Technology Inequality Opportunities and Challenges for Mobile Financial Services April 2017 AUTHOR Leon Perlman, PhD Foreword 1 Executive Summary 2 Introduction 6 Study Methodology 9 1. Technologies That Enable Access to Mobile Financial Services 10 Unstructured Supplementary Service Data (USSD): The Accidental Hero of MFS 11 STK Applications: Potential for Global Use 12 Java-Based Feature Phone Applications: Cheaper and Quicker Than USSD 14 Acknowledgements Sound-Based Access: Universally Compatible and Secure, But Somewhat Convenient and Relatively Expensive 15 The Center for Financial Inclusion at Accion would 2. Effect of MNO Coverage on the Spread of Mobile Financial Services 16 like to acknowledge Elisabeth Rhyne, Sonja Kelly and Tess Johnson for their integral 3. Which Phone for Which Purpose? 19 contributions to this report. Basic and Feature Phones Still Dominate the MFS Market 19 Basic Phones: Still Widely Used 22 Cover Photo Credit: Feature Phones: Growing More Popular and Getting Smarter 22 Xavier Arnau Smartphones: Developing Markets Are Slowly Embracing Them 24 Hybrid “Smart Feature Phones:” An Emerging Trend 26 4. Mobile Phone Components and Their Impact on MFS 27 System-on-a-Chip (SOC) Technology Revolutionizes Phone Design 27 Mobile Phone Operating Systems 28 Mobile Phone Memory Capacity Constraints 29 Battery Technology Affects Sustained MFS Use 29 Display and Camera Technology 29 5. Technology Fraud and Security 32 Vulnerabilities to Bad Actors 33 Fake Mobile Base Stations Undertake Man-in-the-Middle Attacks 36 Unsecure Mobile Applications May Compromise User Funds 36 Java-based MFS Apps Are More Secure 37 6. Competition Aspects of MFS Technology Access and Use 38 Thin SIMs 38 Annex A Summary of Mobile Technologies and Their Use in MFS 40 Annex B Example Market-Level Regulatory and Industry Initiatives to Combat Fraudulent Devices 42 Foreword When mobile money debuted a decade ago, display MFS menus. These combinations observers marveled that a woman in rural are well-adapted to low-end conditions, Kenya with limited education or financial especially in rural areas in developing means could receive money instantly from her countries, because they operate reliably with children in Nairobi through a cell phone. Ten inexpensive handsets in areas with poor (e.g., years on, tens of millions of people use mobile 2G) connectivity. The widespread coverage, financial services (MFS), and the sector is low cost and reliability of the ‘traditional’ MFS preparing for a switch to smartphones that systems make them essential for reaching will enable even more and better services. financial inclusion target populations for the Not so fast, cautions CFI Fellow Leon Perlman foreseeable future, according to Perlman. in this report. Like many techno-wonders On the other hand, the smartphone of our world, the services used in Kenya revolution is not yet mature. Gaps in and many other countries operate through geographic coverage of high-speed data distinct technologies that must interconnect transmission, $30 smartphone handsets that seamlessly to complete transactions securely. use substandard components, and numerous These layers include data transmission compatibility issues with smartphone connectivity, the handsets themselves and apps all contribute to system fragility. Even their operating systems, and the technologies though smartphones are penetrating markets, delivering MFS menus and commands. These the handset capabilities, data transmission systems are continually evolving, subject to speeds and fraud protection must improve market and technology forces that do not before the standards needed for MFS are necessarily prioritize mobile money. consistently met. In this report, Perlman steers readers This report urges regulators and technology through a primer on the technology that providers to continue supporting MFS based enables MFS to operate on basic, feature on feature phones, even as they work to create and smart phones. But more importantly, paths for new-generation services. In fact, the report sounds a cautionary note about feature phone handsets are getting better, the readiness of the sector for a large-scale cheaper and smarter, and sales are rising. If shift to smartphone and internet-based MFS, mobile financial services are to be a force for particularly for low-end consumers. While financial inclusion, we must not prematurely smartphones promise more intuitive and abandon older technologies as we concurrently richer user interfaces, this promise will take push to create a smartphone-based future. some time to materialize fully and robustly. The backbone of mobile financial services Elisabeth Rhyne to date has been the combination of feature Managing Director phones with USSD or STK platforms