Better Than Cash, or Just Better Cash?

There is so much talk now about how electronic, and in particular mobile, payments are replacing cash. Some see it as a war on cash, the more circumspect talk about transitioning through a cash-lite state. I tend to look at it from the opposite perspective: far from replacing cash, mobile money has made cash so much more efficient. Even in Kenya.


Photo Credit: Alamsyah Rauf

Mobile money, and in particular the agents it spawns, pushes cash collection points deeper into local markets, slums and rural areas where before the only path to cash was to take a long bus ride out to an urban center. If cash had feelings, it could hardly be affronted by all these attempts to make it easier for it to be dropped off and picked up locally, at will. If I were cash, I’d be happy to concede long-distance travel and entrench myself where it matters: in daily life. With mobile money, cash works better.

Indeed the predominant practice the world over is for senders to deposit the cash just prior to sending it, and for recipients to withdraw the cash immediately and in full. From the customer perspective, it’s a cash-to-cash service, and who cares what happens in between as long as the cash gets there. The electronic bit in the middle is just a matter of efficiency for the service provider processing the remittance or the government paying out social welfare; all the customer knows is that she now needs to walk a shorter distance to collect the cash.

Or look at the macro trends. M-PESA money transfer volumes may amount to an awesome 50% of Kenyan GDP, but because there’s cash at both ends just think of how many more cash transactions it has spawned. Nobody quotes those numbers. Because of M-PESA, cash does a brisker business; it enjoys higher velocity, to use the proper economic term.

Given all this, it’s not a surprise that many mobile money systems, particularly in Asia, are cutting right through all this and simply processing payments over the counter (OTC), i.e. processing the transfer through agents’ rather than customers’ mobile accounts and sparing customers from having to press buttons on their mobile phones or open an account. Like pawnshops such as M Lhuillier have long done in the Philippines, like courier companies such as Efecty do in Colombia, like specialized bill payment companies such as PagaTodo do in Mexico, and like Western Union does globally.

What a pity that is.

Because the fight against cash is the good fight. Cash is costly to move around, unfair on the poor (disproportionately expensive for small transactions), unsafe, smelly, a hiding place for germs and criminals, etc.

To truly go towards a cashless or cash-light state, what matters is not so much how money gets moved around but how it gets stored. Again, look at it from the customer perspective: cash, that I go to a local shop to drop off/pick up, is not electronic money, no matter how it left/arrived at the store. Cash is only electronic if it’s not converted back into paper.

If cash is what you have, cash is what you’ll use to pay at local shops. The unfortunate corollary is: you can’t go cashless on empty accounts. Mobile payments will have a glass ceiling as long as mobile money providers continue to neglect savings. The mobile money strategy ought to be to infiltrate cash: making it so easy to go in and out, in and out of cash, that eventually you don’t bother going out any more. That option is shut with OTC because OTC must always start and end with cash.

The rising wave of OTC services amid mobile money deployments reflects two failures. In the first instance, a failure of banking regulators to make account opening simple and painless enough for people to even contemplate acquiring an electronic repository of value. A central bank that enables mobile and agent transactions but insists on cumbersome procedures for account opening (I have a few in mind) is not a progressive regulator. But more fundamentally, it’s a failure of providers to convince customers about the storage-of-value benefits of mobile money accounts. The harsh reality is that the majority of electronic accounts are empty. More precisely, it’s a failure of innovation, because mobile money accounts fail to incorporate the subtle discipline mechanisms that people like to wrap their savings in.

I sympathize with mobile money providers who feel they have their hands full just building out a basic mobile money platform and an agent network, and leave the challenges of dealing with burdensome regulation and innovation to others. But policymakers and donors make a mistake in promoting OTC-heavy deployments like they are just another flavor of mobile money. Sure, today they do pretty much the same job as wallet-based services do today, but their evolutionary path is stunted. OTC systems offer no possibility of electronic storage of value and hence no path to cash substitution. Because the agents are left to do all the pressing of buttons on their own mobile phones, OTC services undermine one of the biggest unique selling propositions of electronic cash which is privacy – agents get to know each and every transaction customers do. (With wallet-based services, agents know their client’s cash in/out transactions but not the destination/source of those funds.) With OTC, customers can never become self-providing, because it is the shops and not the customers who are mobile-enabled.

