95201 BRIEF Promoting Competition in Mobile Payments: The Role of USSD Mobile network operators (MNOs) such as Safaricom in Kenya; Vodacom, Tigo, and Airtel in Tanzania; and Econet in Zimbabwe are collectively underscoring the importance and potential of MNO-led business models to advance financial inclusion. In each of these markets, and in a number of others, where MNOs are able to effectively compete in the provision of mobile financial services (MFS), there are more registered mobile wallets than bank accounts.1 And in each of these markets mobile payment platforms are being leveraged to offer other financial services such as savings and credit at scale. The immediate gains for financial inclusion are clear. At cost, and ease of deployment for the provider. Most the same time, this relatively new role for MNOs can providers agree that when all factors are considered, generate competition concerns for country regulators. USSD is the best available option to serve low-income This is because MNOs compete with banks and other customers today. This view is supported by the fact MFS providers (third parties)2 in the provision of mobile that most large-scale deployments globally use USSD. payments, but MNOs also own key communications This is because USSD works on the vast majority of infrastructure required to provide mobile payments. phones, it does not require changes to the SIM or a new SIM (either of which can be complex and often Unstructured supplementary service data (USSD), a costly steps), and it has important usability and security communications service controlled by MNOs, is believed advantages over SMS. to be a critical piece of infrastructure used to provide MFS on nearly any phone, at low cost, and without There are some exceptions including M-PESA in requiring access to the user’s SIM card. USSD enables Kenya, which uses STK technology together with customers to send instructions to the MFS provider encrypted SMS. However STK requires that the MFS along with their personal identification number (PIN) for provider has access to the SIM to load changes to authentication, while enabling the MFS provider to send it, which is seldom the case for non-MNOs. Other responses to clients and confirm transactions. promising alternatives also have practical challenges that impede scale. Most notably, mobile internet This Brief outlines why USSD is important for mobile requires that customers have access to internet- payments and highlights the main types of complaints enabled phones, which is not currently the case for arising as a result of restricted USSD access for MFS the majority of low-income users.4 On the other providers. It then explores regulatory issues, including hand, SMS is available on basic phones, but is not as when regulatory intervention may be required, which secure as USSD and offers a less intuitive and more regulator might be best placed to intervene, and what challenging user experience.5 type of regulation is most appropriate (CGAP 2014).3 USSD also has its limitations. The customer experience USSD and alternative is not as smooth nor does it offer the same security communication technologies capabilities as STK or mobile internet. Further, USSD is not the only communication service available USSD sessions can be dropped, potentially raising for mobile payments. Other options include short costs and harming customer trust. Despite these messaging service (SMS), SIM Toolkit (STK, a and other challenges, the majority of leading MFS programming environment embedded on the user’s providers rely on USSD, including many MNOs. Large SIM card), mobile internet, and newer innovations deployments that rely primarily on USSD include to interact with customers. MFS providers consider bKash in Bangladesh, WING in Cambodia, EasyPaisa these options against several factors, including reach in Pakistan, ZAAD in Somaliland, M-PESA and Tigo (compatibility with handsets), user experience, security, Pesa in Tanzania, and EcoCash in Zimbabwe. 1 The number of active accounts is a more meaningful measure; however, activity rates were not available for bank accounts (GSMA 2014b). 2 In this Brief, third parties include banks, other MNOs, and nonbank non-MNO MFS providers. 3 This Brief draws heavily from CGAP (2014), which is based on 40 interviews with MNOs, banks, regulators, and third parties and industry experts in over 18 countries. 4 GSMA estimates global smartphone penetration will grow to 32 percent in 2017 (20 percent in sub-Saharan Africa). These averages illustrate that ubiquitous access to mobile internet is likely still a number of years away, particularly for the unbanked (GSMA 2014a). 5 Further, combining SMS with interactive voice response has cost and usability constraints, while SIM overlay technology (see http://www. February 2015 cgap.org/blog/china-%E2%80%93-future-leader-branchless-banking-poor) and other similar approaches require that each customer either make a change to his or her phone or SIM, thus adding cost and complexity to the deployment. 