come from the issuing (customer) side. It’s why credit card holders in the U.S. get air miles and cash back on credit card purchases: to turn them into pushy, demanding customers wherever they go. Stores will always follow customers.

Thus, to get mobile money usage up, it needs to fulfill both functions of money: as a store of value and means of payment. The two functions support each other, they are in fact inextricable. A set of interconnected empty wallets does not constitute much of a payment system. If mobile money providers want to fulfill the means of payment role more fully, they’ll need to start taking a long hard look at the store of value function. Without savings, the mobile money emperor’s clothes will continue to look rather threadbare.