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Saturday, August 01, 2009

Grassroots strategy for mobile phone based payments, sighted in Africa

by Matthew Morris.

Today's mobile phones are as powerful as the computer used in Apollo 11 for the moon mission. So how can India's 400 million-plus mobile phones/NASA computers transform access to finance?

Many people have been talking about the potential of mobile phones to revolutionise payments and ultimately consumer finance. Chapter 3, `Broadening access to finance', of Raghuram Rajan's report puts a considerable emphasis on the role that mobile phone companies can have in improving financial inclusion, even though they are not traditionally seen as financial firms. [Also see].

One breakthrough came on 30 June 2009 when the RBI authorised 17 banks to introduce mobile banking services, enabling customers to carry out fund transfer between banks and accounts.

And there are signs that banks are innovating. For example, there's a Citibank pilot project, reported in the Business Standard a couple of weeks ago, that enables credit card customers to use their mobile phone for payments.

But these are only small steps. The RBI guidelines are still quite conservative, and the Citibank pilot is only for six months and for customers in Bangalore.

What about the hundreds of millions of unbanked people in India who have mobile phones?

A brilliant idea that is used in Africa, where mobile phones are used for money transfers, could be important in India. It's great for unbanked people, because it doesn't require a bank account or even a bank. And it enable small transfers to be made to help friends and family, say with school fees, medical expenses or loan repayments. It requires no cooperation from the government.

Here's how it works, for person A to send $5 to person B
  1. Person A buys a $5 top-up card for his mobile phone from a street vendor or phone kiosk and scratches the card to reveal the top-up code.
  2. Instead of keying in the top-up code, Person A sends it to Person B as an SMS message.
  3. Person B receives the SMS and takes her phone to a local phone kiosk, and sells this top-up code to the local trader.
  4. The local trader inserts the top-up code into his own phone to verify that the $5 top up is valid and pays Person B (a bit less than $5).
  5. The local trader can then sell calls on his phone or use the credit for his own private use.

Essentially, a secondary market in top-up cards has been developed that enables small money transfers to be made quickly and easily.

This informal money transfer system has proved so popular that these top-up cards are now sold among the diaspora in London as a handy way of remitting money to relatives. And Western Union is now planning to roll out a mobile money scheme in Africa to avoid being left behind.

Banks here are also keen to explore the opportunities that new technology provides. Yet regulators remain cautious of the potential of mobile phones for transforming access to finance.

While the legal and regulatory issue wait to be resolved, it would be an interesting experiment to see if an informal transfer scheme, along the lines of the one described in this blog post, would work in India. It would also be interesting to hear comments on what other solutions people are using already to make the most of their pocket-sized Apollo-11 quality computers.

These are small steps, which are a grassroots effort at overcoming problems. The big leap will come when the mobile finance sector is opened more fully to competition and innovation.


  1. This is a very promising idea and one that shows a lot of promise. I am sure India can use a variant of this idea to support money tfr in some way.

  2. what prevents people even now from doing this?A migrant laborer in a city can even now do the same thing which people in Africa are doing.It only needs word of mouth publicity,literacy and wider coverage of Telecom network.
    Maybe telecom companies can use this as a marketing ploy.This will be well within even current regulations.
    But the amount of money that can be
    transferred and traded is too low to make a meaningful difference. The current declining ARPUs of 210(Reliance) come nowhere close to typicaly amounts remitted.

  3. Such a strategy, that replaces the usage of currency, unfortunately also brings with it all the problems of fiat money.

    In this case, a recharge card is a claim to a real consumption good - cell phone minutes. But what if many more minutes are sold than available capacity? The exchange rate between currency and recharge cards will start fluctuating. What if the carrier goes out of business?

    As a means of small-time payments on a small scale, this is a great idea. But at large scale, in a country like India, will this really work?

    What is really cool here is the low overhead for making small payments. We know how ebay really took off with paypal (and it's high transaction costs). Perhaps the key idea can be distilled and implemented in India.

  4. Hi, We are working towards something similar with our mobikwik balance. Please check it out at


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