Transactions Want to Be Free

Pablo García Arabéhéty
21 Jul 2017

“Information wants to be free.” This was the powerful motto that made hacker culture mainstream in 1984. Then the internet happened.

What if, as with information, transactions want to be free?

Could we expect a new internet-like moment for retail financial services if everyday users were given the ability to move money instantly across providers for free? Let’s entertain this idea for a moment. What would it take to accomplish? What would the impact be for financial inclusion?

Plenty of transactions are already offered for free. For example, I have a bank account that offers unlimited ATM withdrawals anywhere in the world at no direct cost to me. But as with lunch or instant messaging, no transaction is free. There is always someone paying. (In the case of my ATM withdrawals, sadly, I am paying through seemingly unrelated fees.)

For this reason, the question of whether it is possible to make transactions free is ultimately about business models. It is a question of whether certain players in the global retail financial services arena are positioned to move away from transaction-based revenues and cover their transactional costs by other means.

Three trends make this liberation of transactions more likely today than ever before.

Real-time, interoperable payment and transfer infrastructure is spreading across markets. If free transactions need to be subsidized by other revenue streams, lower prices bring them closer to feasibility. In the last decade, instant, interoperable payment and transfer infrastructure has become more widely available across markets, including lower-income economies. Avoiding intermediaries to access this basic infrastructure brings operational savings, ultimately lowering costs. At the same time, open transaction exchange systems using blockchain or other distributed ledger technologies have gained some traction and could become viable alternatives to centralized payment infrastructure. (Surprisingly for some, Bitcoin can be expensive and slow on this front.)

2. Transactional financial services providers are diversifying their revenue sources. Shifting away from transactional revenue requires providers to have alternative revenue streams. In the last five years, transactional businesses have started to cross-sell a broader portfolio of financial services. Kenya’s M-Pesa, which has traditionally focused on domestic transfers, launched a micro-loan service in association with a bank that reached a user base of more 12 million last year. Similarly, PayPal has been offering working capital loans since 2013. As of last year, the value of those loans had reached $2 billion.

3. Analytics are becoming a key competitive advantage for cross-selling. Analytics are taking over traditional credit scoring and making it easier for providers to diversify their revenues through lending. Ant financial, a subsidiary of the Chinese retail giant Alibaba, is already offering Sesame Credit, a scoring system that taps several alternative data sources. The ability to tap richer data to offer personalized and timely products is becoming a new competitive edge for financial service providers.

These trends present financial service providers with an opportunity to move away from transactional revenues, but how willing and well equipped are they to do so?

Banks are well positioned across these three trends. They are the backbone of the instant transaction interoperable infrastructure in many markets, they know the business of cross-selling financial products, and they have been early adopters of analytics to assess credit risk. Many banks already offer free instant transfers across providers (in Brazil, for example).

Nonetheless, their payments business model — which accounts globally for a third of their overall revenue — depends heavily on transactional revenues. Opening the floodgates to more free transactions could directly impact their bottom lines in the short term, so to many it does not represent an enticing future.

On the other hand, there is another group of market players that might not be deterred by this immediate hit to the bottom line. Online retailers, instant messaging apps, social networks, online search engines, cellphone manufacturers, and a variety of fintech startups are managing to find niches at the intersection of the trends described above. They are in an unprecedented position to offset transactional costs by cross-selling products like instant credit and digital advertising to third parties. In some markets, they are connecting to the basic interoperable instant transfer infrastructure. And they are well versed in the world of analytics and deep customer insight and personalization.

Here are just a few examples of what these companies have been doing so far.

Alibaba is aggressively raising capital to continue its global expansion and diversification strategy. The creation of Ant Financial as the parent company for Alipay and the launch of the savings product Yu’e Bao, both in 2013, signaled the company’s expansion. Ant Financial recently won a bidding war for the acquisition of Moneygram.

Facebook and Whatsapp have already secured a payments license that could enable them to debit and credit any bank account in Europe once the new PSD2 payments directive is implemented in 2018. This would make it possible for bank customers to manage their finances through third parties. In India, there are reports of Whatsapp following a similar path through the new domestic Unified Payments Interface.

