After the success of services such as M-Pesa, Kenya’s mobile-phone based money transfer service, it is clear that there is a large under banked population in the non-western world. A population that is quick to adopt low cost mobile based solutions.

Dinero-LogoA new mobile payment system, Dinero MPS, aims to offer a wide variety of mobile payment services starting with the unserved markets in Africa, South America and Asia. Founded by financial cryptographer Ian Grigg and entrepreneur Ken Griffith, Dinero’s Ricardian-Contract based system is set to launch later this year with the release of an Android phone app.

Dinero’s co-founder Ken Griffith shared with DGC insight on the businesses’ plans and motivations.

Julia: As Dinero is a Ricardian-Contract based system, can you give me an overview of the origins of the Ricardo Transaction Engine?

Ken: It started with Systemics, a business founded by Ian Grigg & Gary Howland in 1995. Gary was at DigiCash before he left in Fall 1995 to join Ian.  Their initial goal was to create a platform that could trade multiple instruments from many issuers. Their target was corporate bond trading, but as they developed the model to do bond trading they invented the Ricardian contract and Gary created the Secure Open Transactions Protocol which we call SOX. They soon realised that the model was so flexible that it could be used for currency; it could be used for stocks, for bonds or just about anything that you could write a Ricardian contract for.  So the Ricardian Contract is the heart of the system.

(A Ricardian Contract is simply a contract that defines a set of conditions for the instrument that can be read by both humans and computers and is signed with the Issuer’s public key.)

The Ricardian Contract is important because it allows several things, but the primary benefit is the triple entry accounting.  Most people don’t understand what’s so secure about it but when you start using the system you understand how powerful it is.  It makes it very difficult for an insider to forge a transaction because you’ve got a digitally signed transaction history in every transaction receipt so if someone tries to forge a transaction it’s very easy to prove which one is fake.   In a multi-Issuer ecosystem it allows trading, and trading is where the real power of the system is.

Julia: Can you tell me a bit about the origins of Dinero? When/why did you and Ian decide to launch the business?

Ken:  In the early 2000’s I realized that once the phones became powerful enough to process encryption, that the union of phone and wallet would be a beautiful child that every woman would love.  Ian had also realized this and written about it in 1998, and I’m sure others anticipated this as well.  So you could say that both of us have been waiting for the development of smart phone operating systems with enough power to process strong crypto.  As you know the media has been chattering about mobile wallets for the past two years, so the time has come and there are about 150 companies trying to figure out how to do this and be the first one to capture this market.

I was invited to Kenya by a friend in 2010.  At first I was not interested. But then I heard about M-PESA, a digital money system that Safaricom had put on their phones.  This caused my ears to perk up because this was an example of a telco breaking the glass ceiling where the banks have managed to keep non-banks from becoming serious players in digital money transactions. M-PESA was the first instant clearing transaction system to gain more than 5% market share in any country of the world.  It was the first mass adoption of digital currency by the average Joe.  Today they have about 90% penetration of the market and process 30% of Kenya’s GDP.

So I moved to Kenya in 2011 and spent a year studying the economy and the opportunities in the digital money space.  M-PESA had become such a dominant player in Kenya that the other telcos had copied their system, but completely failed to take more than 1-2% market share.  30% of Kenya’s GDP allegedly went through M-PESA in 2011, which means that the first company into the space had become so dominant that it would be virtually impossible to compete with them on their own turf.

But M-PESA also has several glaring flaws, most notably the fact they are limited to the Safaricom network, they have reversible transactions (which are now resulting in a growing fraud rate), inability to be certain you paid the right person until after the money was sent, and there is no API to allow other applications and web sites to use M-PESA.

While we think we have a superior transaction engine to M-PESA, trying to compete directly with the biggest player is a non-starter.  Airtel, Orange and Yu-Pay have all tried with far greater resources than we have, and failed.

So I had been looking for a niche that M-PESA cannot effectively serve.

I learned that Kenya has a savings culture of these groups called “chamas” that are little clubs where the members pool their savings together for investment.  There are 300,000 chamas in Kenya managing about USD $4 billion per year in savings.  By offering a variety of savings instruments to these chamas, we can take advantage of the strengths of the Ricardo system in a niche that neither M-PESA nor the banks are currently serving.  This lets us establish ourselves as the first entrant into a new market at the base of the pyramid.

