Can Cellphones be the New Bank for the Unbanked?
Millicom's Mobile Financial Services uses digital technology to improve financial inclusion. Without a doubt, this business model has potential, but the industry still faces challenges that cannot be ignored.
Millicom is one of the leading telecom providers in Emerging Markets, particularly in Latin America and Africa. It brands itself as a Digital Lifestyle company that brings communication services to those left behind the digital revolution. Currently, mobile and broadband (relatively traditional segments) make up the majority of revenues, but Mobile Financial Services (MFS) is by far the most innovative segment and a potential source of future growth. 
With over 11.2 million subscribers (~17% of total Millicom subscriber base) across Latin America and Africa, the company is a leader in MFS. Millicom’s business model in this segment is to deliver financial services to unbanked small and mid-sized businesses in addition to individuals through mobile technology. The way in which the company is delivering this value is by having a best in-class infrastructure, innovative technology and local presence in each country (97% of staff is of local nationality). 
A MFS customer can simply add credit to a mobile wallet by going to a Tigo (Millicom’s brand) point of sale or a local Tigo Cash agent. Once the deposit has been made, the customer can transfer money to any other Tigo customer. Additionally, a customer can also save, borrow micro and working capital loans and access micro-insurance through the same MFS platform. 
Through MFS, customers who would not normally have access to traditional financial services can have access to national and international money transfers and payment services. This may seem like a trivial service to many of us in developed markets, but around 65% of people living in Latin America and 80% of those living in Sub-Saharan Africa do not have access to a formal or semi-formal financial institution . For these individuals, having access to mobile financial services can be extremely valuable and thanks to new technology, it is now possible. This is especially true given the increasing mobile penetration in these regions; for example, in Tanzania over 50% of the population owns a mobile phone, while only 15% of the population has a bank account .
Sounds great, right? Large underserved market, leading position, ground-breaking technology – makes us wonder what could possibly go wrong…Although I am a big supporter of using digital technology to drive inclusion at a global scale and serve the unbanked, there are a few factors that Millicom should pay attention to.
Investment. Although infrastructure is a barrier to entry, there have been an increasing number of competitors to MFS in certain countries, such as Ghana . To continue being a leader in the segment, Millicom has to continuously invest in digital innovation. It also been already doing so to a certain extent; for example, it was the first provider in the world to offer customers interoperability. However, this can involve a material financial investment, which can be a potential hindrance to further digital innovation. This is a challenge as the company is focusing on cash flow generation after a cycle of significant investment in its core segments, especially considering the relatively low margins in MFS.
Regulation. The mobile financial services sector is still relatively unregulated in countries where Millicom operates , but it is likely that central banks begin to pay more attention to these transactions and regulators begin to add limitations to the operations  . This is not necessarily negative for Millicom as it can bring clarity and stability to operations, but it can also further pressure MFS margins and limit certain transactions. Additionally, as a non-bank financial, the company has the responsibility to safeguard funds while ensuring appropriate and legal use of funds. Looking forward, the company should not only do its best to be involved in discussions with regulators, but also be focused on developing internal control processes. In my view, Millicom is currently somewhat reactive in this matter and should be doing more in terms of control development as well as leading regulatory improvements.
Macroeconomic risks. Historically, there has been economic and political volatility in many of these countries. This includes currency devaluation and regime changes as well as a negative impact in GDP growth due to fluctuating commodity prices . This can be dangerous for Millicom as it not only deters growth, but as its portfolio of services increases, credit risk can become a threat.
In a digital world, opportunities are likely to arise and companies like Millicom will undoubtedly grow. In this scenario, there is the chance to add value to customers while helping further financial inclusion. However, risks are evident and the challenge now is: how to hold MFS providers to the high standard of a financial institution while still leaving space for growth and incentives for continuous digital innovation.
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 Millicom Annual 2015 Report
 Chaia, Alberto; Dalal, Aparna; Goland, Tony; Gonzalez, Maria Jose; Morduch, Jonathan and Schiff, Robert, Half the World is Unbanked (October 2009). Available at: http://mckinseyonsociety.com/downloads/reports/Economic-Development/Half_the_world_is_unbanked.pdf
 Mpogole, Hosea; Tweve, Yohana; Mwakatobe, Neema; Mlasu, Serijo and Sabokwigina, Deo, Towards Non-cash Payments in Tanzania: the Role of Mobile Phone Money Services (IST Africa 2016). Available at: http://www.ist-africa.org/Conference2016
 Hattingh, Henry Lindo, An Opportunity Exploration and Best Practices Analysis for South African Mobile Value-Added Companies entering the Ghanaian Market (March 2015).
