MOBILE TRANSACTIONS ZAMBIA LIMITED

PRESENTED at

FINMARK S BRANCHLESS BANKING FORUM

ABOUT

DEVELOPING A PAYMENT SYSTEM IN ZAMBIA 26 AUGUST 2008

PRESENTED BY: BRAD MAGRATH

ON

PILOT 2007 21st July, 2007

Strategy had to be transformed

Katete 1st Payment to Rural Cotton Farmer

Bank of Zambia Approval

Successful Pilot

Cotton Companies Buy In

Made a Payment

Agent Buy In

Trained agents & Company Staff Web site for Admin & Company Controls GSM Networks Zero rated SMS ISP Hosting Agreement

Bank Agreement

Pilot Lessons
A large number of rural farmers did not own phones. Established mobile payments

systems assume customer has access to a mobile phone.

Like point above customers do not have a simcard so the same problem would exist in a

shared phone concept, there were also additional security risks with this concept made manual input errors, they thought the system was not working element of risk using SMS as a transaction medium. SMS and the cheapest SMS rate was $0.04 immediately

Earlier EVD solutions meant customers picked up text based commands but when they The system used a One Time Pin (OTP) generation to reduce risk, but there remained an Using SMS was a high transaction medium. A payment required 4 SMS and a transfer 6 SMS is a forwarding type transaction medium. An SMS can be sent, but not received Companies needed multi level authentication from different staff to complete payments Companies needed multiple sub accounts to replicate companies current payment

account structure

If system was required to be locally installed it would be limited There was no integration into the formal banking sector which raised regulatory concerns

INTRODUCTION
About Mobile Transactions

In 2007/8 with BOZ approval CAD International ran research and pilot projects in the rural financial sector to access the potential for the use of a mobile banking service MTZL registered in Zambia in July 2008 Is jointly owned by Dunavant Cotton Company and CAD International Limited

INTRODUCTION
Our Products

Payment and transaction services

Registration as a designated payment system by the Bank of Zambia expected within 8 weeks Specialise in low cost payment and transaction services utilising mobile phones as an access medium Integrate into back end systems to automate communication and provide efficient two way, low cost mass market info services Increase efficiencies and promote cross business integration that have benefits in terms of info availability and ordering for small scale farmers and SME s. We are currently engaged by Dunavant, ZAMACE and Parmalat

SMS and IP based communication solutions

System Development services

PROPOSED BUSINESS IMPACT

Business Impacts

Reducing transaction costs and risks for farmers Creating a sustainable and viable access channel for key role players including suppliers, financiers and brokers to the rural farmer community Providing quick access to reputable market info directly to small holders Providing benefits to 160,000 poor people in year 1 to 470,000 in year 3 with an average benefit per person from $ 26 to $ 36 pa Creating pro poor benefits of $ 4.2 m in Year 1 growing to $ 17 m in year 3 Generating MTZL revenues of $ 1.2 m to $ 3.2 m in 3 years Registering 480 agents in Year 1 growing to 750 in Year 3 facilitating access to communication and payment and transaction services Focusing on Outgrower Management Systems that improve production efficiencies Driving Preferred Supplier Programs Creating an efficient low cost town transfer service with largest access footprint in Zambia

Business Targets

Activity Impacts

PAYMENT SYSTEM
The Service

Targeted at companies making payments to the unbanked who currently receive cash. The payees do not need a cellphone, SIM card or bank account. Suited for high volume, low value
An example is a company paying a farmer in Katete. System will debit the company account and credit the farmer. If farmer has a phone he will receive an SMS informing him payment has been made. Farmer takes NRC and Payment Slip to registered agent. Agent will log onto account via mobile and input details of both. On validation agent will pass phone to farmer to type in **** pin. On physical and virtual verification the electronic funds will be transferred from the farmer acc to the agent with agent commission, agent will pay cash to farmer

The Justification

There are over 200,000 small scale cotton farmers. Each sells approx $ 180 pa. Estimated 600 k of transactions with a value of $ 40 million Benefits are for companies making the payments, the agents facilitating the payments and MTZL. As farmers shift from payment to transaction accounts the true benefit of a monetised low cost transaction becomes relevant to pro poor.

The benefit

TRANSACTION SERVICES
The Service

There is a need to have a cell phone and simcard, but not a Bank account. It essentially provides financial services to the unbanked
For example, a farmer could register a transaction account and receive payments, make deposits, and purchase agric inputs and retail goods. The farmer would have access to market info thru ZAMACE and have the ability to transact within their community using their phone as a monetised medium. Transactions are authenticated based on **** personal code and a random one time PIN that is SMS ed to the customers phone, ensuring dual factor physical and virtual authentification for all transactions Another example is rural customer who can not afford high bank charges and transport fees to get to a bank. They can register with their NRC at an agent, once registered they can load cash, store funds and have access to a convenient, low cost transaction service

The Justification

The market development zone in Zambia is 2.4 million for Financial Services. Physical access-1.5m, awareness-0.2m, Can t afford-1.6m Provide low cost monetised medium that benefits rural pop, who historically purchase high and sell low due to barter customs. Transaction accounts remove the requirement for physical access as financial services are enabled electronically via mobile devices in rural areas

