In a recent brain-tickler by three of their China consultants, McKinsey released an article advocating the use of China's SMS system as a means to allow China's masses to make and receive payments and transfer funds. One hopes that the folks at ATM manufacturer Diebold (DBD), smart-card maker Schlumberger (SLB), and electronic payment gear-maker VeriFone (PAY) aren't on McKinsey's client list, but we digress.
The Idea Giveth...
The idea is not terrible, and from the 35,000-foot altitude from which McKinsey examines the option, it makes sense and seems simple. As is always the case with these "big idea" thought leadership pieces, the positives receive a lot of play, and the obstacles are minimized. The Philippines loves their SMS payment system, so why not China?
Without addressing the macro-economic problems of having so much cash in circulation (especially as the economy grows), there is much to recommend a consideration of McK's proposal. At first glance it seems more practical than adding tens of thousands of ATMs and point-of-sale [POS] devices. Over 15% of rural Chinese already use mobile phones, and that number is growing. The article is a little too dismissive - if not cavalier - about the severity of the challenges, however, and it takes a simplistic approach to a complex problem.
...but the Details Taketh Away
First, you would need China's numerous banks to work together to ensure that payments could move easily from one financial institution to another. Banking in China is intensely competitive, so much so that the effort to unify the clearance of bank and debit cards is still challenging the country. Ask any retailer how many different card machines they need to have at a point of sale - 15 years after the effort began to unify the systems - and you will realize the magnitude of the problem.
Second, as generous and public-minded as China's mobile operators are, I'm not certain they would be ready to give their bandwidth to a profit-making operation without taking at least a small cut beyond the RMB¥0.15 they take for the cost of an SMS. Quite likely they would levy some charge on the transfers, which would then need to be added to the commissions and transfer fees that go to the banks. The charges, in other words, are already starting to add up.
Ask anyone with on-the-ground retail experience in China and he will tell you: for most Chinese, especially the low-income consumers that are the target of an SMS payments system, such fees would create a powerful disincentive to use SMS payment versus simple cash. If you ask the merchants to take on those charges, it is a disincentive for them to accept payment versus cash.
Even if you reduced the payment to something even the poor would almost find insignificant - I'm thinking, say RMB 0.01, or one fen, it would require 46 billion transactions just to pay back the capital costs of the system.
Third, although the article lightly flicks over the issue of public trust, this will take time - and money. McKinsey estimates that it will take between US$40 million and US$ 60 million to set up the system. While they fail to give a cost breakout, the context of the article suggests that this would include purely the infrastructure costs. The effort to build and sustain public trust in the system would involve a considerable expenditure in marketing, including advertising, PR, point-of-sale support, and - most critically - a word-of-mouth program. Given the size of the market and the particular challenges involved in reaching and building safe-as-houses trust for the system, the costs for a program like this could easily run into the tens of millions of U.S. dollars.
Finally, McKinsey is a bit too optimistic in proposing the mobile phone as the nexus for a rural payments system. The 15% of China's rural adults who own mobile phones are the low-hanging fruit. Getting a large enough percentage of China's rural population to buy and own mobile handsets is going to take several more generations of innovation in handset technology, cuts in usage costs and, at some point, a system of subsidies that make handsets available to the genuinely poor. A $40 handset sounds like a great deal, until you realize that to a massive part of rural China that represents six weeks or more of family income.
There are other issues as well. Security for one - in a nation where your average mobile user changes phones every 15-18 months and the second-hand market in handsets is booming, the challenge of residual information on the handset is a tricky one. And that's just one problem. No aspersions on the ingenuity of Filipinos, but China's hackers are among the world's finest. Hacking the security on a digital phone network becomes extraordinarily lucrative if you have billions of monetary transactions taking place.
No thought is given to the banking infrastructure required to support this, especially since an immense proportion of the people McKinsey seeks to target with this system are "unbanked." Either you'll have to develop a safe and convenient debit system (read: pre-pay), or you'll need to come up with a Grameen Bank equivalent in China. Either way, without one or the other, the system is essentially a non-starter.
The Argent Projectile Fallacy
What is most concerning about McK's approach - in particular given the reputation of the source - is that it suffers from what we call The Fallacy of the Argent Projectile [silver bullet]. It is frustratingly common in technology generally but in China specifically for an innovator or ideator (someone who creates or adapts an idea) to suggest a single-factor, simple solutions to a complex problem.
I am a big fan of simplicity, but I am also painfully aware of H.L. Mencken's reminder that "to every problem there is a solution that is simple, workable...and wrong." There are, in essence, no silver bullets.
The One Laptop Per Child [OLPC] project will not bridge the digital divide by itself, but it is a good step in the right direction. Unseating and executing Saddam Hussein did not by itself give Iraq a participatory, pluralist future. And even if you overcome all of the obstacles and challenges, SMS payments will not wean rural consumers off of their reliance on cash - the handset ownership numbers alone ensure that much.
Fix Problems with a Full Toolkit, Not Just a Hammer
Addressing the challenge the People's Bank of China [PBoC] has posed to the nations banks to develop a new rural payments system is a complex issue. I have no doubt the PBoC would love it if there was a silver bullet answer, but there probably is not.
There is an old saying that when you have a hammer, all of your problems start looking like nails. A wise carpenter, on the other hand, knows he needs a full box of tools. An intelligent approach to rural payments would be a complete, evolutionary, and inclusive system that provides consumers with the best of all worlds:
1. A system of rural banking that makes it economical, indeed profitable, to service micro-depositors. India and Bangladesh have made immense strides in this direction, and there is much to learn from them.
2. Companies like Diebold and VeriFone need to get going on innovations that will make both ATMs and POS equipment suitable to service China's rural masses (i.e., make them simple, rugged, and an order of magnitude cheaper.)
3. A unified national clearing system for micro-payments, debit, and credit cards that by sheer volume would drop the processing cost per transaction, and that could even use credit and debit card charges to partially subsidize a rural payment system.
4. A debit system based on pre-payments using commercially available smart SIM technology usable by inexpensive handsets.
5. An SMS payments system that integrates with - and compliments - all of these other initiatives.
There is already a natural propensity among policy makers in the PRC to try to shoot their way out of problems with simple solutions rolled out on a massive scale. This should be discouraged - the line between "simple" and "simplistic" is a narrow one indeed, and the last thing the nation needs is intelligent outsiders encouraging this misguided approach.