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 that are 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 through a network; second, customers can complete transactions through the mobile phone 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 to 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), mobile money transactions in Sub-Saharan Africa amounted to $697.7 billion, a 40% increase compared to the previous year. The 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 shows 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 currencies, and even cryptocurrencies are already popular, 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 open a personal account and have a bank card at a branch, making it a "chicken or egg" problem. Therefore, mobile money can expand financial services to a wider range of people with less infrastructure investment, making it more inclusive.

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

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

Based on these three points, we can understand 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.

Case Study: MTN MobileMoney#

Before introducing Web3, let's briefly discuss 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, including 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 make remittances, 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 remittances. In the case of both parties being MTN mobile money users, the maximum fee for remittances 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 the business model, MTN's entire operation network consists of three roles: 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 and conducting 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. Whether it is registration or remittance and deposit/withdrawal, users need to go to retail agent locations. However, 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 them rely on manual processing. 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 does not provide comprehensive inclusive financial services. This includes the lack of savings services such as current and fixed-term deposits, as well as 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 a decentralized account by binding their SIM card with a Web3 wallet address. They can directly connect to 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, the integration of mobile money with Web3 allows for direct accounting through blockchain, enabling decentralized inclusive financial services to be completed entirely through the internet. Through technologies like Layer2, transaction fees can be reduced to much lower 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 or regional financial crises (such as Greece's bankruptcy) 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 devaluation. They can also purchase compliant assets like RWA to protect 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 forest aspects of Web3 need promoters to conduct centralized audits and screenings. I don't 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 open Web3 network.

Some of the information in this article is 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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