The benefit

TOWN TRANSFERS
The Service Customers use the MTZL Agent network to send and receive funds thru town transfers. This is an existing service but expensive. Longer term strategy will be to offer these services thru transaction accounts reducing costs further

An example is a seasonal worker in a rural ginnery can go to an MTZL agent, hand over cash and request town transfer. Agent will input details into phone, system will request customer types in secret code ****. System will store this transfer, respond with an associated random transfer ref for the agent to give customer. Customer will contact receiver in different town and inform them of secret codes to facilitate then being able to receive funds from agent in their community

The Justification This is already a captive market and there is a large customer requirement for both existing users and those that can not afford high charges The Benefit Town transfers will promote urban to rural remittances. By enabling cash to be remitted to the rural population assists the rural population from selling assets like cows or crop at a lower then market rate to enable them to transact

PRODUCT EXPANSION
Current Planned New Products targeted at the rural communities

Insurance Services Micro Finance Agric Brokerage Creation, delivery and redemption of bar codes to mobile phones Expand internet based chat functionality to social and business functions for rural communities Business Linkages

Preferred suppliers farmers linked to agric input suppliers and a sales channel for out puts SME s running containers as sales outlets for big corporates have access to a more efficient ordering and payment system

SYSTEMIC CHANGE
Legal and regulatory change MTZL is the 1st kind of financial service that is truly targeting the unbanked in Zambia and will continue to work closely with BOZ to learn and work to adequate regulatory structures to improve financial access to unbanked, in secure controlled environment but respecting the characteristics of the market. These lessons will enable quicker roll out and faster adoption for new entrants Market attractiveness change Through the combination of lower transaction costs and increased info and financial flows MTZL will foster increased integration of the rural smallholder into the more formal commercial sector. At present the cost of transacting and informing small holders makes them unattractive to commercial firms. By making transacting cheaper and less risky, it becomes more attractive Business is our first target and adoption by Dunavant, ZAMACE and Parmalat highlights the target market buy in In time we can target Government or social cash transfer schemes to assist basic needs, health, education, food and shelter Competition and competitive markets Banks are expanding their services, but current models are limited in terms of targeting the 2.4 m unbanked As MTZL is implemented as is sustainable and profitable other companies and indeed banks will adjust offerings to compete in this area Companies offering town transfers, facing price competition, will improve services, prices and access points

RISKS AND ASSUMPTIONS

Money Laundering Services can not be used for laundering as MTZL float accounts are held in registered bank. Only customers who have a registered bank account can increase or decrease the float. The banks KYC manage this security Customer Funds Protection MTZL ensures all customer funds are replicated / mirrored with an underlying bank account. MTZL sub accounts are reconciled daily against the MTZL accounting system and the balance in the registered bank account. Customer funds are protected by the MTZL partner bank as there is a one to one relationship between the sum of the individual accounts and the registered bank float account. System also has daily limits and transaction codes limits. Customer disputes MTZL keeps records of all cash payments, transactions and money transfers. All activities are filed. All customer info is collected for every transaction. All records are maintained Agents Defraud Customers Strict Agent screening process. Agents must meet minimum requirements of MOU and Articles of Association, VAT and TPIN, Bank reference, Certificate of Incorporation, Copies of Directors Identification, Completed Agent Application form, Cash deposit of K 5 million

RISKS & ASSUMPTIONS cont

MTZL Bank Accounts

Deposit Taking Activities

Client Account Transaction Account Deposit Account Fees and Commission Account The bank is the deposit taking institution for all deposits that increase the balance in the MTZL Client account. Customers will deposit funds into their bank account using MTZL account as the reference. Bank will process the deposits as per normal. MTZL will take the export from the bank online and load the transactions into the system where they are allocated to the underlying account based on deposit reference. The banks integrated automated system will update accounts All transactions in MTZL-transfers, payments, cash deposits or pay outs are actually transfers from one acc to another. Customer uses a phone or PC interface to create a transaction. The system will authenticate the user and transfer funds from the sender acc to receiver acc. The automated banking will process and post the entries Companies, agents or customers can transfer their MTZL funds into their bank account. Daily recon produced by MTZL, verified by bank to reconcile funds in MTZL system to funds in MTZL Bank acc. The reconciliations will reconcile all MTZL system accounts to the MTZL Bank accounts for Client, Transaction, Deposit and Fee accounts

Transactions

Withdrawing Funds

Reconciliation

RISKS & ASSUMPTIONS cont

Payment Fraud MTZL system validates a request to withdraw a payment against NRC, details of payment slip and customer secret PIN. The first two items of info need to be physically present when payment is claimed and collected thru agent. There is effectively a three factor authentification PIN Fraud The WAP technology secures the connection to The MTZL server so the PIN can not be seen during transmission User training focuses on the importance of the PIN code When the PIN is input into the system it can be seen e.g **** If customer forgets to log out there is no risk as PIN is required for each and every transaction