54. Web3 Thinking: Mobile Currency + Web3 = Borderless, Diversified Open Inclusive Finance?

What is Mobile Money#

Mobile money is not the same as mobile payment. According to the definition of the African Development Bank, mobile money refers to the currency stored on the user's SIM card, which is different from the currency stored in traditional bank accounts. The SIM card replaces the bank account as the user's identification code.

Therefore, mobile money is a financial service innovation that extends financial services to areas and populations not covered by traditional banks, using information and communication technology and non-bank physical networks. It has two main characteristics: first, customers can complete deposit and withdrawal operations outside the banking system; second, customers can complete transactions through the mobile interface.

The operation of a mobile money account is similar to Venmo, but with one key difference: it does not require a bank account. In order to deposit or withdraw cash from the application, mobile money systems use human agents who carry cash and mobile phones and roam key locations across the country, including remote rural areas. Mobile money can also be used for cashless transactions, including purchasing goods or paying bills.

Mobile Money Market#

According to the 2021 report by the International Telecommunication Union (GSMA), $697.7 billion (a 40% increase from the previous year) of mobile money transactions were processed in Sub-Saharan Africa. This region accounted for nearly 70% of the global transaction volume ($1 trillion) last year, far surpassing South Asia ($156.3 billion).

Additional information in the GSMA report states that there are already over 184 million active mobile money wallets in Africa, compared to just 161 million accounts a little over a year ago. It is believed that the latest data will show even greater growth trends by 2023.

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Why is there a demand for Mobile Money#

For most people, modern mobile payments, electronic currency, and even cryptocurrencies are already prevalent, so why is there still a demand for mobile money? There are three main reasons:

Low financial inclusion in remote and underdeveloped areas

Globally, there are still large remote and underdeveloped areas, with Africa being a typical example. The financial needs of people in these areas cannot be met. According to the World Bank's 2023 report, only 28% of the population in African countries use the internet, which means that over 70% of people cannot access modern and convenient financial services.

According to data from The Global Findex Database 2021, the global account ownership rate is 76%, which means that 24% of the global population still does not have a personal account.

High operating costs of traditional bank branches and ATMs

The operating costs of promoting traditional bank branches in sparsely populated remote areas and economically underdeveloped areas are high, and the profitability is low. To use an ATM, one needs to first open a personal account and have a bank card at a branch, making it a "chicken and egg" problem. Therefore, mobile money can expand the scope and reach of financial services with less infrastructure investment, making it more inclusive.

High barriers to entry for mobile banking and third-party payment

Existing mobile banking or third-party payment service providers require users to have a personal account and a linked bank card to operate through a mobile phone. For economically underdeveloped areas, there may not be traditional bank branches available to handle these services.

Based on these three points, it is clear why seemingly outdated mobile money technology is still widely used. Mobile money is almost the only inclusive financial service available in underdeveloped and remote areas.

MTN MobileMoney Case Study#

Before introducing Web3, I need to briefly explain the existing mobile money operating model.

MTN is the largest telecommunications operator in Africa, with operations in 22 countries in Africa and the Middle East, serving 219 million users. MTN's mobile money service, called MTN MobileMoney, is the most widely used mobile money service in Africa and has been extended to countries in East and West Africa such as Uganda, Cameroon, Ghana, Ivory Coast, Rwanda, Benin, Nigeria, and Zambia.

Users can become registered users through their mobile phone numbers and receive a mobile money account based on the telecommunications operator after registration. They can increase the balance of their mobile money account by depositing cash at authorized agent locations. Users can use their mobile phones to complete remittance transactions, and the recipient will receive a withdrawal message from MTN. After verifying the account at an agent location, the recipient can withdraw cash. Users can also store cash in their accounts and use mobile money to pay bills and purchase goods at MTN's partner institutions.

In terms of profitability, MTN mainly relies on transaction fees from remittance services. When both parties are MTN mobile money users, the maximum fee for remittance services is only $1. The agent locations under MTN have no authority to charge any fees and can only earn commissions provided by MTN after users deposit or withdraw cash.

In terms of business model, MTN's entire operating network consists of custodian banks, super agents, and retail agents. Custodian banks are responsible for safeguarding MTN customer funds, super agents are financial institutions or partners that provide mobile money and cash management and allocation services to retail agents. Retail agents directly serve users and assist them in using MTN mobile money for deposit and withdrawal transactions.

Limitations of MTN MobileMoney#

Although mobile money fills the gap in inclusive financial services in underdeveloped areas, there is still room for improvement. The current limitations include:

Complex and highly dependent on agents. Both registration and remittance services require visits to retail agents, but retail agents are not as widely available as convenience stores. Without retail agents or coverage from partner institutions, it is almost impossible to access the services.
High maintenance costs. MTN currently maintains over 20,000 retail agent locations, and many of these operations rely on manual processes. The high operating costs of these agent locations are also a limitation, especially in economically underdeveloped areas.
Limited to local currency. Currently, MTN only supports local currency services and a few insurance-related financial services. It lacks more comprehensive inclusive financial services, such as savings accounts (current and fixed-term) and more advanced financial products.

Integration of Mobile Money with Web3#

So, what can the integration of mobile money with Web3 bring? There are still three advantages:

Permissionless inclusive financial network. Web3 does not require account opening or various proofs. Users can directly obtain decentralized accounts by binding their SIM cards with Web3 wallet addresses. They can also directly access the open financial world of Web3 and access inclusive financial services through protocols like Maker DAO. There is no need for centralized custodians to hold funds, as financial services can be highly trusted through open protocols.
Low-cost decentralized ledger. Unlike the high operating costs of MTN's over 20,000 retail agent locations, mobile money integrated with Web3 can directly record transactions on the blockchain, enabling decentralized inclusive financial services through the internet. By using technologies like Layer2, transaction fees can be reduced to much less than $1.
Cross-currency open financial network. The current mobile money system only supports payments in local currency, which is not enough for inclusive financial services. Economic underdevelopment and even regional financial crises (such as the Greek crisis) can be disastrous for people with low incomes who hold local currency. By introducing Web3 into mobile money, people can use compliant USD digital currencies like USDC to avoid local currency depreciation. They can also purchase compliant assets like RWAs to safeguard and increase their wealth.

Web3's open financial network brings borderless and more diverse inclusive financial solutions, but it also faces issues such as scams, rug pulls, and hacking. These dark aspects of Web3 require promoters to conduct centralized audits and screenings. I do not believe that Web3 needs a completely unregulated and fully decentralized utopian world. Therefore, introducing appropriate regulatory and financial institutions to assist the open Web3 network may be the future of Web3. This is my understanding of the balanced Web3 open network.

Some parts of the article are quoted from:

"Mobile Money: African Cases and Implications" by the People's Bank of China Working Paper No. 2015/3

"The Global Findex Database 2021"

"Latest Global Findex Data Chart 10 Years of Progress in Financial Inclusion"

"What Kenya can teach its neighbors — and the US — about improving the lives of the 'unbanked'"

Author: Liu Yejinghong

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