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.


10 August 2012 Submitted by John Gitau (not verified)


What a powerful way the close the month! This posting is very thought provoking. As I teach about money to employees of corporates, I do ask one question to the learners. I ask ” when money is mentioned, what picture comes into your mind as your image of money? Is it notes, coins,ATM bank balance, bank statement or lifestyle that money can acquire?”. I get various responses. Senior managers would talk of bank balances. Junior staff would talk of cash. Now, what picture do the low income have of money? You can almost bet it is money in coins and notes and not bank balances. Why is this important? It’s because money is a way of thinking. It is a paradigm. The low income have pictures of money in cash. They want to touch it, exchange it in a face to face transaction as they chat, hide it at a place only them know and access it when they feel it’s time to spend it. To penetrate that paradigm, a financial service provider must almost live in it. Cash money is a way of life. That is what you are saying Ignacio that service providers must capture electronically how people think about their money. In Neuro-linguistic programming(NLP), they call it mirroring. I agree that any product or service that goes against the grain of how the low income people budget and discipline themselves will fall flat in the face and if it succeeds, it will be after a lot of hard work. Changing the way of thinking and behaving is an exact science. Could banks be knowing this truth and that’s why they don’t want to do hard work trying to change low income earners into savers with pittances that don’t make business sense?

In my view, why Mpesa is so successful is because it is primarily a money transfer platform. It is indeed the gap filled as you rightly put it Ignacio. To adjust the transfer platform into a receptacle of value for planning and future payments is a thinking pattern that the low income people need to be inflicted systematically and with all the motivational force in line with their psyche. It is converting their cash money and interaction based spending way of thinking and behaving, to an electronic virtual money way of thinking. It is another paradigm altogether. If you add the pendling of financial services through the platform, it becomes increasingly confusing to the low income earners. Ultimately, they will adopt but that will take time. Patience and understanding is required. As a financial literacy teacher, I am still figuring out how to teach and inflict behaviour change from cash to electronic money patterns for the low income earners. In a Visa Inc Gala dinner I attended recently in Nairobi, Visa was celebrating the 5,000 cards level mark in Kenya. Only? Well, how long is it going to take the adoption of mobile saving, insurance, budgeting, pension planning?

Ignacio, one is able to hear you out, loud and clear and your vision is clear and realizable. Who would have thought that Mpesa would reach 70% of Kenya adult population in less that five years, at least as a transfer platform. Perhaps your model will bring a similar transformation for the low income earners.

Great posting!

10 August 2012 Submitted by Jatinder HANDOO (not verified)

Thanks Ignacio. Quite Valid and an honest analysis of the situation. This piece really helps us to hold for a while and look back at the flood of m-wallets and mpayments cacophony across developing markets.
Particularly in countries like India which is emerging like a breeding ground for multiple experiments on mobile and to some extent seem to have led to hiatus in the financial inclusion agenda due to confusing confabulations.
Quite well mentioned about need to understand how poor earn ,spend and think about the money which (unfortunately) most of the e-money elevangelists miss to note.

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