Could Mobile Money Transfer Destroy Emerging Markets?
Throughout the course of financial history, payment systems are largely intertwined with the country’s banking system. For example, in England, you have a bank account and each transaction passes through the central bank. However, in recent years, technological advancement is shifting the way in which we pay for things: a shadow payment system has emerged which operates outside the prudential regulatory regime governing these banking systems. These payment systems include mobile money platforms, such as Kenya’s M-Pesa, which allows individuals to conduct peer-to-peer (P2P) transactions in the emerging economies.
What is M-Pesa?
M-Pesa is one of the biggest mobile money system on the planet. In essence, M-Pesa facilitates a free-flowing transfer of funds between individuals without the need for the bank. Customers can deposit and withdraw money at various locations (such as petrol stations and post offices), then transfer their deposited money by sending a text to the person they want the money to go to.
There are currently around 300 million connected mobile money devices that operate in nearly 100 countries. Most of these platforms are located in Africa, but they have also experienced strong growth in Latin America and South Asia. The reason for the growth in these areas is due to the lower standards of financial infrastructure, and mobile money systems promote greater financial inclusion.
Storage and Liquidity
One of the key fears of P2P networks - such as PayPal and cryptocurrency exchanges – is that they lack the storage and liquidity functions of national banks. For example, there are no deposit guarantee schemes, emergency liquidity assistance or special bankruptcy rules.
Here lies on of the biggest potential problems with a shadow payment system, such as M-Pesa. The people reliant on M-Pesa are usually owners of small businesses, and as mobile money systems grow, more small business owners will rely on it to control their company’s funds. In other words, such systems will be the primary means for them to make and take payments. If the illiquidity and lack of storage is as bad as it first appears, then if M-Pesa were to fail it could jeopardise the liquidity and, ultimately, solvency of an important cross-section of businesses within the real economy. The concomitant effect is a disastrous impact on economic growth and employment in these, already, poverty stricken areas.
The benefits of mobile money payments seem so obvious: small business have access to conduct necessary financial transactions where the banks have under-served them. However, there are too many red flags for small businesses in the emerging countries to fully embrace these P2P networks. What lies beneath the surface is a magma lying dormant, ready to erupt.
Mobile money systems will not only cause issues to customers due to storage and liquidity problems, but will be a disaster when the central banks of these countries are unable to control and manage the monetary supply through traditional policy tools. Tools such as open market operations, reserve ratios, and discount rates will be rendered virtually useless if the shadow payment grows too big too quickly, with damning effects on the countries that have embraced them too liberally.
Nevertheless, M-Pesa is an interesting and exciting step towards a fully fledged digitised monetary system, which will help to prevent individuals evading tax and engaging in organised crime. To evade tax successfully and avoid being caught as a criminal it is necessary for there to be some anonymity of cash payments, which is stripped away when payments have to be made via an online network. In addition to this, the ability to control their country’s money will substantially increase. For example, they will be able to implement monetary policy at the ‘zero lower bound’. This means, they will be able to adopt a negative interest rate designed to stimulate investment, without the risk of widespread bank runs (i.e. people withdrawing money from the bank) and undermining financial stability through economic stagnation.