Pablo Montesano is the Director, New Business Development, Telefónica. Pablo began his career at Telefónica in 2008 as Director in the Corporate Strategy Department and in January 2009 became the Global Head of Financial Services, leading the development of B2C and B2B propositions in this new business area. As part of these responsibilities, he led a Joint Venture agreement with MasterCard for Mobile Money across Latin America. He currently leads the Regional Marketing and Sales efforts for this Joint Venture.
Prior to joining Telefónica, Pablo worked in Strategy Consultancy at Arthur D. Little (2000-2008) and also held Sales and Marketing positions at Coca-Cola (1998-2000) and BBVA Bank (1993, 1995).
Pablo holds a Business degree from Brock University in Canada, and a Masters in Economics from the London School of Economics.
Mobile money is set to take over Latin America. This is an historical step in the evolution of human commerce - eliminating the use of cash. Mobile operators are well positioned to manage this service with their prepay systems and mass market experience but they need to co-operate with financial institutions who know how to deal with banking transactions, fraud and financial regulations. New partnerships and acquisitions are beginning to shape the value chain in Latin America. These partnerships must learn from the African experience and ensure large enough scale for this low-margin business, strong co-operation and wide networks of trusted agents.
Arguably, no other technology has revolutionised more the lives of the emerging classes in Latin America as mobile communications. Beyond being an essential tool for communications and work, the mobile phone provides bottom-of-the-pyramid consumers a connection to the world. The mobile phone represents possibly the only “luxury good” that they can afford, and are part of their identity as new consumers in society. The prepaid service is an essential part of this trend, allowing consumers the control and flexibility they demand. These factors explain the wide adoption of mobile phones in the region, reaching close to 92 per cent penetration this year .
Mobile money is a revolution in its own right, with the potential to have an impact similar in size to mobile communications. While nearly 65 per cent of Latin Americans are unbanked, this is not to say that they do not have strong need for financial services. In fact, studies show that on average, low income consumers have as many as ten informal “financial instruments” at a given point in time: they send money regularly to relatives living in the countryside; they may have under-the-mattress savings (with the consequent risks of getting robbed); and they also at the same time may borrow money under communal microcredit scheme.
These services usually come at a high cost. For example, a national remittance within any Latin American country can cost more than ten per cent of the value being transferred. Microcredit agencies usually charge interest in excess of 80 per cent, partly to make up for the inefficiencies associated with distributing and collecting their loans.
The ‘unbanked’ are usually limited to informal work relationships and often are self-employed. If they do not work, they do not get paid. An efficient management of their money can make the difference between their children having a decent meal that day or not. An important part of someone´s identity is their financial track record, and on this front, the ‘unbanked’ simply do not exist. This is why financial inclusion is such an important element of economic development. It is estimated that a ten per cent increase in private credit reduces poverty by three per cent .
Mobile money provides a compelling answer to these inefficiencies. The value proposition is simple: a user´s mobile phone number becomes a mobile prepaid account, enabling several services such as national money transfer, retail purchases, international remittances, bill payment, etc. These services are offered under a pay-as-you-use basis, with no set up fees and ideally (depending on local regulation) with none of the paperwork usually associated to opening a bank account. User transaction history opens the door for consumers to qualify for credit or insurance products.
A common concern about mobile money is whether it is secure enough: “what happens if my phone is stolen? Is the money in my wallet gone?” Actually, mobile money is safer than cash or credit cards. A secret PIN number entered at the phone is needed to authorize any transaction. Cash points are served by attendants in high transit areas, making it more difficult for criminals to coerce you into withdrawing your funds, a common modus operandi in Latin America with ATMs. Cash is anonymous and cannot be traced, compared with mobile money transactions that are linked to highly traceable accounts and phone numbers.
At present, mobile money is very much a reality in some parts of Africa and Asia, with the M-PESA service by operator Safaricom in Kenya being the main reference point. With around 15 million active users after five years in service, and ten per cent of the Kenyan GDP (Gross Domestic Products) flowing through the service, M-PESA has caught the attention of Mobile Network Operators (MNOs) and Banks CEOs operating in emerging markets. However, Latin America is not Africa. Latin American economies are much larger and sophisticated (In terms of GDP, Argentina and Mexico are 11 and 32 times larger than Kenya, respectively), and enjoy a longer institutional tradition. Will mobile money work in Latin America?