Venmo, which is now owned by PayPal, has been offering free money transfers across wallets for a long time in the United States (as have many companies in other countries). But they can only offer free and instant transactions within their own platform; transactions across providers take one business day. It is an interesting case in which the United States’ infrastructure is limiting the extent to which transactions can be made free and instant (although things are changing rapidly this year).

M-Pesa, the global brand for mobile money that operates in Kenya, Tanzania and India, among other developing markets, is now experimenting with free in-platform transfers for transactions of less than $1. This initiative could have implications for financial inclusion. By definition, providing transactions to low-income segments is more expensive because cash conversions are typically required, at least at the beginning or the end of each transaction cycle. M-Pesa has excelled at making cash conversion access points available (in my view this is their core innovation), but they are expensive to operate, and subsidizing their operation could be a challenge. If M-Pesa figures out a sustainable way to subsidize these transactions, it could have a significant impact on financially excluded segments.

Looking at the overall trends in the global retail financial services industry, liberating transactions seems increasingly possible. Yet the economics of innovative business models like these will ultimately determine to what extent, and for what types of transactions and use cases, free will become the new normal.

One thing is clear: If transactions do want to be free, there will be a battle of the titans to liberate them.

What Keeps People from Paying with Their Phones?

Michiel Wolvers and Daniel Waldron
21 Jul 2017

Ever since M-Pesa caught the world’s attention in 2007, East Africa has been ground central for companies offering services that can be paid for using mobile money to the bottom of the pyramid. Pay-as-you-go (PAYGo) solar providers have reached upwards of 800,000 households in Kenya, Tanzania, and Uganda — markets where customers are able to repay the loans for their solar devices through mobile money. But what happens when PAYGo products are introduced into markets where few people are used to making payments on feature phones (in other words, almost everywhere else)? CGAP explored this question by partnering with PEG Africa, a PAYGo solar company operating in West Africa, and Tigo Ghana, the country’s second largest mobile network operator.

Mobile money in Ghana

Mobile money in Ghana has taken off only in the past few years. Until 2015, it was technically illegal for a nonbank to own an e-money platform, which left mobile money in the hands of banks that were uninterested in, or ill-suited for, the costly task of building up national agent networks. Once mobile network operators were permitted to offer mobile money services, they applied a strategy to reach scale quickly by deploying agents and paid minimal attention to educating customers about how to use their services. This helped create an over-the-counter market where agents effectively operate customer’s mobile wallets for them. And although over-the-counter service may lead to or complement mobile wallet use, it has notable drawbacks for some advanced services.

Mobile money payments, the foundation of PEG’s business model, are one of these services. As in the M-Kopa Kenyan model, PEG finances the sale of a solar home system, allowing users to pay for the system over a 12-month period. Loan repayments are tied to use, so if a user runs out of prepaid days, the unit shuts off until he or she makes another payment. Ideally, customers pay early and often, their devices are never shut off for failure to pay, and they finish repaying on or ahead of schedule. Mobile payments are the key to making this happen, as they are the quickest and cheapest mode of payment.

Yet in 2016, only 24 percent of PEG’s payments arrived via customers’ own mobile wallets. About 76 percent of payments were made by customers through someone else’s mobile wallet — typically, over the counter with mobile money agents or PEG field staff. Relying on someone else’s mobile wallet creates delays, higher costs and inconvenience for the customer. This results in less light for customers, longer paybacks for PEG, and decreased mobile wallet use.

Insights for increasing mobile money payments

Together with PEG, CGAP set out to come up with generalizable strategies to increase mobile payments among customers. The project began with a three-month research period, followed by a five-month pilot phase. Three main learnings came out of the initial research:

  • PEG’s customer base is used to passive payment methods. The Ghanaian payments sector has been designed for user convenience, and services providers are often actively involved in the payments process. This is not only the case for over-the-counter mobile money, but also for informal payments schemes. A well-documented Ghanaian example is the susu, a savings scheme whereby a collector visits customers everyday to collect deposits. Another example is the informal “lottery,” in which participants buy lotto tickets for cash when a seller visits them. A final example is utilities that send payments collectors to users’ homes. When passive payments are common, requiring customers to be actively engaged in the payments process disrupts the status quo.