The reason that this chama culture exists is that the banks of Kenya have high fees and low returns, making them inaccessible and unaffordable to the majority of Kenyans who have an average income of $140 per month in a country with 11% average inflation.

Having seen the opportunity to field Ricardo in Africa, I contacted Ian Grigg in July of 2012 to see if he would be interested.  After several months of discussion and test marketing, Ian moved to Kenya and we formally founded the Dinero MPS venture in December 2012.

Julia: Dinero’s initial market will be the under-banked population of Kenya?

Ken: Yes. Kenya is our test platform or testing country largely because the idea of storing value on the phone has become accepted by the mainstream here.

Kenya has the one of the worst environments in the world in terms of trust. Kenya ranked #1 in the world for financial corruption. There are a lot of issues with trust which are compounded when dealing with people at a distance.  If we can build a system that can work in this adverse environment we believe it will work well anywhere.

But I think Kenya has a lot of positives.   Kenyans have an excellent work ethic and a very high savings rate (12%).  This means that there is a very large potential profit to be made by solving the problem of savings for the Kenyans at the base of the pyramid – and thereby capturing the entire pyramid, like M-PESA did with payments.

In the longer-term we are going to an unserved market – the poor in Africa, South America and Asia, countries with large unbanked populations.  We are providing them with a system that has such low transaction and operations costs that it can work for them on their phones and enable them to diversify their savings into apolitical investments like bullion, unit trusts for real estate, stocks, etc.

Additionally, we are building a bridge to allow someone with a dumb phone to control a Ricardo account which will be hosted on a server.  The penetration of Android phones is still too low in Africa to support a business by itself.  However, several studies have projected that Android phones will be the majority in Africa in five years as prices come down.

Julia: What currencies will the Dinero system will be set up to trade?

Ken: It depends a lot on who the customer base is, but currently we have groups that are using the national currency and gold. This is being done through a co-operative society, like a members-only club.

There are also other groups that are interested in doing community currencies. And they want to create community currencies for lots of little towns and cities in Kenya and since our system is designed to have multiple issuers and allow trading it is quite well suited for that kind of project.   The first one of these was launched on May 11th in Bangalore Slum in Mombasa, and they call it Bangla-Pesa. We hope we can help them with those projects, and by doing so expand our user base.

In the long run Dinero could be expanded to do other things. It could do coupons for businesses it could move into bonds and move into a stock exchange and trading system.

Julia: Can you tell me more about these members-only investment clubs?

Ken: There is a “Co-operative Societies Act” in most countries, which allows people to form clubs for various purposes, including self-help savings groups. They use these groups to pool their money and invest in things and some of them get bigger and turn into a credit union which in Kenya they call a SACCO (Savings and Credit Corporation).

In Kenya the informal savings groups are called “chamas” and they are quite popular and have spread to other African countries. There are roughly 300,000 Chamas managing about 4 billion dollars in savings per year which comes out to about 11,000 per group. Under the co-operative societies act these savings clubs are allowed to do some of the things that if you did for the public you would be regulated as a bank, a securities issuer or a forex agent. But as a members-only club they are allowed under the law to do these things. So we are catering to that market to give them a platform to do it with good governance.

Our system also has a social networking component that we are using to meet the know-your-customer requirements. So, the Issuers on the system will know with very good accuracy who their account holders are, and who their social network is. So if there is a problem, such as criminal activity, the Issuer will be able to pinpoint who, what and where, freeze the account and then hand that info to the relevant authorities.

Julia: When will the Android app be released?

Ken: The end of this year. The app is right now in Alpha. We are doing invites and transactions on the Android. We are testing but we have got 3-6 months more user interface work to do before it is ready for the end users. We are thinking that it will be Autumn before you will see an app on Google Play that you can download and install on your Android phone.

Julia: So 6 months from now I download the Dinero app to my Android phone and what can I do with it?

Ken: Well initially it has a chat app and chat credits so when you do the default install all you will have is a chat contract. In order to install another contract you have to be invited by someone on that contract. Keep in mind that we are working with investment clubs that are members-only so you have to be invited to a club in order to get a contract installed and then you will be able to trade.

By this Fall the currencies that will be available in these investment clubs in Kenya will probably be the Kenya shilling, gold and the US dollar and possibly Euros.