 di Castri, Simone and Gidvani, Lara, Enabling Mobile Money Policies in Tanzania: A ‘Test and Learn’ Approach to Enabling Market-Led Digital Financial Services (April 15, 2014). Available at SSRN: https://ssrn-com.ezp-prod1.hul.harvard.edu/abstract=2425340 or http://dx.doi.org.ezp-prod1.hul.harvard.edu/10.2139/ssrn.2425340
 Rojas-Suarez, Liliana, Financial Inclusion in Latin America: Facts, Obstacles and Central Banks’ Policy Issues (June 2016). Available at: https://www.researchgate.net/publication/305221313
 Tagoe NA (2016) Who Regulates the Mobile Money Operations by Telco’s? The Need for an Effective and Robust Legislative and Regulatory Framework in Ghana. J Bus Fin Aff 5:208. doi:10.4172/2167-0234.1000208
Student comments on Can Cellphones be the New Bank for the Unbanked?
Hi Daniela, great post and I think you capture the challenges. I was struck by the backlash from the banking systems of other African countries to the success of a telecom driven financial transaction system in Kenya (M-Pesa). I think there are strong arguments for this being a banking sector product due to the issues of regulation. However, to date, much of the African banking sector has had little incentive to move into this under served market, due to the weak economics. I would love to discuss in class how you think this is going to develop in the coming years (particularly as many of these markets go through a sustained period of commodity price weakness).
Great article, Daniela! I really like the model of Millicom, which enables basic banking service in the emerging markets. I wonder though, how they are dealing with international FinTech competition such as Transferwise and Braintree. These firms provide similar services already across the globe and offer additional features. Is their possession of the infrastructure enough to hinder the competition from entering?
Thanks for this Daniela – really educational article.
I would be interested to understand more about how Millicom obtains creditworthiness data in order to offer its micro-loans and micro-insurance. I remember being really impressed learning about M-Kopa last year (http://www.bloomberg.com/features/2015-mkopa-solar-in-africa/), which generates its own credit data by leasing solar power units to customers, then extending more credit to those who prove to be good at repaying (not unlike ITC learning about the incomes of different farmers in its network and considering using the data for financial services). Does Millicom use any existing social infrastructure in its operating model to understand creditworthiness, or is this determined in some other way?
Love the article. I believe completely that cell phones can help bank the unbanked! I remember the case of m-pesa, which worked really well in Africa. There are some efforts in making it available in South East Asia, a region I’m more familiar with, but it has been a challenge due to regulations and the undedicated/unfocused projects by big telco companies. Instead of a clear pioneer, there has been many partnerships being made here and there around banks, start-ups, and telco companies. It is especially important to get the banks involved because of their influence in building regulations and outsourcing functions such as credit scoring. I wonder if similar trends are emerging with Millicom and its competitors.
Great Article! The use of this technology in emerging markets to bringing banking to the unbanked is great. I think that you and others have captured some of the challenges that they are and will face moving forward. One area that I was thinking about is how the actions in the MFS area are impacting other parts of Millicom’s business or other parts of the economy in these areas. As they use technology to provide these MFS to underbanked, these customers potentially have access to more parts of the economy and become more tied to banking systems. While I am not familiar with how Millicom is implementing their MFS service, how are they adapting this business model over time to adjust to changing technology and the other challenges that you discussed? Are they in cooperating more services on their platforms beyond banking to provide a complete suite of services or remaining primarily in the MFS area?
Thanks a lot for your article. It sheds light on a very important problem that our world faces — providing banking/payment services to those who cannot connect to our regular banking system. This issue is particularly interesting to me as India, being a home to 1.2 billion people, has millions of people who don’t have access to the regular banking system. The use of such technologies can clearly help a lot in that sphere — given the fact that the mobile penetration in the Indian market is huge. People don’t have access to electricity, but they have a mobile phone, which they charge using tractor engines.
Hi Daniella. This was a very informative post.
As a few others have noted, I’m having a tough time deciding what Millicom’s role should be versus the local banks. Millicom is spending lots of time and resources to develop its micro-finance capabilities, an area which is not a Millicom core competency and, as you mentioned, not particularly profitable. Would it be better for Millicom to focus on providing the technical infrastructure and to allow the local banks to provide the actual financial services elements over Millicom’s technology?