Why You Don't Need a Mobile Wallet

Wednesday Jan 9th 2013 by Mike Elgan
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What's holding up the use of mobile phones as credit cards? A lack of need.

It may shock you to learn that Kenya is far ahead of the United States in the use of mobile wallet technology.

Kenya uses a system called M-Pesa, run by a company called Safaricom. Nearly every consumer purchase in this country, from utility bills to groceries, is paid for with a cell phone.

How did an economic and technological superpower like the United States of America get pwned in this category of technology by an East African nation with a small population and limited technological development?

M-Pesa

I've been visiting Kenya for two months. As I walk around Nairobi, Kenya, I'm constantly stunned to see everybody paying for stuff with phones.

M-Pesa is a mobile wallet service provided by the Kenya-based companies Safaricom and its minority partner Vodacom. The system enables any subscriber with a mobile phone to deposit, withdraw and pay for things with that phone.

The key attribute of the M-Pesa system is simplicity. Money is stored in an M-Pesa account, rather than deposited in a bank. And it's transferred via SMS. So users give their cash to an authorized M-Pesa location, and that money appears in their online account. Then, when they want to buy food, pay back loans, send money to family members or pay their bills, they just sent the money by texting it.

The supporting infrastructure of the M-Pesa system is made up of tiny stores that enable people to make deposits into their M-Pesa accounts with cash.

The system is so useful and popular that it's spreading to Tanzania, Afghanistan, South Africa, India and Egypt.

It's estimated that about half the world's mobile wallet transactions take place through M-Pesa. Kenya is the world's number-one mobile wallet powerhouse, and it's exporting that service abroad.

So why is one of our first-world problems that we're still stuck in the credit card era?

Why Everyone Wants a Mobile Wallet

The mobile phone is an obvious place to put your digital money. The reason is that it's a computer. It's connected to the Internet. And everybody's got one.

So where's my mobile wallet?

After looking at this problem in detail, I've come to the conclusion that the reason we in the US aren't using our phones to pay for everything is that it's unnecessary. Some people want the technology, sort of. But why?

Well, we just like the idea of it. We'd like to carry fewer credit cards. Beyond that, we really don't have good reasons to switch from credit cards to mobile phone payments.

To understand how unnecessary mobile wallet technology is to American consumers, it helps to understand how necessary it is to Kenyans.

In a nutshell, mobile wallets replace cash in Kenya for most consumers, whereas in our own country it would replace credit cards, mostly.

Some 85% of the world's transactions are still done in cash, according to MasterCard CFO Martina Hund-Mejean. And that can be a problem. Cash can't be transferred over distances remotely. And it can be easily stolen.

M-Pesa relies on a huge number of local retail stores that convert cash to M-Pesa account deposits. And Safaricom must make sure these small outlets make profits on the deposits, otherwise they wouldn't have an incentive to offer that service.

Bill Gates even recently compared Safaricom's M-Pesa business model to Microsoft’s Windows model. The reason is that both companies found themselves in an adoption chicken-and-egg challenge. Without adoption, you couldn't get partner buy-in. And without partner buy-in, you couldn't get adoption.

Both Microsoft and Safaricom managed to get past this problem, gaining both buy-in and adoption.

Why? Because Kenyans really needed this.

For starters, Kenyan families often work in different areas. For example, one spouse may work in Nairobi and the other spouse may work on the family farm. If wages are paid in cash, how do you transfer the money? One option is to carry the cash until the remote spouse can return home. But carrying cash creates enormous risks of being robbed.

In the same way that many countries went directly from limited landline phone access directly to ubiquitous cell phones, some countries are moving from a primarily cash-based economy to mobile wallet technology, largely bypassing the everybody's-got-a-credit-card phase.

In the United States, on the other hand, ubiquitous banks, ATMs and the use of credit and debit cards makes transferring cash digitally over large distances very easy. Balances, transfers and other transactions can already be done through banks via smart phone apps. The basic functions of a mobile wallet system are already taking place, so transferring money over long distances is not a problem that needs to be solved.

Who Wants the Mobile Wallet? Companies Do

Kenya sought to replace cash transactions; US seeks to replace credit card transactions. It's easier to offer an alternative to cash, because nobody benefits politically or economically from the use of cash. Cash doesn't have a lobby, a marketing department or an existing set of income streams that need to be protected, as do credit card companies.

In the United States there are two kinds of mobile ePayment systems -- remote and local. The remote ones, such as PayPal, are useful for transferring money online. The local ones, like Google Wallet, are mostly used for cash-register payments, where buying something in a brick-and-mortar store.

In Kenya, the M-Pesa system does both, and the distinction between distant money payment and transfer and local point-of-sale transactions is unimportant.

While M-Pesa is trying to solve only the customer problem, mobile payment systems in the United States and elsewhere are trying to solve financial-services business problems.

Banks, retail stores and other companies see mobile payments as a way to track customer transactions, then apply analytics to them to gain customer intelligence.

Second, financial institutions see opportunities to replace declining banking fees with new paid services.

Third, retailers and service providers see mobile payments as a way to incentivize additional purchases though coupons, loyalty programs, special offers and by using the payment system to generally advertise and promote products and services. Apple's Passbook system is build around these incentives.

Technology companies see mobile wallets as a way to sell more chips, sensors, phones and wireless services.

In short, the mobile wallet "revolution" everybody is expecting is primarily a boondoggle for the companies that will provide that service.

Tech geeks want it because more technology is always better than less.

Though consumers may want mobile wallet technology, they don't need it.

The mobile wallet is a solution in search of a problem in the United States.

If you don't believe me, then consider the idea of everybody in America simply embracing M-Pesa. Why not?

It would be simple, convenient and affordable for consumers. But it will never happen.

Why? Because it would be simple, convenient and affordable for consumers. It doesn't solve the problems (mostly cash-flow problems) of the financial institutions, retail stores and others.

The bottom line is that while Kenya is already using mobile wallet technology for everyday transactions, America is still waiting for a bloated, expensive, technology-heavy solution that pays the companies currently making their living from credit cards.

But consumers don't need that.

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