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USSD & Mobile Payments

Mobile-networks-for-banking

Mobile network operators (MNOs) such as Safaricom in Kenya; Vodacom, Tigo, and Airtel in Tanzania; and Econet in Zimbabwe are collectively underscoring the importance and potential of MNO-led business models to advance financial inclusion. In each of these markets, and in a number of others, where MNOs are able to effectively compete in the provision of mobile financial services (MFS), there are more registered mobile wallets than bank accounts. And in each of these markets mobile payment platforms are being leveraged to offer other financial services such as savings and credit at scale.

The immediate gains for financial inclusion are clear. At the same time, this relatively new role for MNOs can generate competition concerns for country regulators. This is because MNOs compete with banks and other MFS providers (third parties) in the provision of mobile payments, but MNOs also own key communications infrastructure required to provide mobile payments.

Unstructured supplementary service data (USSD), a communications service controlled by MNOs, is believed to be a critical piece of infrastructure used to provide MFS on nearly any phone, at low cost, and without requiring access to the user’s SIM card. USSD enables customers to send instructions to the MFS provider along with their personal identification number (PIN) for authentication, while enabling the MFS provider to send responses to clients and confirm transactions.

This Brief outlines why USSD is important for mobile payments and highlights the main types of complaints arising as a result of restricted USSD access for MFS providers. It then explores regulatory issues, including when regulatory intervention may be required, which regulator might be best placed to intervene, and what type of regulation is most appropriate (CGAP 2014).

USSD is not the only communication service available for mobile payments. Other options include short messaging service (SMS), SIM Toolkit (STK, a programming environment embedded on the user’s SIM card), mobile internet, and newer innovations to interact with customers. MFS providers consider these options against several factors, including reach (compatibility with handsets), user experience, security, cost, and ease of deployment for the provider. Most providers agree that when all factors are considered, USSD is the best available option to serve low-income customers today. This view is supported by the fact that most large-scale deployments globally use USSD. This is because USSD works on the vast majority of phones, it does not require changes to the SIM or a new SIM (either of which can be complex and often costly steps), and it has important usability and security advantages over SMS.

There are some exceptions including M-PESA in Kenya, which uses STK technology together with encrypted SMS. However STK requires that the MFS provider has access to the SIM to load changes to it, which is seldom the case for non-MNOs. Other promising alternatives also have practical challenges that impede scale. Most notably, mobile internet requires that customers have access to internet-enabled phones, which is not currently the case for the majority of low-income users. On the other hand, SMS is available on basic phones, but is not as secure as USSD and offers a less intuitive and more challenging user experience.

USSD also has its limitations. The customer experience is not as smooth nor does it offer the same security capabilities as STK or mobile internet. Further, USSD sessions can be dropped, potentially raising costs and harming customer trust. Despite these and other challenges, the majority of leading MFS providers rely on USSD, including many MNOs. Large deployments that rely primarily on USSD include bKash in Bangladesh, WING in Cambodia, EasyPaisa in Pakistan, ZAAD in Somaliland, M-PESA and Tigo in Tanzania, and EcoCash in Zimbabwe.

USSD – unstructured supplementary service data. It sounds a bit complicated, and can get technical very quickly, but for the purposes of financial inclusion, there are two key things to understand. First, when you dial a number that starts with * and ends with #, you are using USSD. Second, USSD is currently the best available communications technology to deliver mobile financial services to low-income customers.

With the notable exception of M-Pesa in Kenya, the majority of large scale mobile financial services (MFS) deployments in the developing world use USSD as their primary mechanism for communication between customers and their mobile payments platform. These include bKash in Bangladesh; Wing in Cambodia; EasyPaisa in Pakistan; Tigo and M-Pesa in Tanzania and EcoCash in Zimbabwe, to name a few.

GSMA and others have documented the success of MNO-led business models to advance financial inclusion – with a number of countries having registered more mobile money accounts in a matter of years than bank accounts opened in decades. From my perspective this is clearly positive for financial inclusion. However a potential regulatory concern arises when MNOs not only compete in the provision of MFS, but also control a key input competitors need to offer these services – namely the communications infrastructure, and specifically USSD. The issue is more pronounced in countries where the MNO has market power in telecommunications, meaning constraining access to USSD (by withholding access, charging a high price or offering poor quality USSD) could prevent the MNO’s competitors in MFS from reaching scale. This can effectively block customers from realizing the potential benefits of competition (such as lower prices, increased investment in agents, improved service levels, customer choice and product innovation). 

Over the past months CGAP has explored this issue. This Brief, which builds on an earlier Working Paper commissioned to Genesis Analytics, outlines the findings from that work, with some key takeaways mentioned below.

First, as mentioned above, our research supports the notion that USSD is currently still the best communication technology available to provide MFS to low-income individuals. Smartphone applications that connect users with providers through the internet still exclude the vast majority of the poor, while Short Message Service (SMS) has security and user experience shortcomings compared to USSD.

Second, MNOs have practical reasons (such as concerns over network congestion) and strategic reasons (such as the desire to leverage USSD control as a competitive advantage in the provision of mobile payments) for withholding effective USSD access.

Third, whether regulatory intervention is required is a complex matter requiring country-specific context. Regulatory coordination between the telecommunications, financial, and competition regulators is critical when evaluating the USSD issue.

Finally, regulators pondering USSD access should consider the following progression of options to promote healthier access to USSD.

  1. Encourage market forces. The best outcome for any market is for commercial agreements to emerge between MNOs and third parties. This would advance competition and the development of the MFS market without placing restrictions on MNOs. Access to USSD is a technically and commercially complex issue that market players ideally can sort out amongst themselves. Some encouragement to sort it out directly may lead to the best outcome for all concerned.
  2. Introduce a dispute resolution mechanism (DRM). In markets where commercial agreements are not forthcoming within a reasonable time, a coordinated dispute resolution mechanism could be useful to allow the regulator(s) to understand the considerations of all stakeholders. A DRM would be able to hear a balanced set of views from market participants and recommend ways forward without introducing a heavy hand of regulation.
  3. Explore regulatory options. In the event that a DRM does not result in a mutually agreeable outcome, and the non-provision of USSD is found to seriously hamper competition, regulatory intervention may be justified. In such instances, the most effective intervention may be to mandate that MNOs provide access to USSD, without regulating the price. In some extreme cases regulators may in time be pushed to set minimum quality standards and pricing rules (such as requiring that USSD prices are applied in a nondiscriminatory fashion) to foster healthier competition.

Those interested in more detail on the role of USSD, and the regulation thereof, in promoting competition in mobile payments should contact us.