Mapping and structuring Banks/Mobile Operators relationship Banks and operators are in different parts of the value chain

It is impossible for a mobile network operator to offer Mobile Money without a bank: at minimum, a bank must hold the deposits which back the electronic value stored in customers and agents wallets. Conversely, it is impossible for a bank to offer Mobile Money without an operator: at minimum, an operator must provide the data channel which allows customers and agents to initiate transactions using their handsets. Still, mobile operators know the low-income consumer, while banks understand how to design and price financial services (although only in certain cases will they have experience doing so for the poor). To date, however, very few operators and banks have taken advantage of this natural complementarity for the purposes of product development for Mobile Money. Of course, when it comes to actually operating more sophisticated financial services, banks have an asset (the license to offer a financial service) that operators will probably never apply for. Operators cannot pay interest on savings, cannot make loans, and cannot write insurance policies; only financial institutions can. As such, regardless of who designs these services, operators will need to turn to banks actually to offer them. Key Questions: What are the respective strengths that mobile operators and banks bring to Mobile Money? What are the activities that need to be performed to offer Mobile Money, and which party (a bank, an operator, or a third party) is best equipped to perform each? What are the different ways that banks and operators can engage with each other? How can banks and operators structure, or restructure, their agreements to reduce friction and improve the service that they offer to their customers?

Why banks and operators are interested in mobile money? For banks, Mobile Money is a way to serve a vast swathe of customers who are otherwise out of reach. Generally speaking, the low-income segment cannot be profitably served using the traditional banking model, in which bricks-and-mortar branches are the primary point of contact between customers and the financial institution. This problem is exacerbated in the rural areas, with low density population. Mobile Money services allow users to cash in and cash out at a network of independent agents, leveraging existing infrastructure to serve customers more cheaply than in a bricks-and-mortar branch. Mobile Money allows banks to profit from helping serve a market they might otherwise have to forsake. For operators, Mobile Money does not usually represent an opportunity to serve a new market segment; instead, it allows them to cross-sell a new service to customers whom they already serve (i.e., their own subscribers) or compete for (the subscribers of other mobile network operators). Given the increasing competition in developing countries among operators for share of the mobile business, and the increased propensity of customers to churn from one operator to another in search

of a lower tariff, differentiation has become a primary strategic objective. So although the revenue opportunity that Mobile Money presents is huge, mobile operators are increasingly focused on Mobile Moneys potential to strengthen their relationship with mobile users, giving them a compelling reason not to churn away to a lower-priced operator. Strengths of Banks and Mobile Operators

Float holding: Always held by a bank because only banks are licensed for deposit. Why would a bank want to hold float for a Mobile Money service? First, banks make money on deposits by charging borrowers higher interest rates than they pay depositors, and they can make money on float holdings in exactly the same way. Money service achieves significant scale; this can become a very large deposit. And its an unusually stable deposit: because it represents the holdings of many end users and agents, it is unlikely to fluctuate in value significantly over time. Second, banks can charge mobile operators transaction fees. Since float accounts can be high-transaction-volume accounts, these fees can be considerable. Third, there is at least one indirect benefit of holding float. Clients of a bank holding float for a Mobile Money service are sometimes able to convert deposits in their own accounts into e-money more

quickly than others, because an intrabank transfer is faster than an interbank one. In Kenya, some MPESA agents have opened accounts at CBA to take advantage of this difference. License acquisition, Regulatory engagement, and compliance Banks clearly have the edge over mobile operators when it comes to license acquisition and regulatory engagement. Banks are able to build on existing relationships with the central bank, and they are already intimately aware of the concerns and perspective of the financial regulator. They also have established compliance functions and understand issues like anti-money laundering (AML). Operators who seek to be licensed directly must establish new relationships and educate themselves on the central banks interests from scratch. Even so, operators who are eligible for direct licensing typically choose to pursue it themselves. Service Payment Fee When services can been delegated, they are usually provided on a fee-for-service basis. Examples include: For superagency, business-owning operators typically pay banks a flat fee every time an agent sells e-money to a branch for cash or a percentage of the value of the e-money sold to the branch for cash, although these fees are sometimes passed on to agents For access to the handset, business-owning banks and third parties typically pay mobile operators a per-session fee, plus a flat fee for space on the SIM (if applicable) For float holding, banks can charge transaction fees but typically pay interest to the business owning operatorunless the bank is providing other services, such as license acquisition, regulatory engagement, and compliancein which case interest is often not paid at all

When operators and banks want to share business ownership of the MM service, they will need to structure a partnership in which revenues or profits are shared between them according to some formula. This structure makes more sense when both parties must invest significantly in driving the business to grow, because it aligns their interests to the long-run success of the venture.