Electronic Payments Via Mobile In Rural Areas

The article authors write that rural areas, such as rural China, are cash based and people do not have banks nor credit cards. The authors propose using mobile payments, in particular SMS messages to merchants.

Developing a new rural payments system in China
China could provide itself with a rural payments system cheaply and quickly by taking advantage of an existing technology and infrastructure.

Jan Bellens, Chris Ip, and Anna Yip
Web exclusive, May 2007

A growing middle class and a decade of annual double-digit growth in retail sales have provided a powerful magnet for businesses hoping to cash in on emerging China. Yet outside of the main cities—in the vast expanse of rural China, where around 750 million people live—the reliance on cash makes it difficult for consumers to spend and for retailers to sell.

China has just 530 point-of-sale (POS) terminals and ATMs per million people, far below the 10,000 per million found in the United States. Accordingly, cash is used in 83 percent of all payment transactions in China, compared with just 21 percent in the United States. With most of these terminals and ATMs in China’s cities, practically all rural transactions are cash based.

One way to wean rural consumers off their reliance on cash might be to add more ATMs and POS terminals. However, we estimate that such an effort would cost at least $2 billion and add just 130 terminals and ATMs per million people. Installing equipment and extending the telecommunications network in remote areas would also take a prohibitively long time.

Recognizing the need for a new rural payments system, in August 2006 the People’s Bank of China directed domestic banks to devise a solution. China views the development of a low-cost, noncash payment network in rural areas as critical to increasing rural spending and closing the wealth gap with urban areas.

The good news is that mainland China can tackle the problem by using existing technology, without a hefty price tag. McKinsey research shows that the mainland’s existing mobile Short Message Service network could be quickly and cheaply deployed to provide an SMS-based payment system in rural areas.

Because the most expensive parts of the infrastructure—the mobile network and millions of mobile phones—are already in place, we estimate that the cost of this solution would range from less than $40 million to $60 million. A payment-settlement system among merchants, banks, and mobile-phone network providers would account for the bulk of this expenditure. The initial investment would quickly be recouped through transaction commission fees and mobile-phone usage charges.

There are alternative mobile-payments solutions gaining exposure around the world, but these are not well suited to the needs of rural China. For example, Seoul and Tokyo have both introduced a system that allows a transaction to be completed using a mobile phone with a special built-in chip and an in-shop noncontact reader. However, the need to install the reader and to use special—and expensive—mobile handsets renders the solution inadequate for rural China.

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2011.01
Near field communication
Recent reports that Google is developing its own NFC-based solution for using smartphones as an e-wallet.