Critical success factors of a money-transfer service in telecom

Following up my intention of writing a brief essay related to money-transfer, and considering that we will be participating in the Mobile Money Summit in Barcelona next week, we wanted to share our view of the critical success factors for ensuring success in any money-transfer or mobile payment service.

In the last several years the mobile money products (mobile banking, mobile payments and money transfers) have received a lot of attention from mobile operators, regulators and trade organizations. Specifically in the case of money transfers, there have been a number of success cases, notably M-pesa by Safaricom in Kenya and Smart Padala by Smart Communications in the Philippines. International experiences suggest that money transfer services thrive in markets where (A) there is low penetration of banking services and (B) there is an important inflow of international remittances.

Different African and Asian markets show different completion levels of these pre-conditions. Just to give some examples, you can find: 1) Algeria, a country where the estimated 2008 inward remittances were $5.4 billion annually and the banking penetration rate is at 31%4, 2) Kenya that demonstrates low rate of penetration of banking services at 10% and 3) the Philippines holding the 3rd position in the world by inward remittances at $14.6 billion in 2008.

What should be the Business Model of Money transfers? The business model of money transfers involves 2 critical functions: the central service provider and its peripheral agents. The central service provider (typically a bank, money transfer operator or mobile operator) is responsible for the accounting, account management, settlement and logging of all transactions. Another key service performed at the core is the cash-in-transit services.

The peripheral agents provide the capillarity of the system and perform all client-facing operations: cash handling (reception, delivery) and document management (ID, log-book, etc.). There is the critical function of communication – both between the agents and the end clients, which is naturally the domain of the mobile operator. For each specific implementation of this business model a series of decisions must be made, e.g.:

  1. Which of the central services will be carried out in-house and what part outsourced to external partners? How will the outsourced services be grouped (e.g. full-service approach with a bank)
  2. What will be the design of the distribution network (both cash-in and cash-out) and what type of partnerships will be used?
  3. How will the money flow through the system? At what point (if at all) will they be converted into e-money and can the balance be used for mobile payments and telephony credit as well?
  4. What will be the type of interface and communication for the end client? Is there going to be an application installed on the handset or not?

How can MNOs ensure success of their money transfer services? Several critical factors have to be accurately analyzed:

A) Regulation. Financial operations in many countries are subject to regulation by the government and the central bank. A regulatory audit must be performed in order to establish what is the regime in Algeria with regard to money transfers, holding deposits and exchanging currencies. The outcome of this audit will affect the business model and profitability of the service.
B) Distribution network. The distribution network consists of authorized agents who will perform client-facing functions such as handling of cash and management of documents. It is important to keep in mind that the money transfer services will include two very different distribution networks – national and international.
C) Value Proposition. The development of a good value proposition to ensure customer adoption is critical. The major factors, which will affect the perceived value of the money transfer services, are:

  • Trustworthy brand. When people entrust their money to someone else trust is of critical importance.
  • Competitive price. Currently the perception is that pricing is high. All major players offer between 12 and 14%5). By definition the segment is price sensitive, therefore a small price discount may generate interest.
  • Quick transfer times. Traditionally money transfers have been a slow operation. The most competitive MTOs changed that and currently achieve transaction times of less than 10 minutes.
  • Ease of use. MTOs offer the best ease of use – cash in, cash out and a simple collection code6. In the case of mobile operators, very often there is a special “e-money” account, a conversion process and several-step communication. These iterations must be kept to a minimum or the service must be introduced in a simplified version in order to be understandable and easy to use.
  • Quality of service. The client facing personnel at the authorized agent locations must provide the service with high quality and understanding. It is important to create a minimum set of staffing requirements for its agents in order to ensure this level of service.

D)  Other factors of importance: Apart from the previous considerations, there are two additional topics to consider.

  • IT Platform and interoperability. The platform that manages the client accounts, transaction logging and settlement may or may not be part of the existing IN platform of the operator. The key requirements to this platform are (A) to be easy to integrate in the current IT environment, (B) to provide all necessary functionality and flexibility for the service and (C) to enable interconnection and interoperability with the other money transfer operators.
  • Cash-in-transit. In order to ensure sufficient cash availability at agent end points, cash will need to be transferred to these locations. If an MNO decides to partner with a bank and use full-service model then the bank will provide also cash transfers (wholesale level). The alternative is to use a provider of security vehicles only for this type of service. In the case of international transactions a transfer operator with established channels will need to be used.

Going to the Mobile Money Summit 2009 in Barcelona. Best regards

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