Creative risk management: what mobile money operators can learn from PayPal

It’s unsurprising that PayPal comes to mind when thinking about proxy industries for mobile money.  Despite existing in completely different contexts, both services share a similar value proposition and rely on scale and networks effect to prove the business model. [1]  What makes this comparison so valuable are the lessons and insights that PayPal can offer to mobile money operators.   One of these insights relates to how PayPal developed its risk management strategy in conjunction with managing rapid commercial growth.

When PayPal launched in 1998, it enjoyed tremendous growth in the early days though a strategic focus of on-boarding customers and driving network effects as quickly as possible.  Yet initially, the incidences of fraud seemed to grow as fast as their commercial success.  Within the first month PayPal had cyber-attacks and KYC issues originating from around the globe and hitting the system in numbers the team didn’t initially anticipate.  At the peak, fraud costs reached 2.4% of volume transacted.  Quickly, it became clear that the success of PayPal depended on a robust and effective risk management strategy.

What started as a way to mitigate the risks in ecommerce developed into a philosophy that changed how PayPal would run the business.  Matt Bannick, the former president of PayPal, describes how the company began to conceptualize managing the balancing act of risk and growth.   “We thought of risk as a “dial” that we could turn up or down to generate either reduced fraud or increased payment volume.  If we tightened our models we would reduce fraud but payment volume would also decline.  If we loosened the fraud models, then fraud would go up, as would volume.  The place where we set the dial was the subject of on-going conversation.  The role of the fraud modelling team was to stay head of the fraudsters and develop new, more effective models that would yield a “win/win” by reducing fraud while facilitating greater volume.”

This concept of a co-ordinated approach to managing risk may not be new to the world of risk management, but how PayPal implemented it was.  In many industries, risk managers may only work with the commercial team during the annual audit or only when the commercial team wants to make a change to the operations.  The subtle difference is that at PayPal, the risk managers did not just review new service proposals, but rather they were a key part of the process for designing the commercial strategy.   Equally, rather than being a remote team who periodically conducts audits, the risk management team had weekly, sometimes daily, interactions with the commercial side.  Both teams were responsible for considering and examining market needs and customer feedback in order penetrate or grow the market.  So instead of two teams with a different agenda, they became two sides of the same coin.

How can this apply to mobile money?

Mobile money is a growth industry with many operators showing levels of growth that look like PayPal’s early days.  However, growth needs to be sustainable and well-managed.  PayPal decided that a “cut and paste” risk management strategy would not work for their retail focused business.  It was critical that they reacted quickly to the needs and behaviours of their customers, while ensuring their customers and their revenues were protected.   It’s no different in a mobile money deployment.   Using a co-ordinated approach to risk management allows for operators to efficiently leverage commercial innovation and drive with practical and relevant risk management.