2 Providing critical infrastructure Union 2011). The second is the aforementioned to competitors potential for those MNOs allowed to play an active role in providing MFS to foreclose competitors by Non-MNOs that provide MFS have three types of limiting effective access to USSD.6 complaints regarding access to USSD: • MNOs may deny providers access to USSD. Regulatory considerations This has been the case in Pakistan, where MNOs The fact that MNOs compete in the provision of MFS are typically willing to provide USSD access only and have control over USSD raises questions around to their partner microfinance banks, which are when regulatory intervention may be required, which effectively part of the same corporate group. regulator is best placed to intervene, and what • MNOs may provide access, but at a high price. options there are for intervening. Such complaints have emerged in Nigeria, Kenya, and Bangladesh, for example. Which regulator and which • MNOs may provide access, but with poor standard of competition? quality. Quality issues are typically in the form There are typically three relevant regulators: financial, of a high proportion of dropped USSD sessions telecommunications, and competition regulators. that abruptly end before the customer is done. The overlapping jurisdiction and differences in basis This impacts the customer experience, trust, and for assessment and process means that coordination effective price. among the different regulators is critical. The In response to complaints related to access to USSD, telecommunications regulator is typically best MNOs often raise concerns over potential network placed to lead interventions on USSD. Both the congestion and implications for the quality of voice telecommunications and competition regulators have and SMS services. While none of the eight MNOs jurisdiction over the telecommunications services of interviewed in 2014 (spanning seven countries) MNOs. However, to intervene, a telecommunications is currently impacted by USSD-related network regulator often needs only to demonstrate that congestion, the impact on MNOs’ networks at greater the proposed remedy would maintain or enhance volumes is difficult to predict and could potentially be competition in the market or prevent a situation detrimental for networks that are nearing capacity. where anticompetitive behavior is likely.7 By contrast, MNOs also note the lack of operational billing competition authorities have to pass a higher hurdle to facilities to charge for USSD (since USSD was initially intervene, typically needing to meet a strict definition used for MNOs’ internal operations and not for of anti-competitive behavior. The competition authority customers). However, USSD gateway operators or would typically want to confirm that there is an “abuse of aggregators, which sit between the MNO and the dominant position” that led to harm to competition and MFS provider, increasingly are able to bill end users consumers. It would also need to determine whether or MFS providers directly. USSD is an “essential facility”—a strict legal test. MNOs also have strategic incentives to limit access Further, it would be more complicated, but not to USSD. The right to provide USSD services was impossible, for a financial regulator to intervene.8 typically acquired (implicitly) as part of an MNO’s For example, the financial regulator could license the telecommunication license. Some MNOs argue MNO, or a special purpose vehicle (SPV) of the MNO, that this gives them a competitive advantage in the to do mobile payments subject to the MNO providing provision of MFS, which they intend to protect. There access to USSD to competing MFS providers. are, however, two complicating factors. The first is the licensed nature of telecommunications and the role of One complication is the regulator that identifies the regulator to foster effective competition, protect the issue may not be the regulator best placed consumer interests, increase access to technology to intervene. This increases the importance of and services, and avoid market failures (World Bank, coordination among different regulators. For InfoDev, and the International Telecommunication example, the financial regulator may identify potential 6 In competition economics, this is known as vertical foreclosure—a situation where a vertically integrated firm (i.e., a firm present in both the upstream and the downstream market) uses its market power in the upstream market to limit effective supply of its upstream product to its downstream competitors, preventing the downstream competitors from competing (CGAP 2014). 7 In line with their objectives, which typically include ensuring an efficient and competitive telecommunications market. 