Obstacles to the Global Mobile Banking Era

In many parts of the developing world, mobile banking or "m-banking" has largely supplanted conventional banking as the primary interface of customers with the financial system. For starters, many of the poor cannot meet minimums to open bank accounts. And, even if they did, bank branches are often sparse outside of urban centres. (Some m-banking heavy countries have generations of customers who've never even really used bank branches.) Just as cell phones have become far more plentiful than land lines in LDCs, though, people have needs for financial services as well as communications. Hence the ongoing popularity of using cell phones as "mobile wallets" to make purchases, pay off loans, receive salaries and so forth. As such, they can be quite handy in countries where financial services are sparsely available.

Truth be told, though, the diffusion of m-banking services has not been so swift outside of innovative countries in this space alike the Philippines in Southeast Asia, India in South Asia and Kenya in Africa. Just in time, a batch of three new articles from Global Briefing, the online publication from Commonwealth nations, tell us not only about their prospects but also why their diffusion has been slow.

First, there are competitive pressures from traditional banking institutions. Especially in the developed world, traditional bricks-and-mortar banks are afraid about what virtualization of money may do to their income. That is, what would m-banking do to their addiction to fees, fees, fees in a world where consumer choice is more unfettered in sending and receiving money across borders? There may even be broad systemic implications for the international monetary system should virtual currencies gain acceptance and replace national ones. Virtual money supplanting the dollar? I'm all in favour of it! Still, American authorities may not be so keen given the implications of such a shift...

So M-payments are a small part of the financial universe, but they are growing. In terms of the number of transactions, they are mushrooming fastest in emerging economies, although, inevitably, there is more growth in the value of transactions in developed economies. But it is not the mere expansion of transactions that is getting banks and governments hot under the collar about M-payments. What is driving the debate is the potential that mobile money has for changing the way that money works. Consider this: mobile communications are an alternative infrastructure, controlled not by private financial companies, or central banks, or governments, but to a large extent by the people who use them [...] The financial impact may only just be gathering momentum. Could it be that mobile communications will become the medium for new forms of unregulated money, beyond the reach of conventional banking and conventional financial regulation?

If that were to happen, the way the world uses and thinks about money would change beyond recognition. Bank regulation, instead of being a topic of urgent debate, would become an irrelevance. Economic management through monetary policy – the control of interest rates and the issuance of money – would be a relic of the past. Capital controls would disappear entirely. There would be no more offshore banking havens, because everything financial would effectively be offshore. Both risk and profit would be in the hands of individuals, along with whichever companies manage to grab a piece of the new commercial action. Far fetched? In fact, there are many who would welcome such a zero-regulation financial world, in which there are no safety nets and no taxpayer-funded bank bail-outs.

Second, aside from prospects for revolutionizing how the international monetary system works, less drastic regulatory concerns abound. In particular big, bad America's insistence on stringent anti-money laundering and counter-terrorist finance (AML/CTF, not AML/CFT as the article mentions, actually) is saddling consumers worldwide with additional costs:

Given modern technologies, it is hard to believe that sending money costs nine per cent on average and, in some south-south corridors, 15-20 per cent of the principal amount remitted. The fee structure is also highly regressive – the smaller the remittance, the higher the fee. International regulations, especially anti-money laundering and countering the financing of terror (AML/CFT) regulations, are increasing the cost of using mobile phone technology and internet to send money across international borders. These regulations are also preventing global banks from operating bank accounts of money transfer companies, thus contributing to higher costs. Exclusive partnership agreements between national post offices and major money transfer companies are increasing the market power of the latter and stifling competition from new players. Capital controls are preventing outward remittances from many developing countries. And exchange controls, together with dual exchange rates, are discouraging remittances in many countries.

Third, then, is the rather slow uptake of virtual currencies. At present, none can yet fulfil the traditional functions of money: store of value--no one is sure if any of these currencies are going to be around in a few years' time; medium of exchange--even fewer still are accepted by an appreciable user base; and unit of account--valuations of these virtual currencies remains...irregular. So, we still need a trustworthy virtual currency that many will be willing to use and hold:

The next step in the mobile money revolution is the emergence of virtual currencies. At present, mobile wallets use established currencies but parallel digital currencies are now being introduced that can be traded across any digital platform on a peer-to-peer basis. The first – and best known – was Bitcoin, which, unlike alternatives, is not restricted to a single website, nor used solely in gaming. The currency is created by ‘Bitcoin mining’, where rival servers compete to solve maths tests, the complexity of which regulates the supply. The winner gains the virtual money created and it can enter the market, in much the same way that currency created by a central bank is distributed.

Bitcoin has attracted criticism, not least because its founders are unknown, its market value volatile and it has proved attractive to drug dealers. Each Bitcoin was valued at $15 at the start of this year but quickly rose to more than $100 on investor interest. In six hours in April, the exchange rate plummeted from $266 to $76 then rebounded to $160. Other convertible virtual currencies have followed, including Ripple. Developer OpenCoin has created a fixed number of 100 billion Ripples, most of which it will give away for free. It hopes limiting the supply will increase the currency value over time, thus making the Ripples it retains worth a fortune.

The more I read about it, the more I believe that the emergence of m-banking is a necessary step in moving further into a better, post-American world. Escaping from the shackles of their junky national currency which causes American busybodies to stifle innovation over "security" concerns post-9/11 involves the development of a better alternative. In many parts of the developing world, it is already emerging with m-banking. The obstacles are not insurmountable if innovation progresses at the rate it has in the developing world, leaving America far, far, behind in the sophistication of such services.

As always, necessity is the mother of invention.