Julia: Dinero is an account based system?

Ken: Yes.  The system has a master nym – that is your id and then you create sub-accounts under that nym, on various contracts. So your nym might be “Julia Dixon” And you install a contract for a gold issuer, and a contract for Euros. Then you can create one or more holdings on each of those contracts. So for your Euro contract, you might create one account called, “DGC Magazine” and a second account called “Julia’s Personal”. On your gold, you might just called it “JD Gold Savings”.

Now under your top level nym you have these three accounts. In order to pay someone, you first need to invite them to be able to transact with you on a particular contract/account.  You just send them an invite code and they can add you to their address book and transact or chat with you.

Julia:  How does Dinero compare to the current mobile payments giant M-Pesa?

Ken:  A huge problem in the past decade has been phishing. And with M-PESA the problem is that the phone number is the acct number.  And it doesn’t tell you the name of the person you pay until after the payment went through.  So the big problem with M-PESA is people getting a digit wrong on the phone number and paying the wrong account.

Since anyone who has used M-PESA for a number of transactions has probably paid a wrong number, a phishing scam has arisen based on this.  The scammer sends a fake payment notification message purporting to be from M-PESA for several thousand shillings.  Then they SMS the victim and say, “Pole (sorry), I accidentally paid the wrong account, please refund my payment. Asante (thanks).”  If the victim did not realize the payment receipt message was a fake, they might send a real payment back to the perpetrator.

So the weaknesses in M-PESA’s transaction model have given rise to a criminal enterprise of professional fraud.

The way we have solved that problem is through relationship and what we call a zero payment. I can send you an invite code via email or SMS. When you enter the invite code, your app then checks to see if you have this contract installed.  If not, you are given a chance to install it. Once you have installed it, you create a holding. And then this “zero payment” is deposited into your holding. Now both of us can look in our transaction history and see a payment of zero from me to you. We now know we have the right person. Henceforth, I can make payments to you via the address book without worrying about having the right account number because you have already been verified.

Compared to M-PESA we have a much more flexible and sophisticated system because we can do multiple currencies and instruments.  M-PESA can only do one currency on one telco network.  So it works very well in a larger country like Kenya where Safaricom has majority market share.  But in other countries like Nigeria with no dominant telco, the M-PESA technology results in a highly fragmented mobile payments market where each system is incompatible with the others.  It is like only being able to SMS someone who uses the same telco as you.

Also in the small countries of West Africa, several currencies are often used in one country.  The Ricardo system can handle that very well.

So our major strength is having one system that works for many currencies, on any telco in any country.

Julia:  How does Dinero compare to other digital currency systems such as Voucher-Safe?

Ken:  In one way it is similar. Voucher-Safe is also a multi-issuer system with some very impressive software engineering. The major difference is that Voucher-Safe uses blinded digital coins and is designed for maximum privacy.

For a long-term transaction system for businesses, you need account histories, auditing and accounting. Ricardo is better suited for businesses because it has the audit trails that are needed for governance. By governance, I mean an organization (company, non-profit, etc) keeping track of their own funds and how they spent them.

Voucher-Safe, as I understand it, is deliberately designed to serve as a digital cash system.  In the real world you need both cash systems and book-entry systems, because they serve different purposes and roles.   So I am happy to see the development of Voucher-Safe and wish the founders of that system the best of success.

The second major difference is that Voucher-Safe is designed for maximum user privacy, but the users know very little about each other.  This may be considered to be a benefit in certain sectors, but we all know that organized cyber crime has proved to be the bane of digital currency systems.

In order to avoid a repeat of “the e-gold problem”, where the system became permeated with criminal activity to the detriment of legitimate users, we are taking the opposite approach to privacy.

The Dinero system combines social networking with transactions so that Users and Issuers can have a high degree of confidence in the people they transact with.  We hope to build a community of integrity so that users can feel safe using the Dinero MPS System, knowing that if there is a problem with a transaction, they know who the other party really is, and there is a fast, reliable and inexpensive dispute resolution system.

In order to get there we are starting with members-only clubs, which we realize will slow down our rate of growth in some ways.  But we believe the long-term benefit of building a system that is able to identify and self-eradicate the bad actors will pay off for the community and for us in the long run.