Over the course of the past decade, greater penetration in mobile phone usage and continued lack of formal banking presence have made mobile money services the primary financial platform for millions of rural Tanzanians. However, despite its rapid increase in popularity, mobile money is, to this day, largely limited in its role as a tool for cash transfers and withdrawals, while accounting for very minor portions of day-to-day financial transactions. However, with changed incentivization, more extensive use of mobile money for a mobile-to-mobile money transfer can revolutionize the economic landscape of rural African communities.
The concept of mobile money is pioneered in East Africa by British-based telecom Vodaphone, for its Kenyan subsidiary Safaricom and Tanzanian subsidiary Vodacom as early as 2007. Locally termed “M-Pesa,” the service allows users to deposit, withdraw, and transfer money in real time via regular feature mobile phones over 2G networks.
The over-the-phone financial platform makes great sense in the rural East African context. Due to vast distances between villages compounded by high logistical costs due to subpar infrastructure, the costs of maintaining and servicing traditional financial institutions such as bank branches, ATMs, and even POD machines for bank card transactions are simply too high to be economically viable. M-Pesa allows for financial transactions to take place without the need for supporting infrastructure, aside from reliable mobile network, to accompany the mobile phone, making the platform easily implementable in the most logistically remote of rural communities.
However, despite the convenience mobile money platforms, the benefits at the current state still pale in comparison to what is available to customers of regular banks. Much of the difference, however, is less due to mobile money platforms’ inherent deficiencies as its clients’ lack of understanding on, and thus underuse of, certain existing mobile money functionalities. In most cases, the lack of understanding stems from the fact that, under current operational structures, mobile money service providers see no incentive in promoting the usage of mobile money in those particular ways.
Perhaps the most prominent of the underused functionality is the ability for mobile money platforms to act as a direct transaction tool. For regular bank customers, debit or credit cards, along with the presence of POD machines in various businesses, allow various transactions to be conducted through “swipe of a card,” entirely bypassing the need to convert the transacted amount into cash first. Mobile money platforms can replicate the same cashless transaction, through direct money sending from one account to another.
However, at the moment, mobile money rarely fulfills the same functionality as bank cards. When a mobile money user goes to a shop to purchase products, he is almost exclusively required to pay the entirety of the transaction in cash. If the amount required for the purchase is greater than the cash held by the user at that time, the user is expected to go to a nearby mobile money outlet to withdraw more cash before returning to the shop for cash payment. The shop owner does not take mobile money transfer as a valid method of payment despite both parties in the transaction having cellphones with mobile money functionalities enabled.
But why is maximizing mobile money use for mobile-to-mobile money transfers important? On one hand, the need to print, transport, distribute, and maintain cash over large numbers of population centers over a large territorial area makes cash an economically expensive instrument for governments and financial institutions. The slow movement of cash across long distances and the presence of counterfeit currencies create even more opportunity costs, in terms of chronological delays and operational risks, for conducting business transactions via cash. These costs are amplified in a rural African setting, where incomes remain low and volatile due to economic dependence on sales of agricultural produce.
Greater mobile money usage provides another important benefit that may seem unimportant elsewhere. That is mobile money’s ability to formalize the informal economy. For instance, in 2010, the size of the informal economy in Tanzania represented nearly 60% of the total economic size, with informal retail transactions making up a significant portion of the informal sector. The informal sector remains underreported due to lack of government institutions to keep track of business transactions’ sizes and whereabouts. The lack of comprehensive tracking, then, incentivizes owners of informal businesses to dodge licensing and registration, enabling them to evade taxation on their businesses. The inability of the Tanzanian government to properly monitor and collect taxes on 60% of its economy significantly restricts the number of revenues it can devote to rural development projects and makes the country all the more dependent on foreign aid to fill gaps in national budgets.
Widespread mobile money usage will revolutionize the government’s recording of the informal economy. When businesses and individuals use mobile money platforms for everyday transactions, the government can easily gauge their locations and transaction sizes by requesting transaction information from telecoms. Access to transaction data allows the government to use the information as valid proxy figures for launching more inclusive income and valued added tax regimes. Through the use of mobile money data, the state can inexpensively approximate the economic activities of the country without significantly expanding bureaucracies for gathering data.
Moreover, the government can complete the entire process of tax collection over mobile money services. The government can establish the right to remove the designated amount of credits from every mobile money account. As a prerequisite for mobile money-based tax collection to work, the government must ensure telecoms enforce rules on registering only one permanent mobile money account per person. This is to prevent individuals from dodging taxes by shutting down accounts with negative balances and opening brand-new accounts later.
If mobile money usage is to be used as a proxy for overall economic activity, the greater the proportion of business transactions conducted through mobile money platforms, the more accurate and comprehensive the economic data will be. The government has the incentive to encourage greater use of mobile money in order to maximize tax revenues collected as a percentage of mobile money transactions.
Image Credit: https://www.forbes.com/sites/tobyshapshak/2018/11/27/how-mobile-money-continues-to-boom-in-africa/#aedff76205cb