Mobile currency + Web3 = borderless, diversified open inclusive finance?

Author: Liu Ye Jing Hong, Weissman Notes

What is Mobile Money

Mobile money is not the same as mobile payment. According to the definition by the African Development Bank, mobile money refers to currency stored on a user's SIM card, which differs from money held in traditional bank accounts, with the SIM card replacing the bank account number as the user's identification code.

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

Mobile money accounts work somewhat like Venmo, but with a key difference: no bank account is required. To deposit or withdraw cash from the app, mobile money systems use human agents who carry cash and mobile phones, roaming around key locations across the country (including remote rural areas). Mobile money can also be used for cashless transactions, including purchasing goods or paying bills.

The Market for Mobile Money

According to the GSMA's 2021 report, $69.77 billion (a 40% year-on-year increase) was processed through mobile money options in Sub-Saharan Africa. This region accounted for nearly 70% of last year's global transaction volume ($1 trillion), far exceeding South Asia ($15.63 billion).

Additional information in the GSMA report indicates that Africa now has over 184 million active mobile cash wallets, up from 161 million accounts just over a year ago. It is believed that the latest data in 2023 will show an even greater growth trend.

Why is There a Demand for Mobile Money

To most people, modern mobile payments, electronic money, and even cryptocurrencies are quite prevalent, so why is there still a demand for mobile money? The core reasons are threefold:

1. Low Financial Coverage in Remote and Underdeveloped Areas

Globally, there are still vast remote areas and underdeveloped countries, with typical examples being African nations, where the financial needs of the population remain unmet. According to the World Bank's 2023 annual report, only 28% of the population in African countries uses the internet, meaning over 70% cannot access modern, convenient financial services.

Citing data from The Global Findex Database 2021, the global ownership rate of personal accounts is 76%, indicating that 24% of the global population still lacks personal accounts.

2. High Operating Costs of Traditional Bank Branches and ATMs

In sparsely populated remote areas and economically underdeveloped regions, promoting traditional bank branches incurs high operating costs and yields low profits. Moreover, using ATMs requires first opening a personal account and obtaining a bank card at a branch, turning the issue into a "which came first, the chicken or the egg" dilemma. Therefore, mobile money can expand the reach of financial services and the population served with minimal infrastructure investment, making it more inclusive.

3. High Barriers to Mobile Banking and Third-Party Payment Services

Existing mobile banking or third-party payment service providers can be operated via mobile phones, but these services require users to have personal accounts and linked bank cards. In economically underdeveloped areas, there may not be traditional bank branches available to provide these services.

Based on these three points, it is clear why seemingly outdated mobile money technology continues to be used by many groups. 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 describe the existing mobile money operating model.

MTN is Africa's largest telecommunications operator, with operations in 22 countries across Africa and the Middle East, serving 219 million users. The mobile money service launched by MTN, called MTN MobileMoney, is the most widely used mobile money service in Africa, having been rolled out to countries such as Uganda, Cameroon, Ghana, Côte d'Ivoire, Rwanda, Benin, Nigeria, and Zambia.

Users can become registered users through their mobile phone numbers. Once registered, they receive a mobile money account based on the telecom operator, and they can increase their mobile money account balance by depositing cash at authorized agent locations. Users can complete remittance operations via their phones, and the recipient will receive a withdrawal SMS from MTN, allowing them to withdraw cash after account verification at the agent location. Users can also store cash in their accounts and use mobile money to pay bills or purchase goods at MTN's partner institutions.

In terms of profitability, MTN primarily relies on remittance service fees. When both parties are MTN MobileMoney users, the maximum remittance fee is only $1. The agent locations are not authorized to charge various fees; they can only earn commissions from MTN for cash deposits and withdrawals.

In terms of business model, MTN's entire operating network consists of three roles: custodian banks, super agents, and retail agents. Custodian banks are responsible for holding MTN customer funds, super agents are financial institutions or partners responsible for managing and distributing mobile money and cash to retail agents, while retail agents directly face users, assisting them in using MTN MobileMoney and conducting deposit and withdrawal transactions.

Deficiencies of MTN MobileMoney

Although mobile money fills the gap for inclusive financial services in underdeveloped areas, there is still significant room for improvement. The visible deficiencies include three points.

1. Cumbersome Processes and High Dependence on Agents. Both account registration and remittance deposits and withdrawals require visiting retail agents, which are not as widely available as convenience stores like 7-Eleven. Without coverage from retail agents and partner institutions, services are nearly impossible to complete.

2. High Maintenance Costs. MTN currently maintains over 20,000 retail agent locations, and many operations rely heavily on manual processing, making the large operational costs of these locations a drawback in economically underdeveloped areas.

3. Only Supports Local Currency. Currently, MTN only supports local currency services and a very limited number of insurance-related financial services. The broader inclusive financial services are not sufficiently developed, including the absence of savings services like current and fixed deposits, as well as more advanced financial products.

Integration of Mobile Money and Web3

So, what can the integration of mobile money and Web3 bring? The advantages remain threefold.

1. Permissionless Inclusive Financial Network. Web3 does not require account opening or various proofs. Users can bind their SIM card to a Web3 wallet address to directly obtain a decentralized account. They can also connect directly to the open financial world of Web3 and access inclusive financial services through protocols like Maker DAO. There is no need for centralized custodial institutions to hold funds; high trust in financial services can be achieved through open protocols.

2. Extremely Low-Cost Decentralized Ledger. Unlike the operational costs of MTN's over 20,000 retail agent locations, the integration of mobile money and Web3 can directly use blockchain for accounting, completing decentralized inclusive financial services entirely over the internet. Using technologies like Layer 2, fees can be compressed to far below $1.

3. Cross-Currency Open Financial Network. Under the existing mobile money system, supporting only local currency payments is insufficient for achieving inclusive finance. Due to economic underdevelopment and even regional financial crises (such as Greece's bankruptcy), holding local currency can be a disaster for people with already low incomes. By introducing Web3 into mobile money, people can use compliant digital currencies like USDC to avoid local currency devaluation. Alternatively, they can purchase compliant assets of RWA to ensure the appreciation and preservation of their wealth.

The open finance of Web3 brings borderless and more diverse inclusive financial solutions, but it also faces a series of issues such as scams, rug pulls, and hacking. These dark forests of Web3 require promoters to conduct some centralized audits and screenings. I do not believe that what Web3 needs is a completely unregulated, entirely decentralized utopia. Therefore, introducing suitable regulatory and financial institutions to assist the open network of Web3 may be the future of Web3. This is my understanding of the open network of Web3, a balance.