An account also forms the basis for recording a financial history, which can help spread responsible credit. OTC services can only generate credit scoring information based on what I have spent; with an account one can also capture what I have not spent (i.e. saved). Accounts are therefore a likelier stepping stone into broader financial services.

Some might argue that OTC services may be a valid stepping stone to account-based services, but I don't see an obvious, customer-friendly migration path from OTC to wallet, beyond mere price discounting. Opening an account should be the (albeit, small) price to pay to get the benefit of electronic payments.

OTC services are commercially understandable but represent a large missed opportunity policy-wise. We need to strive to put mobile money technology directly in customers’ hands so that they can feel empowered and in control over their financial decisions.


------Ignacio Mas is an independent consultant.


27 September 2013 Submitted by Maimouna Gueye (not verified)

I believe it has been commonly understood by regulators that cash to cash transaction do not lead to true financial inclusion. But I agree It is a stepping stone to reach customers otherwise excluded. Step by step

09 October 2013 Submitted by François Coupienne (not verified)

Thank you for sharing your thoughts and feeding the debate over OTC with such clear arguments.

You raise very valuable points about the limitations of OTC transactions. I think we can agree that OTC is not fully financial inclusion. However from our experience we feel that the role of OTC transactions as a gateway to financial inclusion should not be underestimated. After all, isn’t banking through a bank branch basically all based on OTC transactions? Like you mention OTC transactions are an important element of the learning curve in electronic payments and in providing access to financial services and in turn electronic payments are a gateway to financial inclusion. There are many real issues that explain why users and providers prefer to maintain OTC transactions:

- User interfaces are not yet user-friendly in terms of language and script, some local languages are simply not supported by systems/phones and literacy issues limit access to many users.
- Users do not change habits that fast, they usually progress in steps, from counter to ATM to Agent to phone… even getting a phone for confirmation of an OTC transaction – even a passive receipt of a message – is a step forward
- Users also need regular contact, someone that can accompany them in their learning curve and some of them, over time, will see the benefit of transacting directly.

This said, innovation cannot and will not stop at OTC and will continue to be an important component to electronic accounts. One way of finding how fast market are ready to move forward is to evaluate the maturity. At Mobile Money for the Poor (MM4P/UNCDF) we are in the process of launching a study that will analyze and compare active rates and registered users as a way to see how clients actually use the services. (to be continued…)

16 October 2013 Submitted by Ritesh Dhawan (not verified)

Hi Ignacio,

Do you think it will be worthwhile to understand the usage pattern of the money that is immediately cashed out once it is credited in the bank account through OTC service providers. I say so because if majority of the household needs are being met through the inward remittances, then it has to be withdrawn as soon as it is credited. It is the urgency of the need of money, that will decide the immediacy of cash out rather than the medium through which it is sent (OTCvs wallet).



17 October 2013 Submitted by Ignacio Mas (not verified)

Hi Ritesh. Surely, many remittances will be withdrawn immediately and in full in order to apply the funds to whatever specific purposes the money was sent for. But that will not always be the case. If the remittance is supposed to see me through for a month, I am not sure that withdrawing it all at once is the optimal thing to do. And I am not sure that remittances only go to desperately poor people who must consume immediately; how about if I send money to my parents out of filial duty to make them feel comfortable rather than out of abject necessity on their part? My point is that customers would benefit from having choice as to how to manage that inflow of money, and OTC-only services are very limited in that respect.

Hi François, I agree with what you say. Just one clarification, purely on terminology. By OTC transactions what is usually meant is payment or money transfer services that do not go through the customer's account. So a typical branch transaction is not OTC insofar as I am depositing money into or withdrawing money out of my account, or otherwise moving the money in my account. I agree the terminology is screwy, the presence of the account rather than the counter is the key...

Micah, that's a very meaningful compliment, thanks!

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