We at the DFS Lab are running a bootcamp/hackathon to encourage FinTechs to engage with the Mojaloop community and explore the business models that wide-scale, interoperable payment systems like Mojaloop will enable. A question that we get often from the wider FinTech community is a simple one: What is Mojaloop? And what does it enable that is relevant to me? We are going to try to answer these related questions in this post.
First, let’s start with the basics.
What is Mojaloop and where did it come from?
In its simplest form, Mojaloop is a payment switch built in open source code.
The aim of Mojaloop, an open source project being spearheaded by the Bill and Melinda Gates Foundation, is to create interoperable, low-cost payment systems that allow everyone, especially the poor, to access financial services. Mojaloop aims to accomplish this by using open source software and implementing a clever payment system design that was purpose built for emerging market environments and low value transactions. The principles behind Mojaloop are articulated in the L1P (Level One Project). Mojaloop is the open source software project that implements the L1P principles and system design. The Seven Principles of Level One Project are:
- Open Loop interoperability between all providers — the system should be open to all actors, including financial institutions (FIs) and regulated non-traditional financial services providers.
- Immediate Funds Transfers and Same Day Settlement — Provides immediate notification of payment from the payer to the payee, transfers funds. The system should settle funds among participants at least once a day, on the same day. This is the most efficient way of managing liquidity.
- Push Payments — Person who initiates transaction should always be the payer. May provide ‘request to pay’ service, but authorization rest with the payer.
- Adherence to Open, International Standards — The system should adhere to internationally accepted payments standards (ISO20022).
- Adequate and Shared Fraud Service — Shared risk management leads to lower fraud and more secure schemes.
- Efficient and Tiered KYC — Account opening requirements should vary based on need, level of transactionality, services provided.
- Transaction Irrevocability — The system should not allow transaction reversal unless in extreme circumstances in order to reduce complexity and cost.
Mojaloop implements these and many other careful design choices in software. You can read more about the L1P project here.
Where is Mojaloop being implemented?
There are two deployments of Mojaloop in the works, one of which is publicly announced:
- Mowali, the independent company setup by Orange and MTN to interconnect their global DFS footprint of 100+ million mobile money accounts. Mowali intends to become a switch for DFS providers globally and sign on more participants outside of Orange and MTN.
What Mojaloop is NOT.
Mojaloop is NOT an Open API. Mojaloop is a switch for digital financial service providers, or DFSPs, which the community defines loosely and can include banks, non-bank FI’s, money transfer organizations and payment service providers. FinTech companies generally are NOT participants in payment switches and this holds true for Mojaloop. A crude illustration is below, and FinTech companies generally will interact with this ecosystem via wholesale APIs offered by DFSPs.
What is new in what Mojaloop enables?
Mojaloop is important for a few reasons:
- The clearing time between transactions on a Mojaloop deployment will eventually be 15 seconds and is available 24/7. Considering one can’t even access basic EFTs in Uganda on Saturdays and Sunday because bank account managers aren’t at work, this is a massive improvement over existing payment schemes.*
- You can make or receive a payment to/from anyone on the scheme via your DFSP without going through (and paying) a 3rd party integrator.
- A centralized directory within the Mojaloop, which, as the system grows in participants, becomes significantly more valuable.
- The implication of both of these benefits is that as more participants are connected to a Mojaloop deployment, the more powerful the deployment becomes. As the number of DFSPs on the system increases,the payment system becomes much more valuable to those included by the system. In other words, there are significant network effects for Mojaloop participants.
- A central switch enables any DFSP to make transfers to any other DFSP on the switch and no external account funding is necessary, which reduces the need for float and escrow requirements for any type of merchant or bulk transfers.
- Merchant Request, which is essentially an e-Invoicing function is built into the switch, which means anyone can request and accept payments from anyone else on the payment scheme.
- Multi-country/multi-currency — Mojaloop is inherently built around interconnection and the scheme designers envision a seamless cross border interoperability once Mojaloop instances are set up in multiple countries. The recently announced Mowali implementation will facilitate this between Orange and MTN in multiple markets (and that scheme is open for other MNOs to join). This could then help to facilitate things like regional merchant payment schemes or multi-country bulk payments
How can fintech companies innovate around the Mojaloop ecosystem?
The diagram below shows the Mojaloop system with numbers indicating three key points of innovation that we see:
- Within the mojaloop architecture itself to create new features or capabilities for mojaloop. As an example, there will likely be new models for fraud detection, KYC/AML and compliance that are based on data analytics on transactions moving through Mojaloop. Identity databases and centralized credit reference bureaus may want to incorporate Mojaloop data to improve accuracy and coverage.
- At the DFSP/Mojaloop interface to make linking, integrating, managing or otherwise interacting with mojaloop better for DFSPs. Alternatively, there will likely be new models for core banking systems to become “Mojaloop-ready”. Fineract, Apache’s open-source core banking system is one such example; any financial institution deploying Fineract does not need to do any modifications for a Mojaloop interconnection. Mifos built an integration that made this available “out-of-the-box”.
- Outside the Interoperable system at the interface between DFSPs and the rest of the world where the new capabilities that Mojaloop enables will potentially allow new innovations in fintech products, e-commerce, banking, or other areas.
These may not be the only places where new innovations can be created and we’re excited to explore these use cases with a group of FinTech companies at our hackathon in April. If you’re a FinTech company and want to participate, apply here.