The synergy between CBDC and mobile money

Athu Karume, eCurrency’s President of Africa Markets, presents the benefits of a CBDC implementation that integrates into the existing mobile money services and systems.

A CBDC implementation that integrates into the existing mobile money services and systems will bring a new level of interoperable settlement efficiency, financial inclusion, convenience, safety, and financial stability. CBDC enables seamless universal interoperability between conventional payment systems and future novel payment systems.

Technology-enabled innovations are enhancing consumer convenience and helping solve complex problems across Africa. This was exemplified by the introduction of mobile money services by Safaricom, MTN, Orange, Telma, Airtel, and others in Kenya and other countries in the continent. These services revolutionised how payments were made and greatly improved the ease and cost of peer-to-peer money transfers and commerce. Amid this digital revolution, Central Bank Digital Currencies (CBDCs) offer opportunities to make mobile money even more useful and efficient, leading to a perfect match.

CBDC is a digital form of cash issued by the central bank under the currency law of the country. CBDC is equivalent to physical banknotes and coins issued by the central bank. CBDC is the liability of the central bank. A holder of CBDC has a direct claim on the central bank. CBDC is a unit of account, store of value, and medium of exchange. It can be used to settle debt anonymously between two parties and reach settlement finality immediately, like a cash transaction. CBDC has the lowest credit and redemption risk versus money issued by private entities.

Exhibit 1 - CBDC and other forms of money

Source: Quarterly Review Sept 2017

A well-designed CBDC solution can stimulate innovations in and enhance the current mobile money services by incorporating CBDC into mobile money services.

Mobile money service providers can either add CBDC to existing mobile money services to offer their users the ability to hold their funds in CBDC and existing mobile money units or upgrade existing mobile money units to CBDC to keep the service simple for their users. Funds in CBDC are 100% guaranteed directly by the central bank. Transactions in CBDC will be settled immediately with finality like cash, even between two service providers.

Users (individuals, merchants, businesses, public services) of CBDC-enabled mobile money services will enjoy greater protection of their funds, availability of their funds and services, use cases for their funds, and efficiency of services. A CBDC’s fundamental value is its ability to act as a direct digital complement for cash, given its denomination equivalent to a national sovereign currency. CBDC held by the users is not the liability of the mobile money service providers. CBDC held in mobile wallets are the users’ assets and liabilities of the central bank.

Mobile money services can leverage CBDC and interoperate on a sovereign central bank-issued legal tender to stimulate consumer trust and preference to maintain their daily funds and digital payments in the mobile money services. CBDC can increase levels of consumer trust and increase usage.

Service providers can lower their settlement exposure, explore new user segments, and increase transaction volume while by and large retaining their existing subscriber base, interaction channels, operation setup, and technical infrastructure.

Agents of the service providers can benefit from better utilisation of their working capital (i.e. funds being maintained at different service providers).

The central bank will gain real-time and granular understanding of the CBDC circulating in the mobile money systems, providing valuable information input into policy decision-making and supervision of compliance.

In addition, due to the lack of visibility of transactions, mobile money schemes have the potential to undermine the integrity and stability of financial systems. Also, given its close coexistence with central bank money, mobile money has implications for monetary policy. CBDCs have the potential to maintain financial stability while reducing banking disintermediation concerns. There are also limited monetary policy and inflationary implications of CBDCs as asset prices/collateral values/exchange rates are not altered. The monetary base is controlled, and existing policy-setting arrangements are maintained. Meanwhile, access to real-time digital data enhances policy making.

A CBDC implementation that integrates into the existing mobile money services and systems will bring a new level of interoperable settlement efficiency, financial inclusion, convenience, safety, and financial stability. CBDC enables seamless universal interoperability between conventional payment systems and future novel payment systems making it ‘instantly’ available to millions of people through existing payment rails, mobile phones, and merchant terminals.

CBDCs will augment and accelerate, not displace, or dampen, mobile money as a means of digital financial services. Mobile money services can interface their existing systems and applications with the CBDC platform to upgrade their services to send and receive CBDC in all kinds of domestic retail, wholesale, and cross-border financial services.

MNOs are embracing CBDCs as a natural evolution of mobile payments. Mr. Eli Hini, Head of Mobile Financial Services of MTN Mobile Money Ghana shared his view on the benefits of CBDC, including the enhancement of digital payments, the opportunity for inclusion, offline (can transact without connectivity), clearing and settlement, and domestic transfers at the MoMo Stakeholder Forum 2022. ‘Innovation will always come, and just like mobile money came to create opportunities for people, other innovations (CBDCs) will come, and we should be ready to embrace it,’ Mr. Hini told the audience.

With CBDC, commercial banks, MNOs, electronic money institutions (EMIs), microfinance institutions (MFIs), and fintech will be more connected and accessible, creating a smoother, real-time, and more cost-effective way to make transactions.

On the other hand, existing mobile money services provide important and effective channels for rapid CBDC adoption. CBDC adoption requires ease of signing up, ease of funding and use, widespread acceptability and usability, low cost of use and incentive, and public education. The general public is already familiar with mobile money services which are tailored for the different demographics with smartphones or feature phones. The operators have already created agent networks and business partnerships to facilitate funding and usage. Mobile money services are already accepted by many merchants, businesses, and public services online and face-to-face. Mobile money services are the ready partners to distribute CBDC ‘instantly’ to their existing user bases through existing payment rails, mobile phones, and merchant terminals.

There are also limited monetary policy and inflationary implications of CBDCs as asset prices, collateral values, exchange rates are not altered. The monetary base and existing policy-setting arrangements are maintained.  

CBDC and mobile money are a perfect match. The interest in CBDC has greatly increased in the past few years. Research and development of CBDCs have spread globally, particularly in ten countries in East and West Africa, where CBDCs and mobile money can complement and enhance each other very well in the drive toward financial inclusion.

About Athu Karume

Athu leads the eCurrency mission in African markets. He frequently meets with central banks to understand their needs and the applicability of the eCurrency solution, recommend the implementation roadmap and assess potential impacts. Athu has over 20 years of professional experience in the financial services and fintech industry in Africa, Europe, and the United States. Before joining eCurrency, Athu was head of Thomson Reuters & Thomson Financial Corporate Advisory Services Brussels, advising many leading North American companies on their international IR strategies and programs.

About eCurrency

eCurrency Mint is the leading innovator and technology provider for Central Bank Digital Currency (CBDC).  eCurrency CBDC solution is the first to be operationalized to issue digital fiat currency operating alongside notes and coins. eCurrency combines hardware, software, and cryptographic security protocols to provide central banks the tools they need to preserve their charter as sole issuers of sovereign currency in a digital economy.