Can Cryptocurrency Eliminate Mobile Money Fees?
One Cape Town startup is using blockchain to remove one of the greatest barriers to financial inclusion: fees.
On the eighth floor of a nondescript building in Cape Town’s central business district, a group of coders is overseeing a quiet revolution in Africa’s mobile money space. They have a simple goal: Increase financial inclusion by removing fees. And they’re doing it with an app called Wala. With the explosion in mobile money following the success of Kenya’s M-Pesa, companies have been signing up new customers around the continent at a fever pitch.
In Nairobi, often referred to as Silicon Savannah, smartphone applications come and go at breakneck speed, each promising to expand financial inclusion through user growth and seamless transactions between merchant and buyer. Despite the growth in apps and companies working on financial inclusion, 94% of financial transactions on the African continent are still made in cash. Are high fees to blame?
The problem with mobile money
Wala is a Cape Town-based startup with operations in key African markets including Zimbabwe, Uganda, and South Africa. The company was co-founded in 2014 by Tricia Martinez, an American with a background in economics from the University of Chicago. Martinez has the air of a tech coder and entrepreneur. With exposed brick, an open floor plan, and a ping pong table, I thought I had walked into a San Francisco office space when I visited Wala. The only identification was Cape Town’s iconic Table Mountain out the window. Martinez, dressed in the standard tech wardrobe of jeans and a hoodie sweatshirt, was sitting at her desk, which was exactly the same as the rest of her staff.
“After I finished graduate school at the University of Chicago, I decided to travel to Uganda to start my first company using technology to provide universal basic income,” Martinez told me as Wala coders quietly poked away at their computers around us. “I was focused on cash transfers to consumers at the very bottom of the pyramid. We were dispersing payments with a goal of seeing how subsistence farmers would invest their money. We were tracking a lot of data, seeing if they were investing it in their kids’ school fees, their healthcare, and building their businesses and expanding their farms.”
The safety of money was a primary concern. Transferring money from aid partners in the United States, Martinez noted that farmers would cash out quickly instead of keeping the money in a mobile wallet. “We knew we were creating impact and helping these people invest in their lives and communities, but there was no safe, affordable, and accessible place for them to grow and store their money.”
Why were villagers cashing out as soon as they could even though that meant storing large amounts of fiat currency? Taking a closer look, Martinez realised the problem was with the banks and their high fee structures. Villagers reported that banks in Uganda were difficult to work with, had rough customer service reputations, and charged high fees for every transaction.
“The way the banks operate in emerging markets is by charging high fees,” Martinez continued. “And that’s the biggest barrier: Consumers are disincentivized from participating in the system. They say: ‘I can use cash because I don’t have to pay fees’. It’s easier. And that’s the problem.”
A solution hiding in plain sight
Every four years, the World Bank releases a Global Findex survey that’s the most complete report on demand for global financial services. The latest report, released in April, found impressive growth in demand for financial services worldwide and a slight uptick in new account creation. As the Center for Financial Inclusion (CFI) outlined in a recent paper, the Global Findex report highlighted a number of serious challenges in the sector. Aside from the large number of dormant accounts in places like India, CFI found that the cost of maintaining an account was still too high and thus excluded a large number of people across Africa. Wala recognized this problem from its experience on the ground. Its business model is designed to find a way around the current fee structure, and it has stumbled upon an unlikely way to do it.
“The biggest issue we saw was that we needed to remove the cost problem and from there we could start really driving financial inclusion,” Martinez explained. “It’s not about just giving bank accounts to anyone, that’s the wrong answer. A bank account isn’t a solution. It’s about creating a more efficient solution that removes the barriers for these consumers.”
The challenge is not solely unbanked populations across Africa but underbanked Africans that are not using existing banks accounts due to high fees and inefficient banks. Wala’s solution was to use blockchain technology to create a new money model that would have zero fees and be easy to use. According to Wired’s Gideon Lewis-Kraus, the standard definition of blockchain describes a “shared, decentralized, cryptographically secure, immutable digital ledger”.
In April, Wala launched Dala, its own cryptocurrency wallet, in South Africa, Zimbabwe, and Uganda. A month and a half later, Dala had over 100,000 active users. Martinez walked me through how Dala works.
“Wala users download the Wala app, and every user gets a Dala wallet. Users deposit money and it goes into their Dala wallet. So, for example, someone would see that they have five dala based on whatever amount of South African rand or shillings they deposit,” she explained. “Dala enables them to move value anywhere instantly for free. They can use it inside the Wala application, where they can buy airtime, data, and pay electric bills or school fees all at no cost. Traditionally mobile money users would pay high fees to pay bills or buy airtime. We launched with no fees at all, and honestly had no idea it would grow so fast.”
According to Wala’s website, the Dala network resembles the structure used by cryptocurrency exchanges. “To engage,” the company website outlines, “a user will create an on-chain payment channel with the Dala network and commit a certain amount of tokens to the channel. The user is then able to transact with all other members participating in the network.” Essentially, the company is making money from fees collected through operating the network and engaging enterprises in the retail, energy, and infrastructure sectors looking to use Dala. At this stage, user growth appears to outweigh concerns about fee collection.
Most consumers in Wala’s markets are spending less than $0.80 on average per transaction, yet some mobile money providers still levy fees. In fact, Martinez argues, the smaller the amount of money, the higher the fee in some cases. This model disincentivizes participation in mobile money. People don’t use the platforms because they’re expensive, not because of access issues.
The challenge of cryptocurrencies is building the right ecosystem that people want to use. Anyone can issue a cryptocurrency but unless there is broad uptake, there is no value. With its surprising growth numbers, Wala is one of the first startups in Africa to solve the ecosystem challenge. The question now is how can it expand to new countries.
“We already have over 100,000 merchants on the ground to do cash-in-cash-out. So the minute we launched Wala and Dala, users could actually buy things with Dala. They can soon go to these merchants throughout Africa and cash in or cash out and say “I want to buy Dala, here’s R10.’”
The next step for the company is signing up enterprises that are willing to pay employees in Dala. That will allow Wala to move closer to achieving its vision of creating a digital currency for Africa that enables consumers and enterprises to move value anywhere instantly.
Consumers don’t even know they’re using crypto
Wala simply created their own cyprtocurrency to enable a new fee payment structure, encourage growth on their platform, and expand users’ ability to use mobile money. The surprising part is most users don’t ever know that they are using a cryptocurrency at all. According to Martinez, cryptocurrency and blockchain is confusing, so to avoid that confusion Wala never mentions their use of blockchain.
“Our consumers have been using tokenized assets their whole lives: airtime. Airtime was the first way consumers moved value. It’s not a currency but that’s why M-Pesa launched because people were sending airtime to each other as a form of payment. We’re doing the exact same thing, it’s just called Dala. We don’t even need to explain it to them. They instantly adapt and get it. As long as you have an exchange rate so they can see what it’s equal to in their local currency, it makes sense to them.”
Given the popularity of Wala’s products, the future looks bright for real-life blockchain applications in the financial inclusion sector. According to Martinez, South African regulators are “probably the most progressive in the world right now” when it comes to blockchain because they are stepping back and letting the technology develop. It’s one reason why Cape Town has emerged as a powerhouse of fintech development in Africa.
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