Mobile financial services are big business in emerging markets, where mobile phone owners drastically outnumber those who have bank accounts. However, these services have typically been somewhat exclusive, operating on a ‘closed-loop’ system wherein the financial services network of one provider isn’t interoperable with wider global payment systems.
However, this could be about to change. A new ‘open-loop’ system is being launched across much of Africa by MTN Group in partnership with Visa, connecting billions of unbanked and under-banked consumers to each other and to the global economy. DT editor James Barton spoke to Aletha Ling, COO of MFS specialist Fundamo, the Visa subsidiary that created the solution.
DT: What does the term ‘closed-loop system’ refer to exactly?
AL: ‘Closed loop’ refers to those mobile money operations around the world where our clients have deployed a fully-integrated ecosystem for these mobile wallets. With for example MPESA in Kenya, all the work to connect that mobile money system to the world - the integration work for that country - is being done on a point-by-point basis; to offer bill payments, they have to integrate to a bill payment network or the bill issuer/aggregator. There’s a lot of work in connecting that ecosystem so that transactions can flow. They can flow nicely within this closed loop, but they can’t jump out of it – it’s impossible to make a payment from this ecosystem into – for example – an ecommerce system or an international remittance. Therefore, although the closed loop is feature-rich for the consumer, it is nonetheless very confined to an environment that has been integrated in this way.
VISA is the largest payments network in the world – it’s already integrated in hundreds of financial service points, across hundreds of countries. The new solution, Visa Mobile Prepaid, can easily connect from the ‘closed loop’ to VISA’s network - the ‘open loop’ – so that customers with a mobile wallet can make ecommerce payments, withdraw cash from ATMs and make international remittance payments. Therefore, services that are already available in that open environment are now becoming available to customers on these ‘closed loop’ systems.
DT: What are the advantages offered by a closed-loop system?
AL: These services have thrived because they are launched by business entities that are close to the consumer needs in those markets. The advantage of a closed loop is that the solutions are focused on a specific market; it has benefits beyond just payments to the operators of these solutions. The fact that a client is not just a prepaid airtime user but is now a registered mobile money user brings that client closer to the network.
There are a number of reasons why these operators put these systems in place and focus a lot of attention on providing services in a way that will benefit consumers; providing them in the local languages for that market, or tailoring price points to work within that market. There’s no reason that transactions flowing in the closed loop should be affected, but offering consumers an additional set of opportunities is very significant as it boosts overall utility for the consumer and transaction volume for clients and for banks using this model.
DT: What will customers be able to do with this interoperability that they currently can’t?
AL: It will allow them to do international money remittances, cash withdrawals – the system set up by the operators involves obtaining cash from a network of agents – and also ecommerce payments. In Africa there is a great need for making payments over the internet, and that’s fundamentally an open transaction. These are not necessarily tailored to the market, but are broadly applicable to the global market.
DT: Could this initiate a global cash withdrawal system with a standardised charge?
AL: We still look at it very much as an emerging market offering. What is fundamental about Visa Mobile Prepaid is that it uses a virtual card – the phone is essentially the card. That’s significant because there are very few plastic cards in circulation in most emerging markets, whereas in developed markets it’s freely available so there’s not really a problem to address. The solution’s main value is as an additional option for withdrawing cash in emerging markets.
DT: How does the solution ‘open up’ the closed-loop while maintaining its benefits?
AL: Visa Prepaid is a product which runs independently from the underlying wallet system. It’s already integrated into Visa Net, and because of this we can connect that set of transactions to Fundamo’s closed-loop systems, but it can also be offered to other providers’ closed-loop systems. It’s definitely something that financial institutions are interested in – in emerging markets, growth means reaching out to new consumer segments. Doing this means taking a different view of service delivery; the idea of mobile being a fundamental delivery method within Visa through this virtual card mechanism means that all parties can consider this a means of providing services to consumers.
DT: Will it be a hurdle to make people use their phone to access their bank account?
AL: In emerging markets, most consumers have never known the alternative, so it’s a very accepted idea.
DT: Is this solution leapfrogging the developing world’s financial infrastructure to provide an alternative that is both suited to and viable in emerging markets?
AL: It doesn’t break the existing the existing financial services approach to electronic payments; it still supports the ‘four party’ model of issuers, acquirers, merchants and the payments network. There’s the issuer, which is the entity that holds the account against which the card operates – you are never a Visa client, you are a bank’s client which then issues you a Visa card. Whether it’s the network operator issuing the virtual card or the bank issuing an actual card, you are the customer of the issuing entity. The four party model remains in place. By the nature of mobile – its pervasiveness and availability – in emerging markets, the mobile virtual product is superior to plastic simply due to the infrastructure.