Perhaps it is more a matter of when it will arrive and who will be the winning players delivering it. The increasing level of competitive activity points to this time frame coming sooner rather than later. The two largest regional Telecom players, Telefónica and America Móvil, have already announced the launch of mobile money services in selective markets within their respective footprints during 2011. Local examples, albeit with limited impact so far, such as Oi Paggo in Brazil, Tigo Cash in Paraguay and Entel PCS in Chile, are already launched.
Mobile network operators, by leveraging the assets built for their core business, are well positioned to lead this new space. MNOs own large customer bases and have an easier way of reaching consumers through embedded applications that work on all types of devices. They can also build a vast network of authorized cash in / out agents that can make the wallet liquid at any point in time by leveraging their existing prepaid distribution network. Also relevant are the MNOs’ brands, which in Latin America are much more trusted and close to consumers than the brands of financial institutions.
Banks are also becoming active by pushing their own mobile banking applications into phones in cross operator initiatives, such as Redeban in Colombia and Naranja Mo in Argentina. Remittance service players are redefining their positioning, getting closer to the consumer, for example, with the purchase by Western Union of the bill payment network Pago Fácil in Argentina. Over the top players, such as Dineromail or Paypal, are moving from the affluent internet consumers towards the mass market. We will certainly witness an increasing number of offerings in the market as well as new partnerships and acquisition, as the retail financial services value chain continues to reshape.
Out of these competing offers, only a few are expected to succeed. What does it take to build a successful mobile money initiative in Latin America? These are some of the most relevant Do´s and Don´ts from the African and Asian experiences:
• Scale is critical. Mobile money is a high volume, low margin business. Open, interoperable solutions that connect banked and unbanked customers will deliver a stronger value proposition. Regional solutions that enable cross border transactions are another way to gain scale. M-PESA, as a closed loop solution (i.e. no interoperability with the mobile wallet of other MNOs or connection to bank accounts) has been successful because it has 80 per cent market share. Attempts to replicate the same solution in markets where MNO market share is more evenly spread (as is the case of most Latin American markets) will meet much more resistance.
• “Don´t go into it alone”. Banks and MNOs are accustomed to calling the shots in their respective markets. Mobile money, at the intersection of both markets, requires the expertise of both sides. Operators are good at selling mass market products to the bottom of the pyramid but have limited knowledge of payments, fraud, disputes, and financial regulations. The right partner should be equally keen in wanting to introduce this game-changing proposition. MNOs need to be mindful of “false friends” that have no intention to challenge the status quo.
• Build a large, trusted network of distribution agents. Agents represent the service - the face in front of consumers. Having an extensive network of places where users can cash in / out without having to walk far is critical. Creating a consistent user experience at the point of sale and helping customers understand how to use the service will generate the necessary trust in the network. The use of ATMs is a good benchmark. People know how to use an ATM regardless of the bank it belongs to and the look and feel is similar in most countries. Also, if an ATM is out of cash, people do not mind walking a few blocks to the next available machine. Latin America has a history of several bank crises and Ponzi schemes which makes this issue extremely relevant.
The authorities can also do much to help driving financial inclusion. A special regulatory environment needs to be defined and implemented to recognize mobile money, ensuring that service providers meet the necessary requirements to keep customers’ money safe, but lowering KYC and AML requirements to the risk levels associated with small transactions. Also, by not forcing mobile wallets to be linked to individual bank accounts, they can help avoid the cumbersome barriers and paperwork associated with established bank products. Countries like Peru, Nicaragua and Mexico have made significant progress in this regard, and these efforts need to be extended to other markets across the region.
Mobile money must be viewed as one more step in the evolution of exchange methods that has taken place for centuries: from the exchange of shells in 1200 BC, to the early silver coins in 500 BC, the adoption of paper currency in the 9th century AD, and the invention of credit cards in the 1950s. Cash may disappear and with it, millions of consumers will be able to manage their money and their lives much better.