Bridging a Financial Gap

By MicroSave

Few breakthroughs in financial services have ever generated as much excitement as mobile money—and the enthusiasm is understandable. Billions of people have historically been excluded from the financial services mainstream either because they live in remote areas far from the nearest bank branch, or because their finances are too small-scale to service profitably under traditional banking business models. The promise of mobile money, which puts banking as close as the phone in a person’s pocket, is to dissolve distance and to make transaction size irrelevant. Small wonder, then, that mobile money is the subject of such intense interest. But not all mobile money models are the same.

One of the key issues is over-the-counter (OTC) transactions. MicroSave defines an OTC transaction as one that “an agent conducts on behalf of a sender, a recipient or both from either the sender’s or the agent’s own mobile money account.”  Think of it like this. Instead of sending his mother back home on the farm some mobile money directly from his own mobile phone account to hers, an adult son living in the city takes some cash to his neighborhood agent and pays that agent a fee to send Mom the money from either his own or from the agent’s mobile money account. Mom gets a text that she has received money, takes her phone to the nearest agent in the home village and withdraws the cash her son had sent.

That scenario is certainly better than the old alternative where the son might make the long trip back home every few weeks to deliver cash in person (and hope that in the meantime the cash did not get stolen from its hiding place in his rented room in the city). But the OTC model is still less efficient than a pure P2P direct.

In many countries where OTC is offered in addition to mobile money accounts, the majority of mobile money users seem to prefer OTC, according to a report MicroSave co-published earlier this year. This is true even in East Africa, which is widely viewed as a leading global market for mobile money. In Uganda, 57 percent of registered mobile money users reported they preferred to “use OTC via an agent;” the comparable figure in Kenya, birthplace of M-Pesa, was 54 percent.

Various industry stakeholders have expressed concerns around OTC: increasing risks of money laundering or financing for terrorism; constraining product evolution; locking providers into the model; and decreasing provider revenue and profitability. But ultimately, financial inclusion—the end toward which mobile money is supposed to be the means—is supposed to be about meeting customer preferences. MicroSave’s work indicates that:

  • OTC without proper forms of identification may indeed increase the risk of money laundering and terrorism financing. However, this should not mean that the regulators should ban OTC transactions altogether. Instead, the regulators may formalize OTC transactions to ensure that both the sender and the recipient (for a person-to-person transaction) can be identified. Regulators should also let the market decide the nuances of the registration processes.
  • OTC is often seen as a brake on creativity, constraining the evolution of better products. But OTC may be an appropriate tool to promote adoption and familiarity with mobile money for early use cases. Providers can still collect data on the preferences and usage of the mobile money users during an initial period of OTC. The data thus collected may be used to develop additional use cases around credit, savings and insurance that can be pushed through a mobile money account. Customers, already thus familiarized with the basics, may be more inspired to make fuller use of available services.
  • Industry experts argue that it is much harder to transition OTC users to mobile money accounts at a later stage because both users and agents get stuck in a sort of OTC rut. But most providers offering OTC also offer mobile money account registration, and for most providers, mobile money account use and OTC use grow in tandem. The industry-leading numbers of account registrations in both Bangladesh and Pakistan, where OTC is prevalent, illustrate that OTC does not in fact inevitably prevent growth in account registrations.
  • OTC transactions do reduce profits for the providers because of higher operational costs. But the increased volume of business still justifies serving the segment of mobile money users who prefer—at least for now—OTC.

For a more detailed discussion of these issues, please see “OTC: A Digital Stepping Stone or a Dead End Path?