The swift, silent change in consumer payments

Mobile money is now available in two thirds of low- and middle-income countries.

HI-TRAC: The author's shorthand for Happiness Index, Infrastructure, Talent, Regulations, Access and Capital. The six pillars that make UAE a great place for a startup. This week, the focus is on the Capital available in the UAE.
Over the last couple of months, there has been increasing visibility for fintech in the UAE. Although there have been multiple articles, there is room for explaining the fundamentals of one important aspect of fintech i.e. digital payments from a practitioner's point of view. The Nilson Report is the go-to information source on card payments. The website indicates that in 2015, the total purchase volume from the card industry was in the region of $21.5 trillion with the bulk coming in from Asia.
Four seemingly unrelated initiatives point to a strategic shift in the payment industry. The industry is currently dominated by a couple of global giants and several aspirants at the global, regional and domestic level. In the series of articles relating to the coming change in payments, the focus will be to examine the specific changes being brought about by these four and how each one of these relates to a critical aspect of the payments value chain. 
First, it is relevant to highlight four key elements of the digital payments value chain - authentication and authorisation or simply just getting to know who is making the payment and whether that entity is good for the amount. Clearing and settlement or basically collecting on an IoU. The third is interchange or the source of revenue in the value chain and finally there is interoperability and standards that allow multiple players to connect to each other. There are of course, several other factors including regulations, fraud control, liability and foreign exchange conversion management but the four mentioned are fundamental.
In each of these four, one strong challenger to the existing practices will be discussed briefly to allow fintechs to see the strategic opportunity.
This article will deal with the impact of the shift in authentication and authorisation that is taking place. The example used is M-Pesa as implemented by Safaricom in Kenya but it is only indicative of a trend. 
A relatively unnoticed evolution happened in the first few months of 2016. Safaricom is the dominant telco in Kenya. It's half-year results (sourced from the company website) for the period ending September 2016 showed that contribution from its voice services (US$449 Million) was overshadowed by the contribution from payments and data ($511 million). Even more important, unlike its counterparts from other parts of the world, Safaricom is not getting stuck in a low or no-growth scenario. Year-on-year net profit grew at 32.4 per cent. It looks like a systemic shift both in the business model of telecom companies as well as in the payments business. It is important to note that Safaricom's journey with M-Pesa is less than eight years old.
Throughout the history of payments, control of how much and how to pay always rested in the hands of the payer. However, for a brief period, the control moved over to merchants. Till recently, only merchants were likely to be able to afford to pay for the technology and communications required to initiate electronic payments. For example, card point-of-sale acceptance terminals which connect to the cardholders banks. These are usually found at more affluent segment merchants. The mobile money payment experience brings back the control in to the hands of the payer.
All of this happened on the back of how authentication and authorisation are performed. In typical mobile money transactions, payers access the keys to their account from their own devices. Payers send a message to their own accounts, identifying themselves through a simple number code. The software that manages their accounts takes into account two factors to authenticate a transaction¬- the SIM of the mobile phone and the customers' code. Customers are able to pay all other entities connected to the same software e.g. people, merchants or billers.
What started off as a one-trick pony in 2008 in Kenya now covers 92 countries. The mobile money industry now handles over 30,000 transactions a minute which contribute to an annual volume of $269 billion. About 556 million registered users and 4.3 million registered mobile money agents are the staggering figures for the industry in less than a decade. Although this is a very small share of the total payments industry this is just the beginning of a trend. In the upcoming series, the shift in payments in Asia will be looked at. Especially what is happening in South Asia and China.
So the key question for an entrepreneur would be to understand if there is opportunity to provide value in the area of authentication and authorisation. The answer is yes.
Increasingly, it seems that the willingness to change is happening - for example supportive regulatory frameworks such as the PSD2 in Europe and the FCA Electronic Regulations Approach in the UK, as well as the Payments Banks regulations in India are indicators of this trend. At the same time, the accessibility of identification-related information from agencies such as Nadra in Pakistan is another example of a global trend. And finally, banks and financial services providers are waking up to the fact that it is better to collaborate with fintech in payments than take a go-it-alone approach.
In summary, the mobile money experience has put the control for payments back in the hands of the payer. This opens the opportunity for fintech companies to create applications and technology that serves this shift in authentication and authorisation. - To be concluded
 
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