By: Frode Lervik
Globally, mobile payments initiatives are proliferating, usually driven by major telco carriers and banks. However, Ecuador has chosen a different path. The Central Bank of Ecuador has just launched 'Dinero Electrónico', the world's first electronic currency scheme where a central bank is the owner and operator of what is, by law, set to become the country's only electronic wallet. Neither the country’s three telco carriers nor the traditional banks have a stake in the scheme except as service providers. The Central Bank of Ecuador’s ambition is to reach 500,000 users by the end of 2015.
Following financial turmoil and a banking crisis, Ecuador’s government decided to discontinue its own currency, the sucre, in the autumn of 2000 and replace it with the US dollar. Through these measures the country effectively gave up sovereign control of money supply and its independent monetary policy in a bid to strengthen confidence and increase financial stability.
Ecuador has a population of approximately 15.7 million people who have around 17 million mobile phones. At the same time, it’s estimated that around 40% of the economically active population is currently unbanked and relies on cash for its economic transactions.
In addition to the general benefits of improved convenience, safety and efficiency, an important motivation behind the new mobile payments initiative is to rapidly provide access to the financial system for a much larger percentage of the population.
The scheme is founded on a new law passed in 2014 to regulate the use of digital currencies. Essentially, the law bans digital currencies like Bitcoin and gives the Central Bank a monopoly in Ecuador.
Despite the translation of the scheme’s name being ‘digital money’, it should not be confused with crypto-currencies like Bitcoin. The core of the system is effectively an electronic wallet where the balance held in the wallet must correspond to actual physical cash held in the Ecuadorian Central Bank.
Worries have been raised by some commentators that the Ecuadorian government could use the scheme to increase money supply and seek to replace the dollar with a new, national currency. Several measures in the current legislation would make this difficult and the government fiercely rejects such allegations. It also seems unlikely given the current structure of the scheme.
The vision for Dinero Electrónico is to offer a range of services such as person-to-person, top-up, cash-in and cash-out, in-store purchases, business-to-business and electronic receipts, including fund transfer links to the existing banking platform.
To achieve its objectives, the Ecuadorian Central Bank has contracted with the Uruguayan company IN Switch Solutions to supply proven technology, capability and experience. IN Switch already operates in a range of countries, but perhaps most notably, their solution is being used to run a Paraguayan scheme, currently with 1.4 million users.
The system is based on unstructured supplementary service data (USSD) technology and can be used with any mobile phones, smartphones and other devices. Furthermore, it can be used without a data plan and without incurring additional SMS costs since the central bank purchases the necessary network capacity to process the USSD-based text messages sent by the mobile payments platform.
Being the country’s only mobile wallet, interoperability problems between mobile payments should not exist.
Like most central banks, the Ecuadorian Central Bank does not have any retail presence. To create the necessary distribution network, it has structured the operating model of the scheme to depend on a set of ‘macro agents’ and ‘transaction points’ that will facilitate transaction activities and receive a fee for this.
Both major retailers and smaller establishments are signing up to the scheme to achieve nationwide coverage and the number of agreements is increasing steadily.
Transaction costs are an important factor in determining the attractiveness of the scheme for the users. The scheme is promoted as non-profit and the government claims it will be cheaper than any other form of payment.
Fees are structured by transaction types:
In some cases the fees also depend on the transaction size, and the scheme’s transaction fees for person-to-person payments are as shown in table 1.
|Transaction size||Fee (USD)||Fee as a % of transaction|
|$0,1 - $0.99||1.5 cents||1.5152 %||15.0000 %|
|$1 - $10||2.0 cents||0.2000 %||2.0000 %|
|$11 - $50||4.0 cents||0.0800 %||0.3636 %|
|$51 - $300||6.0 cents||0.0200 %||0.1176 %|
|$300 - $2000||10.0 cents||0.0050 %||0.0333 %|
|$2000 - $9000||15.0 cents||0.0017 %||0.0075 %|
As evident from the table, the transaction fees drop sharply already in the range between $1 and $10. To put this into perspective, the EU’s proposed 0.2% cap on interchange fees for debit card transactions is reached at transactions of $10 and the fees then keep sinking far below this level for higher value transactions.
The implementation of Dinero Electrónico is happening as we speak. Phase one began on 24 December 2014 and since then Ecuadorians have been able to acquire an electronic wallet by using their mobile phones, the internet or through authorised physical agents.
Phase two then commenced on 27 February this year. From that date, money could be deposited in and withdrawn from the electronic wallets using physical agents, dollar amounts transferred from wallet to wallet, electronic payments made in participating establishments and dollar amounts withdrawn from ATMs.
Phase three will be initiated in the second half of 2015 and will add the possibilities for paying public taxes, fees and services such as water, electricity and transportation as well as carry out national and receive international money transfers.
According to the Central Bank, at the start of phase two almost 12,000 accounts had been created and during the first couple of days, a little over 1,000 transactions carried out. The system included 75 macro agents and 200 transactions centres and this is set to increase to 12,000 over the coming months.
In other words, there is still a long way to go before reaching the initial target of 500,000 users by the end of the year.
Will Ecuador succeed in gaining the necessary confidence? Will they be able to extend the nationwide merchant coverage quickly and broadly enough to make it the preferred option for consumers? If so, which measures do they take to achieve this and what works? Are the fee levels sustainable? Will the lack of telco and bank involvement turn out to become a decisive factor or not? These are all questions which are currently being asked.
It's too early to say whether Ecuador will succeed in turning the electronic wallet into a centrepiece of their payments system. It will be interesting to follow the developments, and although geographically far away, the launch may provide perspectives and learning for the further development of mobile payments in our domestic markets.
Thomas BjørnstadOslo, Norway
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