‘LEAPFROGGING ’: A SURVEY OF THE NATURE AND ECONOMIC IMPLICATIONS OF MOBILE MONEY Janine Aron January 2017 INET Oxford Working Paper no. 2017-02 Economic Modelling 1 ‘Leapfrogging’: a Survey of the Nature and Economic Implications of Mobile Money JANINE ARON1 January-17 (revised) Abstract Mobile money is a recent financial innovation giving financial transaction services via a mobile phone, including to the unbanked global poor. Mobile money technology has spread rapidly in the developing world, “leapfrogging” the provision of formal banking services by solving the problems of weak institutional infrastructure and the cost structure of conventional banking. This survey examines the evolution of mobile money, its important role in widening financial inclusion, and the impact of regulation on the development of mobile money systems. It explores the channels of economic influence of mobile money from both a micro and a macro perspective, and presents the first critical survey of the current state of micro and macro empirical literature on the economic impact of mobile money. 1 Affiliations: Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, UK, and Centre for the Study of African Economies (CSAE), Department of Economics, Manor Road Building, Oxford OX1 3UQ. Funding: This work was supported by the Gates Foundation [grant number MQRYDE00], the Open Society Foundations and the Oxford Martin School. Versions or excerpts have been presented at and benefitted from: Gates Foundation-Bank of Uganda-International Growth Centre Policy Workshop on The Impact of Mobile Money, Uganda, February 2015; Peking-Oxford-Stanford Internet Law and Policy Conference, University of Oxford, November, 2015; High-Level Roundtable on Consolidating Africa’s Mobile Banking Revolution, Blavatnik School of Government, University of Oxford, February 2016; and a Special Session on the Economics of Mobile Money, CSAE Conference, University of Oxford, March, 2016. Acknowledgements: Special thanks go to John Muellbauer (Nuffield College, Oxford University). The author also thanks Chris Adam (Oxford University), Tony Atkinson (Oxford University), John Duca (Federal Reserve Bank of Dallas, USA), Colin Mayer (SAID Business School, Oxford University), Ggombe Kasim Munyegera (IGC), David Porteous (Bankable Frontier Associates), Emma Riley (Oxford University), Federico Varese (Oxford University) and Sebastian Walker (IMF) for their helpful comments. 2 Contents 1. Introduction ....................................................................................................................................................... 5 2. What is mobile money? ...................................................................................................................................... 7 3. How does mobile money work and what financial innovations can it lead to? ................................................. 8 3.1 The “nuts and bolts”: storage, deposits, withdrawals and domestic transfers ............................................ 9 3.2 Expanding to a business usage and payments platform ............................................................................ 11 3.3 Expanding to government and donor usage of mobile payments ............................................................. 11 3.4 Credit ratings and micro-loans ................................................................................................................... 12 3.5 A micro-insurance platform ....................................................................................................................... 13 3.6 Expanding to international transfers through mobile money channels ..................................................... 14 4. Greater financial inclusion and mobile money ................................................................................................. 15 4.1 Defining financial inclusion ........................................................................................................................ 16 4.2 Measuring financial inclusion - and the recent role of mobile money ....................................................... 17 4.3 Adoption, usage and awareness patterns – what do they show? .............................................................. 19 5. The growth, geographical spread and profitability of the industry .................................................................. 22 5.1 Trends in the growth of deployment .......................................................................................................... 22 5.2 Profitability ................................................................................................................................................ 24 5.3 Competition in the markets ........................................................................................................................ 26 5.4. Effects on Hawala, and illegal or unlicenced international remittances ................................................... 26 5.5 Cheaper smartphones and technological innovation ................................................................................. 27 6. The economics of mobile money ..................................................................................................................... 29 6.1 The micro-view ........................................................................................................................................... 29 6.1.1 Reducing transactions costs ............................................................................................................... 29 6.1.2 Reducing asymmetric information and improved transparency ........................................................ 30 6.1.3 Increasing saving and changing the nature of saving ......................................................................... 31 6.1.4 Risk and insurance .............................................................................................................................. 32 6.1.5 Changing family dynamics and changing social networks .................................................................. 32 6.1.6 Improving efficiency ........................................................................................................................... 33 6.2 The macro-economic view ......................................................................................................................... 33 6.2.1 Mobile money, credit and transmission to the money supply ........................................................... 33 6.2.2 Saving, “spendability” and inflation – why the focus on velocity is misleading ................................. 36 6.2.3 International mobile money remittances and inflation ..................................................................... 37 6.2.4 Some tax implications ......................................................................................................................... 38 7. Data measurement issues concerning mobile money ..................................................................................... 39 7.1 Global data coverage ................................................................................................................................. 39 7.2 Data for macro-analyses ............................................................................................................................ 39 7.3 Administrative transactional data and survey micro-data ........................................................................ 40 7.4 Qualitative institutional data: addressing a gap ........................................................................................ 42 8. Empirical evidence on the economics of mobile money – selected studies’ findings ...................................... 42 8.1 Micro-literature .......................................................................................................................................... 42 8.1.1 RCT versus Difference-in-Differences, and other empirical approaches ............................................ 42 8.1.2 Adoption studies ................................................................................................................................. 45 8.1.3 Private mobile money transfers and risk sharing ............................................................................... 47 3 8.1.4 Private mobile money transfers and welfare ..................................................................................... 54 8.1.5 Public, donor or employer mobile money transfers ........................................................................... 62 8.1.6 Analyses of savings behaviour and credit ........................................................................................... 64 8.1.7 Regulation and mobile money usage ................................................................................................. 68 8.2 Macro-literature ......................................................................................................................................... 69 9. Incentives: the design of network structures and network agency contracts ................................................. 71 9.1 The exclusivity, shape and size of networks ............................................................................................... 72 9.2 On the recruitment, training and regulation of agents .............................................................................