  • PEG customers are skeptical of using mobile money for anything beyond person-to-person transfers. One of the inherent disadvantages of an over-the-counter mobile money market is that, by relying on mobile money agents and other providers to make payments, customers never become familiar with mobile money technology. This, in turn, creates opportunity for fraud. In fact, 80 percent of customers interviewed for this research reported having to pay additional charges on top of operator fees when paying via a mobile money agent, making them mistrustful and averse to using mobile money. Most customers, whether paying on their own or with the help of an agent, said that they call PEG every time they make a payment to confirm it has been received. This creates unnecessary call volume, and breaking this cycle is critical for PEG to create a sustainable business model.


  • Mobile money agents are not a reliable payments channel. Relying on mobile money agents presents some issues. First, agents do not always have sufficient e-money to exchange for cash, which forces customers to search for agents with liquidity. Second, while agents earn a higher commission on mobile money payments than they do for cash-in/cash-out transactions, mobile payments are more time-consuming because they often present complications that need to be resolved by the agent. For instance, rejected payments sent from an agent’s mobile money account are returned to the agent (not the customer), so customers hold agents responsible for resolving failed payments. Because of these complications, some agents choose not to let customers make payments over the counter. One agent even began to show customers how to make payments from their own phones after cash-in, forfeiting the commission but saving time.


What’s next?

While PEG initially considered over-the-counter payment through agents a viable payments channel for customers unable to navigate the phone menu, the field evidence shows that agents are costly, sporadically available, and often charge added fees. This research provides the rationale for piloting alternative payments methods to reduce the barriers for self-payment.

In a follow-up blog post, CGAP explores the innovative methods used by PEG to make mobile payments more acceptable (and more commonly used) by rural customers in Ghana. The results are exciting and show that even in countries where mobile money is unfamiliar (70 percent of PEG’s customers had never used mobile money prior to PEG), the PAYGo business model can still grow sustainably.

Financial Inclusion Prominently Featured at the G20 Summit in Hamburg

21 Jul 2017

G20 Leaders have acknowledged the importance of financial inclusion as multiplier for poverty eradication, job creation, gender equality and women’s empowerment and expressed support of the work of the Global Partnership for Financial Inclusion (GPFI). In their Communiqué, G20 Leaders explicitly welcomed the updated G20 Financial Inclusion Action Plan and the ongoing work on improved access to financing to help SMEs to integrate into sustainable and inclusive global supply chains.

In their annexed G20 Hamburg Action Plan, the G20 welcomed the work of the GPFI achieved under the German Presidency in more detail. Among the commended documents are:

Further, the G20 Finance Ministers and Central Bank Governors look forward to the GPFI Policy Paper on Financial Inclusion of Forcibly Displaced Persons (FDPs), that will be finalized in the second half of the German Presidency, and ask the GPFI to develop a roadmap for sustainable and responsible financial inclusion of FDPs until 2018.

Photo Credit: BPA/ German G20 Presidency.

This post was originally published by GPFI on 7/11/2017.

Digital Finance Partners Meeting – Banking at a Crossroads

IFC Financial Institutions Group
21 Jul 2017

IFC’s Digital Finance Partners Meeting 2017 brought together over 150 senior-level executives from leading financial institutions, technology companies and FinTech firms from around the globe.  The meeting was hosted by IFC’s Financial Institutions Group and provided a platform for Singaporean, global and regional leaders to share experiences, meet influential and innovative “distruptors” who are redefining financial services today, and discuss challenges, opportunities and solutions in the digital financial industry.

We are pleased to bring you this e-book as an interactive collection of videos, photos and interviews from IFC’s Digital Finance Partners Meeting, held Singapore in May 2017.  Read,  watch the videos, browse through conference photos and data infographics, and check out video interview series with our partners and clients.  This e-book will take you on an interactive journey through the two days of the conference, organized by the Digital Financial Services team of IFC’s Financial Institutions Group.

Explore the E-book

This year, IFC’s Digital Finance Partners Meeting, held under the umbrella of Harnessing Innovation for Financial Inclusion (Hi-Fi) partnership, attracted more than 150 senior executives from financial institutions, technology providers and Fintech companies from around the world.  You may find all the presentations, news links and other information about the event on the website.

We hope you enjoy the interactive experience that the conference e-book offers!


IFC’s Digital Finance Partners Meeting organizing team in partnership with UK AID