This post was written by Lara Gilman, with contributions from Mireya Almazán, from the GSMA. This blog is the fourth in a series on global OTC exploration, produced by the Bill & Melinda Gates Foundation and GSMA. Read the first overview post here.

Mobile money has transformed the financial services landscape in many developing markets, both complementing and disrupting traditional “bricks and mortar” banking. By leveraging near-ubiquitous mobile penetration and existing retail infrastructure, mobile money has introduced a high-volume/low-margin business model that can work for mass-markets.

Looking ahead, greater smartphone penetration is likely to unleash a new wave of game-changers for digital financial services around the globe. Smartphones can enhance user experiences through rich interfaces, accelerate the pace of new product innovation, and, of course, drive a greater degree of competition. Many scenarios can emerge in a smartphone based world, with different winners and losers. What is clear is that mobile money providers with a healthy account-based service will be well-positioned to enjoy the advantages smartphones can enable.

However, services that are primarily used over-the-counter (OTC)—whether or not the provider is deliberately driving such usage—may face a different dynamic. Today, OTC is appealing to some providers because it is easier to implement than accounts and certainly easier to explain. The rapid growth of formal OTC globally demonstrates that it’s a powerful hook to introduce the end user to a new kind of transactional service. Moreover, there is some evidence that OTC can act as an enabler for mobile money accounts. According to InterMedia’s Financial Inclusion Insights data, 56% of all bKash account users in Bangladesh reported making a transaction before signing up for an account. Everything else held constant, OTC could be a Trojan horse for mobile money accounts.

Unfortunately, not everything else is held constant and, as the industry develops, mobile money providers who offer OTC are at an especially high risk of getting squeezed out of the value chain. OTC-based services, by definition, rely very heavily on their agent network for transaction volumes. Any transaction that relies on an agent demonstrates inherent inefficiency, costing both time and money to customer and provider, and disproportionally benefiting the agent network. In Pakistan, for example, this dynamic has contributed to a commission war. As OTC customers have no strong preference for a particular service, agents will conduct the transaction with the provider who pays the greatest commission.  Unlike other competitive markets, where price promotions are a relatively common strategy to on-board customers, providers in Pakistan are locked into a battle where the “agent is king”.

Moreover, without the stickiness of accounts, OTC providers will remain vulnerable to the threat of new entrants offering app-based services who will either build or partner with distribution networks. India is a compelling example of this where a number of local internet players supported by significant venture capital, including Paytm and Oxigen, have applied for a payments bank license to have the option to offer accounts.  On August 19, RBI announced five MNOs as well as Paytm among the eleven entities granted, in principle, the payment bank license.

So what does this all mean?  First, it would be overly simplistic to suggest that OTC-based services do not have a role to play in the future of mobile money.  OTC’s simple customer experience make it valuable, particularly to reach poor, illiterate users at the periphery.  However, without developing an ecosystem-based, account-based model, pure OTC mobile money services will risk foregoing the profitability potential of mobile money.  OTC providers have achieved mass awareness and uptake in many markets. The next question is: will these OTC players adapt to the changing landscape, or leave the door open for someone else to do it?