If you can’t beat them – join them….

Why the Hawala model is the key to mobile money transfer in the 21^st Century, by Simon Cavill, Mi-Pay

People have been using intermediaries to transfer value (including money) across international boundaries for thousands of years, way before banks in their recognisable form appeared in the 15^th century.

In the Islamic world this process is generally known as Hawala (or Hundi in India ). It is a domestic and international money transfer system that makes extensive use of the strong family / clan relationships or regional ties that exist in communities with a large “diaspora” factor, including migrant workers sending money home.

A key factor behind Hawala is the fact that the money is transferred between the sender and recipient without actually physically moving bundles of cash across local or national boundaries.  The sender will approach someone locally whom they either know personally or are recommended to by a family member or friend. 

Once a deal is negotiated, the sender hands over the cash to an agent.  The agent will then call, email, or send a text message to a contact of theirs (another agent) in the recipient’s locality. The receiving agent will be instructed to issue the required amount of cash in local currency to the recipient. In addition, the sender will usually independently contact the recipient directly and tell them from whom to get the cash and the agreed amount. 

In the meantime the two agents may settle their transaction in a number of ways.  They may settle the debt with an over-inflated invoice including the owed balance, or the sending agent may simply instruct a local contact or bank to settle the debt owed to the recipient’s agent in local currency from his own locally held reserves. This keeps the original (usually “hard”) currency offshore.

This whole process from start to finish can take place in a matter of hours and, crucially, is totally reliant on trust between the various parties. These transactions are largely invisible to the various financial bodies, regulatory authorities and Governments in the sender and recipient’s countries. Billions of pounds, euros and dollars are regularly being transferred in this process – amounts that can represent a large proportion of the recipient countries’ GDP.

The alternative “formal” money transfer services using either banks or companies such as Western Union are well established across the developed world. They require users to provide various forms of identification to conform to anti-money laundering regulations. Transferring money between bank accounts internationally is a well understood but expensive process. Providers such as PayPoint work in a similar way but will also process cash and have an extended presence through franchises run through small corner stores.

Senders can use cash, cards or bank account transfers as a source to send the money transfer but in many cases the recipient will also need to have a bank account or in some cases a pre-paid card to receive the funds. In many countries, banking services are simply not available to the lower-income communities.

In addition, unlike Hawala, these formal money transfers typically require the recipient to travel to either a bank or money transfer agent to get their cash.  Card-based systems only work where there is the appropriate card acceptance network or ATMs to retrieve cash. However, access to a mobile phone, even within the poorest communities, is becoming widespread thanks to local, national and industry initiatives. As a result, mobile-initiated money transfer is a relatively new phenomenon, and one that is widely hyped as one of “the next big things” simply because of the availability of the mobile device – but having a phone is not enough on its own.

Many people live in cash-based economies where the transfer needs to be in a cash format at both ends.  Recipients in rural locations commonly have great difficulty in getting access to their remitted cash through the banks and Western Unions of this world because they need to travel into a town or city to get it.

Another consideration is that low levels of education and literacy mean that the services are simply not understood.  We have seen how workers in the Middle East, who are increasingly having their salaries transferred onto pre-paid cards, will quite often queue up at the ATM and withdraw the whole sum in local currency. They then place a large amount of it in an envelope to be sent home through a Hawala service that gives the recipient “cash in hand”.

At Mi-Pay we see the mobile phone operators in recipient countries as being the potential key to enabling mobile-driven money transfers on a truly global basis.  The critical factor here is that unlike almost any other service, mobile operators and their distributors have outlets everywhere selling pre-pay phone vouchers.  These outlets take cash from consumers and feed it back up a well-established supply chain to the operator. This means that in many countries the operator is the trusted brand for consumers – much more than most banks or the Government.

It is relatively simple to enable the mobile operator or their distributor to also act as a cash remittance service. The operator can offset the local balance of pre-pay top-ups held on their behalf by vendors and distributors against their actual foreign exchange market requirements and keep the balance offshore in a hard currency account.  The distributor and vendor can double their commission income and the consumer can retrieve their remittance from their local vendor at their convenience without having to travel. 

By becoming a trusted financial partner, mobile operators have the potential to dramatically increase their profitability whilst at the same time creating a platform that can be used to introduce all kinds of financial services to their subscribers. It’s a situation where everyone benefits.