Mobile network operators (MNOs) such as Safaricom in Kenya; Vodacom, Tigo, and Airtel in Tanzania; and Econet in Zimbabwe are collectively underscoring the importance and potential of MNO-led business models to advance financial inclusion. In each of these markets, and in a number of others, where MNOs are able to effectively compete in the provision of mobile financial services (MFS), there are more registered mobile wallets than bank accounts. And in each of these markets mobile payment platforms are being leveraged to offer other financial services such as savings and credit at scale.
The immediate gains for financial inclusion are clear. At the same time, this relatively new role for MNOs can generate competition concerns for country regulators. This is because MNOs compete with banks and other MFS providers (third parties) in the provision of mobile payments, but MNOs also own key communications infrastructure required to provide mobile payments.
Unstructured supplementary service data (USSD), a communications service controlled by MNOs, is believed to be a critical piece of infrastructure used to provide MFS on nearly any phone, at low cost, and without requiring access to the user’s SIM card. USSD enables customers to send instructions to the MFS provider along with their personal identification number (PIN) for authentication, while enabling the MFS provider to send responses to clients and confirm transactions.
This Brief outlines why USSD is important for mobile payments and highlights the main types of complaints arising as a result of restricted USSD access for MFS providers. It then explores regulatory issues, including when regulatory intervention may be required, which regulator might be best placed to intervene, and what type of regulation is most appropriate (CGAP 2014).
USSD is not the only communication service available for mobile payments. Other options include short messaging service (SMS), SIM Toolkit (STK, a programming environment embedded on the user’s SIM card), mobile internet, and newer innovations to interact with customers. MFS providers consider these options against several factors, including reach (compatibility with handsets), user experience, security, cost, and ease of deployment for the provider. Most providers agree that when all factors are considered, USSD is the best available option to serve low-income customers today. This view is supported by the fact that most large-scale deployments globally use USSD. This is because USSD works on the vast majority of phones, it does not require changes to the SIM or a new SIM (either of which can be complex and often costly steps), and it has important usability and security advantages over SMS.
There are some exceptions including M-PESA in Kenya, which uses STK technology together with encrypted SMS. However STK requires that the MFS provider has access to the SIM to load changes to it, which is seldom the case for non-MNOs. Other promising alternatives also have practical challenges that impede scale. Most notably, mobile internet requires that customers have access to internet-enabled phones, which is not currently the case for the majority of low-income users. On the other hand, SMS is available on basic phones, but is not as secure as USSD and offers a less intuitive and more challenging user experience.
USSD also has its limitations. The customer experience is not as smooth nor does it offer the same security capabilities as STK or mobile internet. Further, USSD sessions can be dropped, potentially raising costs and harming customer trust. Despite these and other challenges, the majority of leading MFS providers rely on USSD, including many MNOs. Large deployments that rely primarily on USSD include bKash in Bangladesh, WING in Cambodia, EasyPaisa in Pakistan, ZAAD in Somaliland, M-PESA and Tigo in Tanzania, and EcoCash in Zimbabwe.