Why Aren't Users Paying with Mobile Money?

On the Center for Financial Inclusion blog, Ignacio Mas and Beth Rhyne are discussing a central question in the evolution of electronic payments in developing countries: why aren't people using it to pay? Even in countries like Kenya with very high rates of adoption of a electronic payment platform, the vast majority of money that goes into the system come back out into physical cash in 24 to 48 hours. Ignacio makes a case that electronic payments systems need to be more integrated into other financial behaviors, like savings and credit, before they will be used for routine payments. The reason is fairly simple: unless you are storing value in the electronic system (as with a savings account) using the electronic system for a payment involves at least one extra step to turn cash into electronic form.

Beth responds that if people are receiving their income in electronic form in the first place, like benefits payments or paychecks, and the merchants they frequent take payment in electronic form then there is good reason for users to keep their money in the electronic system. Using Ignacio's same logic, cashing out involves an extra step if the inflow is electronic and the outflow can be electronic. Beth's argument is one of the reasons organizations like the Better than Cash Alliance are focused on encouraging governments to use electronic payments to pay salaries or benefits to households.  

What intrigues me most in this conversation is the extent to which the necessary conditions for greater use of electronic payments that Ignacio and Beth point to already exist. For instance--as I understand it--many cash in/cash out points are small-scale retailers where users are shopping anyway.  Are users cashing out their full balance and then spending cash at that point or in the near future in the same shop? If so, why? Beyond the cash in/cash out point, I suspect that a large portion of the cash transactions that poor households engage in (in countries with high mobile money penetration rates) are with people who have a mobile money account. In regard to Ignacio's argument about better integration with savings and credit needs, there is nothing inherent in these platforms that prevents them from being used as savings and credit vehiciles. As Ignacio notes, most poor households don't save or borrow in large amounts. While there would be justifiable concern from regulators if people were storing large balances in moblie money platforms, poor households cash savings which are typicalliy small amounts held for short periods of time are unlikely to raise alarm bells or be particularly risky. In many ways, electronic platforms seem better adapted to the existing savings and credit behaviors of poor households than traditional bank accounts are. 

So while progress can obviously be made in both these areas, I think the starting point is understanding why the current behavior is happening.

In this regard, I think there needs to be a greater focus on transaction costs and business models and how they are affecting behavior. Any look at pricing schemes and their effect on behavior has to take into account both the actual costs and the perceived costs to both payer and receiver; but especially, I believe, we have to pay attention to the model of charging per transaction. This model makes the costs of electronic payments far more salient than the costs of cash. In places where electronic payments predominate over cash--like the United States--the transition to using electronic payments happened quite slowly and trickled down from large purchases to small ones and from wealthy households to poorer ones (where rates of use are still quite low relative to wealthier households). That transition, it's important to note, happened in a context where the vast majority of consumers did not pay transaction fees. Merchants were the ones willing to pay those costs in the hopes that it encouraged shoppers to spend more on each visit to the store.  Even today, many small merchants believe that electronic payments are ultimately more costly than transacting in cash (regardless of research that suggests otherwise). I think one of the more fruitful areas to explore is ways to change the pricing and business models of electronic payments.