Mobile Payments in Emerging Markets
Expanding the base of the pyramid through mobile payments
By ETA’s International Committee
Developing and emerging economies present a range of interesting opportunities for furthering the adoption of mobile payments. Growth in these transactions is fastest in countries like India and the Philippines, which have only recently embraced mobile payments. In fact, mobile payments are expanding access to credit, savings, and other financial tools for consumers who have never had that access in the past. Thus, one promising strategy for growing mobile payment acceptance globally is to view it as a vehicle for financial inclusion.
Mobile payment schemes look very differently depending on overall levels of economic development as well as consumer demographics and preferences. In emerging markets, mobile money products (typically SMS-based) and QR code-based mobile wallets have demonstrated the greatest traction. But why have they been so successful, and what can they teach us about the increasing adoption of mobile payments?
Consider the large base of consumers in emerging markets who relies on SMS and QR codes for high-frequency, low-value transactions. One example is M-Pesa, the mobile phone-based money transfer, financing, and microfinancing service that is currently active in 10 countries: Albania, the Democratic Republic of Congo, Egypt, Ghana, India, Kenya, Lesotho, Mozambique, Romania, and Tanzania. India alone has a population of nearly 1.3 billion people. The other nine countries have a combined population of 362.5 million. Average annual gross domestic product (GDP) per capita across the 10 countries is $7,410 (considered upper middle-income by the World Bank). M-Pesa launched in Kenya in 2007. In 2016, there were 23 million M-Pesa users in the country—nearly half the Kenyan population and three quarters of the world’s 29.5 million M-Pesa users.
The widespread use of M-Pesa has allowed Kenyan consumers to access the global e-commerce ecosystem without needing credit or debit cards. In February, Google Play began accepting payments via M-Pesa. In April, Safaricom, a communications company in Kenya, announced a collaboration with PayPal that would allow M-Pesa users to pay online anywhere PayPal is accepted. M-Pesa transactions also have helped people access government services. For example, Business Daily Africa reports that the Kenyan Ministry of Agriculture uses M-Pesa to pay out fertilizer subsidies. Mobile money is a critical tool for facilitating person-to-person, employer, and government transfers. Across the board, access to mobile money helps individuals protect against financial shocks and smooth their consumption.
M-Pesa works because it leverages a largely pre-existing network of agents—Safaricom dealers and retailers like petrol stations and supermarkets. Essentially, M-Pesa simply adds two additional services—namely account registration and cash disbursement—to those existing distribution networks. Building a network that relied on credit and/or debit card payments likely would not have worked as well in Kenya. According to 2017 World Bank data, 37.6 percent of Kenyan adults own a debit card and just 5.7 percent own a credit card. Meanwhile, 87 percent of Kenyans owned a mobile phone as of late 2016.
That success suggests that a product built on a credit or debit network has potential in markets with robust card usage. While credit card ownership is low in most low-income economies (Mozambique tops the list at 9 percent credit card ownership), debit card ownership varies more widely. For instance, a debit-based mobile payment network might work well in Mongolia, a lower middle- income economy where 75 percent of adults own a debit card. In fact, an eMarketer survey found that 63 percent of respondents in Mongolia preferred using mobile payments to other payment methods (second only to China at 64 percent). While Mongolia’s largest financial institution, Khan Bank, has made great strides in mobile banking and recently launched a mobile money product, there are still many opportunities left untapped.
For consumer payments at the point of sale (POS), QR codes are one of the quickest and most cost-effective ways for merchants to accept electronic payments. Merchants only need to print the code on a piece of paper. But as the merchant’s business grows, he or she may consider adding more functionality—perhaps an mPOS dongle that attaches to his or her phone or, eventually, a standalone terminal. By enabling QR code mobile payment acceptance, payments companies can create opportunities to bring merchants into the card system.
Consumers are rapidly embracing QR code mobile payments. China has the largest base of mobile payment users in the world at 349 million people (compared to the United States’ 60 million), representing a quarter of Chinese consumers. The dominant mobile payments platforms in China, Alibaba’s Alipay and TenCent’s WeChatPay, are QR-based. This suggests that the majority of mobile payment transactions in China take place via a QR code.
QR code shoppers in coastal Chinese cities also want to pay with their phones while they are travelling abroad. Their increasing demand is driving mobile payment acceptance, particularly with merchants who frequently do business with Chinese consumers. For instance, Adyen and Alipay are expanding their partnership to enable retailers worldwide to accept mobile payments from Chinese customers. Any retailer currently using the Adyen POS will be able to accept Alipay payments.
Adoption of QR code payments is much lower in India, at 13.2 million users (1 percent of the population), but that may soon change. In March 2018, the National Payments Corporation of India mandated that all apps on the Unified Payments Interface (UPI) support Bharat QR, an interoperable payments acceptance solution that supports Visa, Mastercard, American Express, and RuPay cards. UPI transactions accounted for roughly half the value of debit and credit card transactions in February 2018.
One indicator of the growing use of QR codes is the response from standards bodies. In July 2017, EMVCo released two QR code specifications: one for QR codes displayed on a consumer device and another for QR codes displayed by the merchant (and scanned by the consumer using their mobile device). In May, EMVCo created a universal QR Payment Mark so that merchants can indicate whether they accept payments via QR code. These actions indicate that QR codes are prevalent enough to raise questions about interoperability between different QR code payment mechanisms.
The conversation about mobile payments in the United States tends to revolve around high-tech solutions for high-end consumers. But the real potential of mobile payments is in expanding the so-called “base of the pyramid”—the hundreds of millions of consumers in emerging markets who may not own credit cards but who do own a mobile device. In these cases, the underlying infrastructure already exists, presenting the opportunity to build new tools for commerce on top of it.
ETA’s International Committee comprises member companies interested in growing their business outside the United States. The focus of the committee is to serve as a forum to address issues of interest with respect to payments in global markets including technology matters, market opportunities, and legal/regulatory challenges.
This piece orginally appeared in the May/June edition of Transaction Trends Magazine. Read the full magazine online here.