DGC Blog

Digital Currency and Mobile Payments Offer Benefits For Millions of User

There is always a big fuss happening on places like the CounterTerrorismBlog.com and web sites like NoMoneyLaundering.com (pdf) regarding how new technologies such as digital currency and m-payments could ‘possibly’ be used to fund terrorism or launder drug money. While I suppose this hawkish attitude is needed in today’s world and certainly smarter people then myself are in charge of tracking the bad guys, the devil is in the details and rarely are the benefits and details even mentioned. Since DGCs are the devil I know, take one moment and look at some new technology that falls into the same category. Look at the millions of people who will directly benefit each day from m-payments. Try to remember, that the entire  world does not operate on credit cards, “Nearly three billion poor people in developing countries lack access to the basic financial services needed to help them manage their precarious lives.” *www.cgap.org

Generally, from these hawkish web site you get a synopsis of the potential “criminal” activity like these copied below.

Mobile Payments and Money Laundering

How to abuse the system

Here is how the launderer can abuse the mobile payment system: The launderer buys a prepaid card for any amount and loads it with ill-gotten money. He then registers online with a mobile payment provider using a free anonymous e-mail account, the prepaid mobile phone number, and the money on the stored-value card. Of course, he provides a false identification number and a false address. Using the cell phone, the launderer then logs on to the payment service provider website and gives them the number of the mobile phone to which he wishes to transfer the funds from his prepaid card. The telecom company then sends a message to the receiver’s phone number asking where to transfer the money. If there is a partnership with a bank, the recipient can request the transfer be made to his stored-value card and then withdraw the funds from any ATM, anywhere. The transaction leaves a minimal audit trail: two mobile phone numbers, the amount of the transaction, perhaps short instructions on the transmission, and reception. This could create a situation where we have a minimal audit trail and anonymity, combined with functional similarity to a credit or debit card or remittance services. And all of this is virtually unregulated. *http://www.nomoneylaundering.com/Publications_files/Mobilephonevulnerabilities.pdf

Here is one from the CounterTerrorismBlog.com which quotes a report from the US State Department

The section describes a typical method of moving money through m-payments: Increasingly, in many areas, m-payments provide a new option to expatriates and “guest workers” that wish to send part of their wages home to support their families. M-payment transfers are replacing the use of traditional banks and money service businesses that historically have charged high fees for small transfers. M-payments also provide fast, safe, efficient value transfer service, which will encourage some users to bypass the use of underground remittance systems such as hawala. The following is an example of how money can be moved via cell phones:

• The sender gives cash for transfer to a remittance center, plus a fee of approximately 3-5 percent (fees generally depend on the amount transferred, and there are generally limits on the amount that can be transferred at one time).
• The remittance center transfers the amount electronically through the phone company to the receiver’s cell phone account.
• The recipient receives a text message with notice of the transfer of credit to his or her “electronic wallet.”
• The recipient goes to a licensed outlet, retail store, or even a fast-food restaurant to pick up the cash or use the credit. For example, in a restaurant the patron connects to the cash register with his or her cell phone, enters a personal identification number (PIN), and authorizes payment. The entire transaction takes just a few seconds. The entity that provides the goods, services or disburses the cash may also charge a small fee.

These reports all seem pretty scary to Joe Public, but we must not forget they were all written by the wealthy, credit card and bank account holding college graduates in the United States.

Where are the front page articles proudly showing the everyday benefits of m-payments for locals in Africa. Where is the popular blog on digital currency extolling those benefits for far off nations where bank accounts are just not possible? You don’t see that much on the front page, but the words ‘terrorism’ and ‘money laundering’ sure seem to grab the headlines. There are lots of crooks and evil people out there but occasionally, I ask you… is it not better to light a candle than curse the darkness?  Take a real look at the benefits of technology and not the ‘potential threats’.

Please read the following and have some faith in the folks who create and implement these technologies. Don’t live in a world of fear, new technologies such as digital currency provide an gateway to everyday e commerce that simply was not possible or practical through a high interest bank.

This article is from the CGAP web site. They are a “..the leading independent resource for objective information, expert opinion, and innovative solutions for microfinance.”

Why has M-PESA become so popular in Kenya?

by Jim Rosenberg: Tuesday, June 17, 2008

It is early morning in Bukura, a small village in Western Kenya. The shop-keeper and his wife are preparing to open their small store, which sells household commodities such as flour and cooking oil. They also offer M-PESA services. There is already a queue outside. A group of about twenty villagers are crowding the entrance. “It is always like this,” the shop-keeper complains while pointing to the crowd. “Since we have become M-PESA agents we have no time to rest. This thing has even over-run our other business”. He then holds up a packet of sugar. “We have not sold any sugar in months. They only want M-PESA”. Not just the Bukura agent has seen a great demand for M-PESA services. Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.

Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer. They then influence recipients in the rural area—who are usually female, less educated and poorer—to also use M-PESA. This segment is referred to as the ‘technology laggards’. They are usually the last, and often the least likely, to adopt an innovation.

This research also notes some barriers to adoption. Both agents and customers complain of cash float problems, especially in the rural areas. Because the majority of transactions in the village are withdrawals, agents must maintain their cash float. They do this by making frequent trips to the bank. This can be problematic if the agent is not close to an urban centre, where most banks in Kenya are located. An agent in Malaha, a small village in Western Kenya, commented, “almost every day I ride my bicycle to Kakamega to top-up my float. This takes me almost three hours. I have to leave at 6am because I want to be there when the bank opens. I must then come back again and serve my customers”. When asked if there was any other means of transport to Kakamega, the agent shook his head. He said that he was several kilometres away from the main road. He also said that he could not afford to pay the 200 ksh fee for the matatu (shared taxi).

Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.

Special thanks to Dave Birch over at DigitalMoneyForum for bringing this article to light.