8 Complications can arise, for example, where the financial regulator has not licensed the MNO to provide mobile payments (e.g., issuing a letter of no objection). In such cases, the financial regulator would not have jurisdiction over MNOs. 3 USSD access issues (via its licensees) but need to also give all parties a chance to communicate and coordinate with the telecommunications regulator detail their positions regarding USSD quality, pricing, to appropriately regulate the MNOs. This happened and cost. Regulators in Bangladesh are taking a similar in Bangladesh, where Bangladesh Bank (the central approach, forming a consultative USSD committee, bank) asked the Bangladesh Telecommunication including representatives from Bangladesh Bank, the Regulatory Commission to engage after it received telecommunications regulator, the telecommunications complaints relating to difficulties accessing USSD. association, and multiple banks. This committee seeks to better understand the situation and serve as a mode Should USSD be regulated? for dialog on USSD access. A guiding principle for regulation is that it should be the least restrictive (in this instance to MNOs) to The result of a DRM, and engagement with the achieve the intended objective (increased competition private sector, would ideally be a facilitated, mutually and consumer benefit) and should be proportionate acceptable, agreement. A DRM may also need to to the extent of risk.9 How this plays out in the context remain in place for a period of time to allow newly of USSD access will be market specific. However the emerging disputes to be resolved expeditiously. following progression of options for regulators may 3. Regulation. In the event that a DRM does not result be worth considering: in a mutually agreeable outcome, and the nonprovision 1. Market forces. The first best outcome for any of USSD is found to be a competition issue, regulatory market is for commercial agreements to emerge intervention may be justified. In such instances, the between MNOs and third parties for the provision appropriate intervention would be to mandate that of USSD. This would advance competition and the MNOs provide access to USSD, without regulating the development of the MFS market without placing price. For example, this might be appropriate where restrictions on MNOs.10 the MNO has market power in the voice market and competes in the market for MFS. To encourage such an outcome, regulators could attempt a light-touch moral suasion approach, Should concerns over the quality of USSD access arise communicating a preference for MNOs to provide that service-level agreements between the MNO and access to USSD (together with reasoning for this third-party MFS provider/s have not resolved, the preference). Central banks, including in Kenya and regulator could consider introducing minimum quality South Africa, have communicated similar preferences standards. This could take the form of a maximum for other competition-sensitive issues, namely, percentage of sessions that can be dropped, as a interoperability in retail payments. result of the MNO, before fines or other penalties are handed out. The Rwanda Utilities Regulatory Agency 2. Dispute resolution mechanism (DRM). In markets (RURA) has introduced similar regulations for voice, where commercial agreements are not forthcoming, capping the dropped call rate at 2 percent per quarter a coordinated DRM, whereby the telecommunication (RURA 2013). A challenge of such a regulation would and financial regulator (and potentially the competition be to isolate the cause of the dropped USSD session. regulator) jointly intervene, could be used to resolve Poor quality could be the result of under-investment or access, price, and/or quality issues. This approach selective degradation of quality by the MNO; however, would allow the regulator(s) to understand the it could also be unrelated to the MNO.11 considerations of all stakeholders. This could give MNOs the opportunity to explain arguments for Where pricing of USSD is used to foreclose withholding access, including the potential impact competitors, particularly in the case of dominant that the provision of USSD at scale could have on an MNOs, further steps may be required. Price MNO’s core telecommunications business. It could regulation based on detailed cost considerations 9 For example, banning MNOs from the MFS market, with the objective of removing the incentive of MNOs to restrict USSD access, is more restrictive than a regulation mandating USSD access and could be unnecessarily harmful to consumers. Further, this would only limit the incentive for MNOs to foreclose their competitors if the MNOs believe these regulations are permanent. Given the increasing role of MNOs in mobile payments, MNOs in markets where their role has been restricted might still have an incentive to foreclose in case regulations evolve. 