Mobile Money Interoperability

1. Mobile MoneyInteroperability 6.11.2013 Gerhard.Romen@Millicom.com CMO Mobile Financial Services

2. National Remittances “According to the World Bank, there are now more phones in Kenya than adults, with more than 80% of those with a cell phone utilizing ‘mobile money’.” Ikaminska, I, Jul 18, ”m-euro a lesson in money supply from Kenya”, “80% of Global Mobile money transactions were processed in East Africa” GSMA Mobile money for the unbanked, State of the Industry : Result from the 2011 Global Mobile Money Adoption Survey • “It’s now far easier to send money person-to-person in Kenya than in the United States.” • “M-PESA has within the same period opened the eyes of the world to the potential of mobile money and mobile payments, creating what would easily pass as a financial services revolution.” • Source: Ikaminska, I, Jul 18, ”m-euro a lesson in money supply from Kenya”, “In Africa, and in Kenya specifically, the use of mobile money is already well established. In fact it is doing so well that the World Bank has issued a warning about the way payments systems are developing and the threat of monopoly.” Nick Clayton, Tech Euro, Wall Street Journal, July 23, 2012,

3. $4.8bn revenues 9.500 employees E-Commerce Mobile, Internet, Mobile Financial Services

4. Fundamental Concepts of MFS Concepts • Creating a permanent secure Trusted store of value • Creating a ubiquitous, agnostic and Universally Accepted form of electronic value Phases of Mobile Money • Trust : Domestic Remittances / Bill payments (monthly transactions) • Universally Accepted : Merchant Payments (daily txs) viable / better alternative to physical form of currency • Later : Second generation financial services (Loans, insurance, etc.)

5. Interoperability of Values • Is based on the Economic Principle of the mutual benefit of Exchange • Is a cooperative model rather than competitive model • Every exchange requires a • Willing buyer + Willing seller • Ability for the Buyer to Pay the Seller in a currency acceptable to the seller • The broader the Ecosystem the deeper the penetration & the higher the volume of transaction per user

6. Interoperability dimensions

7. MFS – Initial Business Model Original Distribution / Aggregation Model (Safaricom model) Supports • Initial mass market deployment • Segment Above + Segment Below • Within Segment • Initial Agent deployment New Entities E $ $ E $ E $ E E $ E $ Does not Support • Integrated Banking solution • New entities & segmentation • MNO integration • Agent Integration • Merchant Integration

8. Critical Enablers for Mobile Money

9. MNO – Bank Integration • Mobile banking and mobile payments are in fact complimentary services • Small area of overlap is not where we compete but represents the area to cooperate between the traditional & emerging financial service environments. • Represents the conversion from traditional currency to e-value • MNO gains transaction volume while the Banks receive the value of the aggregated funds

10. MFS – Current Growth by Driver Three factors that determine size of market The Number of Mobile phone users The Penetration of MFS within Mobile base Transactions per user Growth in mobile phone users slowing down Currently operators primarily penetrating their own subscriber base

11. Wallet to Wallet Interoperability • Enables universal customer experience • Uniform simple minimal pricing irrespective of recipient network How : • All wallet operators to act as reciprocal “Agents” of other operators • Recipient operator to pay sender operator Cash-In Commission • Direct daily settlements/top-up of transaction value exchanged and of commission charges • No clearing house required

12. Interoperability : How it could work Right now 1 6 2 7 Customer Chooses Send Money to other networks using the same P2P USSD item MNO 1 prefunds agent account with MNO2 Prefunded Tigo wallet debited and the customer wallet credited MNO 1 tops up agent account with MNO2 SMS Received xxx from Tigo ... MNO 2 MNO 1 1. Send Money 2. Withdraw 3. Buy Airtime ... Interoperability : How it could work 4 5 3 8 E- money is debited from subscriber account and credited into a suspense account Charges configured to be same as on net P2P MNO 1 processes Cash-in transaction to recipient subscriber on as an agent of MNO 2 MNO 2 pays MNO 1 Cash-in Fee @ month end

13. Ecosystem w/wo Interoperability • Assume 3 Market players with overall shares of 40%, 30% and 30% • Even the market leader with looses out on 75% of his market opportunities by not allowing Xnet transactions (16 of 64) • Only penetrates a max of 25% of the potential • Total Market penetration limited to 35% of the opportunity

14. Metcalfe’s Law limited by Dunbar’s number Case Study Metcalfe's theory is apparent in UK SMS volume growth which exploded when the transactions were allowed to cross networks Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system N*(N-1)/2 = V (value) When n=2 players 2*(2-1)/2 => v=1 When n=5 players 5*(5-1)/2 =>v=20 When n=12 players 12*(12-1)/2 => v=66 Dunbar’s Number without scalable methods for collaboration and sharing, the potential of Metcalfe's law is limited in a closed ecosystem

15. Value of the network

16. MFS : Growth Rate past and Future GSMA : Global Mobile commerce penetration East Africa is still amongst the fastest growing mobile money services globally But by the end of 2013 industry penetration expected to approach or exceed 50% Growth is likely to slow down after this Once the market is saturated how will we continue to grow? How can we accelerate this to 90 - 100%?

17. MFS – Future Growth Growth by Driver Growth of Mobile base - Number of Users in Eco system to transact with Increase in transactions per user Penetration of MFS within Mobile base Currently Operators primarily penetrating their own subscriber base By interoperating networks increase number of transactions possible by 100

18. Interoperability – Enablers • MNO willingness & cooperation • Discouragement of anticompetitive monopolistic pricing practices • Progressive legislation and licensing • No MNO would be licensed if they offered on-net calls only • No Bank would be licensed if they only accepted internal transfers only • The same should be applied to the micropayments environment • Technology & Development • Simple pricing and minimal charges • Clearing • Direct daily MNO setoff and settlement and setoff avoiding additional and unnecessary 3rd party costs (e.g. external clearing house)

19. Interoperability – Myths and urban Legends • Large investment required – Advantage of MFS is that it leverages unutilized capacity of existing network infrastructure, relative investment is low and can be executed with existing technology and functionality • Technology is complicated – We integrate with partners on a daily basis • Market leader looses competitive advantage – the MNO with the largest market share stands to gain the most. The gain for the market entrant is only greatest in relative terms • Market share gained / protected by not Interoperating - eventually MFS market share will approximate the mobile market share • Commercial will be complicated – the Super agent model already exists - Each operator simply becomes super agent of the other operators

20. Thank You – Lets connect Gerhard.Romen@Millicom.com +352 691 750 837