Sunday, November 25, 2007

A revolution in payments could be in the pipeline

Imagine being able to pay a taxi driver by `sending him an SMS'. A lot of people have cell phones, so person -> person and person -> establishment payments can be achieved with very low frictions, once mobile phones are properly in harness for the purpose of payments. I believe the cost of production of an SMS in India is now roughly Rs.0.02, so perhaps a P2P payment can get done for a flat cost of Rs.0.04. That makes it viable when buying something worth Rs.5 or Rs.10. (Rs. 10 is roughly $0.25 at the present exchange rate).

At the simplest, a payment could go hit a bank account. But when you have a prepaid phone, a payment could dip into the cash that's been deposited with the mobile phone vendor. And, once the mobile phone vendor has got some of your history of payments, he might be willing to take some credit risk and let your account balance go negative, thus giving you credit. This credit could get securitised and sold off on the bond market just as is the case with credit cards. All this could be merely a relationship between the customer and the mobile phone company, backed by bulk investors for securitisation paper, without a role for a bank.

Hence, this will be opposed by banks, who will substantially lose their role and revenues from payments. Poorly run banking regulators will be defensive about banks and will try to come in the way. How this political economy plays out is of critical importance, in judging whether this new technological opportunity will be properly harnessed.

A press release from GSM Association shows new work and focus on this subject. The GSM Association (GSMA) is the global trade association representing more than 700 GSM mobile phone operators across 218 countries and territories of the world. In addition, more than 200 manufacturers and suppliers support the Association's initiatives as key partners. I was very happy to see Indian telecom vendors playing a role in this thinking. I guess India is very big on the global scale in the world of mobile phones (In October there were 217 million mobile phones in the country, with growth of 8 million a month).

Leslie D'Monte has an article in Business Standard about these developments.


  1. Wow this is incredibly exciting.. I was always under the impression that the SMS would in someway have to link to your bank account before some sort of payment could be made. (like Paypal) but if it could be auto-deducted from prepaid cards or postpaid a/c that would really work. This reduces the security concerns with regard to accessing a bank database to verify information. New insights! very exciting.

  2. Great Idea but here are a few issues:
    1. Bond holders will demand interest - which I believe can be paid from the 'service fee' charged to the sender / receiver of money. So the cost of transaction is not equal to the cost of sending the SMS. It is higher to the extent of the service fee which will have to be commensurate with the duration of the credit (less than the month for a postpaid customer) and the inherent credit risk.

    2. Given that a consumer with bank account doesn't have to pay charges on money transfer (internet banking)- The service fee might introduce the problem of adverse selection. The service will attract more un-banked consumers - people that even operator has done only 'prepaid' business with. So a large number of users of the service will have no credit history. Making financial modeling difficult - and interest rates (demanded by bond holders) higher - service fee higher. This sounds like a lemons problem.

  3. An ingenious payments solution can be found in Nigeria. People are using pre-paid vouchers to send money to friends and relatives. They simply SMS the top-up code to the recipient, who then redeems it for cash at the local phone kiosk. The informal money transfer system has proved so popular that the pre-paid vouchers are now sold among the diaspora in London as a handy way of remitting money to relatives. A simple solution for small financial transfers - and much cheaper than the banks.


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