10 This could happen for a number of reasons, including fear of the alternative (such as direct price regulation); an MNO’s perception that limiting effective access to USSD could impact the regulators’ willingness to allow MNOs to provide MFS; MNOs believing USSD offers an important revenue generating opportunity; or a pre-existing (non-MFS) market for USSD. 11 Selective degradation is technically possible, but is reportedly difficult to do and extremely difficult to prove. Even if a discrepancy in quality of USSD is proven, it is not straightforward to identify the cause of the inferior quality. The point of failure could, for example, be with the MFS provider, the USSD gateway operator, or the MNO. February 2015 can be complex, time consuming to monitor, and commercial agreements with MFS providers. extremely difficult to get right. It should therefore be Third, where such agreements do not emerge, All CGAP publications avoided where possible.12 However, a simple rule, regulators should consider a coordinated DRM to are available on the such as requiring that USSD prices are applied in a better understand this complex issue and seek a CGAP Web site at nondiscriminatory fashion, including to the MNOs’ potential mutually acceptable outcome, before www.cgap.org. own downstream MFS provider or partner bank, may direct intervention. However, if a DRM does not be appropriate.13 Peruvian regulators have taken this reveal such an outcome, regulatory intervention, CGAP approach, including requiring that the MNO create in the form of a mandate to provide USSD access, 1818 H Street, NW MSN P3-300 a separate entity to provide mobile payments, which may be appropriate. Last, throughout this process, Washington, DC provides an opportunity to more easily identify coordination between the telecommunications and 20433 USA discriminatory USSD pricing.14 financial regulators is critical. Tel: 202-473-9594 The above provides a possible sequence of options Looking forward, new technologies (mobile internet Fax: 202-522-3744 for regulators to consider; however, ultimately specific and beyond) are likely to emerge that are able to fulfill the function that is currently played by USSD. Email: market conditions will dictate the optimal role of the cgap@worldbank.org regulator. For example, the Comisión de Regulación Where possible, regulators should look to monitor de Comunicaciones in Colombia recently mandated access to all technologies that can suitably fulfill this © CGAP, 2015 access to USSD after prolonged discussions between function rather than focusing exclusively on USSD. banks and MNOs on USSD proved unsuccessful.15 The regulator deemed this appropriate, without a References DRM, in part due to previous practices of MNOs that CGAP. 2014. “Mobile Payments Infrastructure Access and Its Regulation: USSD.” Working Paper. Washington, charged very high rates for SMSs related to MFS. D.C.: CGAP, May. http://www.cgap.org/sites/default/files/ Given how recent this and other interventions have Working-Paper-Mobile-Payments-Infrastructure-Access- and-Its-Regulation-May-2014.pdf been, it is premature to draw conclusions on good practice. GSMA. 2014a. “Smartphones and Mobile Money: The Next Generation of Digital Financial Inclusion.” GSMA Discussion Paper, July. Conclusion ———. 2014b. “State of the Industry 2013, Mobile Financial From a financial inclusion perspective, the value in Services for the Unbanked.” GSMA. allowing MNOs to directly offer mobile payments is RURA. 2013. “Regulations for Quality of Service of Cellular widely demonstrated, and there is still work to do Mobile and Fixed Networks Services.” RURA, February. to ensure more countries adopt regulations that World Bank, InfoDev, and the International Telecommunication Union. 2011. Telecommunications allow MNOs to provide MFS. It is, however, similarly Regulation Handbook , Tenth Anniversary Edition. important to ensure banks and other suitably regulated Washington, D.C.: World Bank, InfoDev, and the third-party MFS providers are able to compete on International Telecommunication Union, April. a level playing field. Advocating improved access to Acknowledgments USSD is an important step in this process, at least until there is more widespread access to mobile internet, The authors thank Geeta Singh and her team from which may reduce reliance on USSD. Genesis Analytics for their work on the CGAP Working Paper from which this Brief draws (CGAP 2014). This Brief has highlighted a number of key findings. In addition to the many people from each of the First, USSD is still the best option available for MFS organizations interviewed for that Working Paper, the providers today. Second, while regulators have authors would like to thank Johann Bezuidenhoudt for good reason to advocate that MNOs offer reliable his very useful insights, as well as CGAP colleagues access to USSD, this should be encouraged in a Camille Busette, Xavier Faz, Rafe Mazer, Claudia McKay, manner least restrictive to MNOs, ideally through Anna Nunan, Stefan Staschen, and Michael Tarazi. 12 A price set too low may remove the incentive for the MNO to invest in USSD and maintain the quality of the service, while a price set too high may foreclose third-party MFS providers. 13 In South Africa, a market for USSD existed before the introduction of MFS, for example, for the sale of ringtones. Existing rules stating that value-added service providers are entitled to USSD at nondiscriminatory rates apply equally to MFS providers. 14 There is still the risk that the price to the MNO’s SPV is inflated, as a transfer price, without impacting the group’s profits. 15 See http://www.crcom.gov.co/ for more information (predominantly in Spanish). AUTHORS: Michel Hanouch and Gregory Chen