that Center for Financial Inclusion TECHNOLOGY INEQUALITY: OPPORTUNITIES AND CHALLENGES FOR MOBILE FINANCIAL SERVICES 1 Executive Summary In the brief decade since they were introduced, consumer-facing technology designs, security mobile financial services (MFS) have become challenges, type and quality of devices being a pivotal and successful enabler of financial used, and the usability of various access inclusion, bringing services to millions of devices. The report is meant to motivate people, many of whom had never before used a providers, vendors and regulators to improve formal financial service. The potential for MFS upon existing devices, system security and to continue growing in reach and sophistication the regulatory environment as it affects the during the next decade is enormous. MFS ability of BoP customers to access and use MFS may become a significant channel not only effectively. We seek to generate a discussion on for transferring funds from person to person the technical and related challenges faced by (its first major use), but also to store and save the MFS ecosystem and to spark action to solve funds, make and receive payments, borrow, these key challenges. invest, buy insurance and manage personal or business finances. While the report reveals many specific The growth and success of MFS depends challenges and is optimistic overall about on technical components that work together the future of MFS, it does have one clear to bring the customer a seamless, reliable, bottom line. In brief, that bottom line is a convenient and affordable experience, and on call for providers and regulators to continue the regulations and business relationships that to ensure that the technical “combo” that enable the technical harmony. From the handset has dominated MFS to date remains robust to the user interface to the mobile network, for the foreseeable future: feature phones each technology must fit with the others, using Unstructured Supplementary Service even though a wide range of technologies and Data (USSD) or SIM Application Toolkit commercial and public interests are at play. (STK) technologies and operating even While these technical components have where only slow second generation (2G)- developed remarkably well and successfully type communication speeds are available. over the past number of years, there are still While smartphone-using apps and 3G or 4G numerous technical, cost, competition, capacity, networks are developing quickly and may security and access challenges that particularly become dominant in the future, bringing affect people at the “base of the pyramid” enhanced services with them, that future has (BoP) who tend to be the most excluded from not yet arrived, especially for customers in financial services. There will invariably be the developing world who live in rural areas trade-offs between access, cost, security or who cannot afford high-end smartphones. and reliability of devices and services. The smartphone MFS market still faces This study investigates existing and evolving numerous growing pains that must be technologies in MFS systems: mobile data overcome before it can take the place of its “bearer” technologies, access platforms and more pedestrian forebears. Providers and user devices. We unpack the issues surrounding policymakers must not prematurely rush policy, pricing of bearer services, network toward a smartphone future if that means access coverage, cost of devices, evolution of neglecting the feature phone present. 2 CENTER FOR FINANCIAL INCLUSION This report provides a primer on the technical Supplementary Service Data (USSD), the elements that underpin MFS, and as it does so, dominant mechanism; Short Message Service it describes their current status, emphasizing (SMS) in its SIM Application Toolkit (STK) the dynamism in both the feature phone and incarnation, next in prevalence; and finally, smartphone markets. Java applets. Feature phones are likely to dominate • Part I describes the access and user interface MFS for BoP for the foreseeable future. While (UI) technologies that deliver MFS, detailing smartphones are penetrating BoP markets, their pros, cons and (in layman’s terms) the pace remains relatively slow. With user technical requirements. preferences having shifted away from basic phones, feature phone manufacturing is • Part II reviews the state of mobile network actually growing. As early mobile technology coverage in developing countries, looking patents expire, costs will continue to drop and at gaps in the move toward higher-speed use will grow: 3G and 4G coverage. • Most feature phones lack high-speed 3G • Part III discusses the evolving capabilities and 4G access, but many do have cameras, of basic, feature and smartphones, noting WiFi and