The Case for Mobile Money

Without it, even basic societies could not function well. But what exactly is money? Economists usually define it as something with the following three key attributes.

First, as a store of value. This allows people to stockpile it and use it later, smoothing their purchases over time. It also needs to maintain its value temporally and not degrade quickly.

Second, as a unit of account. Something that can be used in a commonly agreed way to price goods and services.

And third, as a medium of exchange. Something that people can transact with to buy and sell goods and services from one another.

Prevailing technologies have also had a strong influence on the evolution of money and payment systems over history. Its earliest forms are thought to have been rare shells, beads and even agricultural products such as grain. Advances in metallurgy in 7th century BCE Lydia (modern Turkey) and China led to the introduction of metal coins (precious metals are especially good at all three functions for money).

Improvements in printing and communications then facilitated the spread of paper money during the Song dynasty in 11th century China (a boom in commerce made the frequent transportation of heavy coins increasingly impractical). In more modern times, advances in banking led to the introduction of credit cards in 1950's America (and then debit cards).

Skip forward to our current era of digitalisation and money is going through many exciting new transformations. From bitcoins to central bank digital currencies to mobile money and digital wallets.

The introduction of mobile money in particular (greatly enabled by ICT infrastructure and the wide diffusion of mobile phones) has been especially notable. Mobile money is defined as a mobile payments system based on accounts held by a mobile operator and accessible from subscribers' mobile phones. The conversion of cash into electronic value (and vice versa) happens at retail stores (or agents). All transactions are authorised and recorded in real-time using SMS.

The United Nations Capital Development Fund (UNCDF) suggests that while the first mobile money provider launched in the Asia-Pacific region in 2001, it was M-PESA's March 2007 launch by Safaricom in Kenya that really galvanized the model. Many subsequent versions, particularly across the African continent adopted a similar functionality and ICT foundations.

The Bank of International Settlements (BIS) identify the growing trend away from cash (notes and coins) for regular consumer purchases. According to BIS's statistics, the annual average number of digital payments per person across the countries it covers increased from 179 in 2012 to 332 in 2021. While the value of cash in circulation as a percentage of GDP has held steady in both advanced economies and emerging markets and developing countries in the last few years after steady declines, wide variations across countries are now appearing. Cash in circulation for example exceeded a fifth of GDP in Hong Kong SAR and Japan, whereas it was as low as 1% in Sweden.

The utility of cash remains high then and its usage as a medium of exchange continues to be popular in many countries. But it's not without its downsides, especially when compared to mobile money.

Cash for example is less secure than mobile money. If you lose cash or it is stolen, there is no way to recover it.

Small businesses also incur ongoing fixed costs in having to physically hold and store cash as well as having to make multiple trips to the bank to deposit it.

For the average citizen it is also arguably less convenient than mobile money (where payments can often be achieved with a swipe of a phone). One has to physically carry notes and coins. We often unwittingly accumulate a lot of small value coins in the course of our annual spending. We also need the proximity of banking outlets and ATMs to withdraw and store our cash.

There are additionally hygiene issues associated with the handling of notes and coins. The World Bank's recent Digital Progress and Trends report highlights the explosion in digital payments use around the world as a consequence of the Covid-19 pandemic.

And finally, there is the sheer cost to the state of minting and printing all those coins and banknotes and the associated distribution and storage expenditures. The Federal Reserve for example estimates those costs at a staggering US$931.4 million for the United States alone in 2023.

Going with the smart money

Contrastingly, mobile money is seen to have many additional attributes over cash and the traditional banking system.

The first and perhaps greatest positive contribution has been mobile money's ability to greatly raise financial inclusion in the developing world. Mobile money facilitates banking services to the unbanked and underbanked populations, often for the first time. It enables people in remote areas without access to brick-and-mortar banks to conduct financial transactions, such as sending and receiving money, paying bills, and accessing credit. The Brookings Institute reveal that over the 10 years leading up to 2021, the share of women in sub-Saharan Africa who owned a financial account more than doubled to reach 49%, mostly because of mobile money.

Mobile money also offers unparalleled convenience, allowing users to perform transactions anytime, anywhere, using their mobile phones. This eliminates the need for physical presence at banks or ATM queues, saving time and effort for users, especially in rural areas where banks are scarce but retail and phone stores are common.

Monetary transactions are often more cost-effective with mobile money compared to traditional banking services. They typically involve lower transaction fees, making financial services more affordable for low-income individuals and small businesses.

Mobile money also boosts economic activity and newly empowers SMEs by enabling small businesses to accept digital payments, access credit, and manage finances much more efficiently. This energizes entrepreneurship, stimulates economic growth and reduces reliance on cash-based transactions. The GSMA calculate that a 10 percentage point increase in mobile money adoption can lead to a rise in GDP by 0.4% to 1.0% in a year.

As the International Monetary Fund has outlined, mobile money also came to the fore during the pandemic as government transfers could be sent and used much more effectively to households who could not work than trying to distribute cash support payments.

Enhanced security. Mobile money platforms employ robust security measures such as encryption and two-factor authentication to safeguard users' financial information and transactions. This reduces the risk of theft and fraud associated with carrying large sums of cash.

And finally, mobile money has been a boon for the process of sending and receiving remittances, particularly in developing countries where migrant workers often rely on these transfers to support their families. It offers a faster, more secure, and (much more) cost-effective alternative to traditional remittance channels.

Coins and banknotes have been an exemplary form of money. Their continued use globally and across cultures over many centuries stand as a testament to that. But new forms of digital money (such as mobile) have multiple advantages over it.

In for a penny, in for a megabyte?

Learn more about Huawei's Mobile Money solutions.

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