Mobile Phones Revolutionize Third World Economics

Published on February 1, 2011

As a nervous world watches the political uprising unfold in Egypt this week, one cannot escape the fact that modern communication systems have made it possible for individuals in poor countries to collaborate in ways that would have been impossible only a decade ago.  It seems like the first response of autocratic governments when faced with an uprising is to cut off internet and telecommunications services.  According to a recent report, Egypt’s mobile phone penetration rate has reached 72 percent.

While the political implications of greater mobile phone use are impossible to ignore, the economic impact is likely to be even greater in the coming years.  Most of the mobile phones currently in use in third world countries are far less advanced that the “smart phones” based on the iPhone and Android platforms but still provide users with valuable communication and payment services.  The Economist recently explored this topic in greater detail.  Some of the systems in place using relatively low-end technology are quite advanced and allow users to receive funds and pay for goods and services electronically.

Although these systems are far less capable than the rumors swirling around Apple’s upcoming eWallet initiative for the iPhone 5, third world micropayment systems are already flourishing in India and parts of Africa according to The Economist.  The chart below illustrates the extent to which this trend could deliver a dose of Schumpeterian creative destruction to established banking and money transfer services in the third world:

For a business such as Western Union, which we profiled in October, the implications of what consumers are already able to do with low-end feature phones should cause significant concern.  Western Union has built a formidable moat over the years by combining an unparalleled physical network of locations with a trusted brand known for reliability and security.  The result has been very high profit margins driven by high fees charged  for money transfer services.

Electronic alternatives such as PayPal have the potential to make headway among the technologically sophisticated, but users must have a bank account or credit card to associate with the PayPal account.  The emerging microbanking solutions discussed in The Economist’s article may be able to undercut traditional money transfer fees while offering consumers in the third world a safe alternative to carrying cash.

As we discussed in the profile of Western Union, the company is taking steps to participate in this emerging trend, but competition is likely to be greater in mobile phone based microbanking compared to traditional wire transfers which could pressure margins in the long run.  Mobile phone based banking in impoverished third world countries was probably almost inconceivable two decades ago but is now a very real threat.  The situation is a great example of how businesses with a seemingly insurmountable moat in the short run still must be aware of the forces of creative destruction being unleashed in the long run.

Disclosure:  No positions.

Mobile Phones Revolutionize Third World Economics