Australia | Jun 19 2009
(This story was originally published on 12 June 2009. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere).
By Greg Peel
Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the first in the series.
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“I recently climbed Kilimanjaro,” a fellow attendee at this year’s Microequities Rising Stars conference told me, “and our Tanzanian guides earned about A$20 a day. This was paid by the tour guide company directly into their bank accounts, but the nearest bank was a day and a half’s travel away. Each week the guides would have to make the journey, and pay bus fares and overnight accommodation, just to collect what was left of their meagre pay”.
Hold that thought for a moment, as I introduce you to a company called eServGlobal ((ESV)). Apologies to every English teacher I ever had.
ESV listed on the ASX in 2000. Its business primarily revolves around providing software to telco carriers for the purpose of issuing and recharging pre-paid mobile phone services anywhere in the world. ESV is a market leader in this field, and its software, though complex, is a one-size-fits-all for every carrier platform. The company currently boasts 90 carrier customers across 54 countries, and given the complexity of the platforms, ESV’s software tends to be a once-only purchase. In other words, customers are pretty much signed up for life, and ESV then continues to draw charging and recharging commissions and ongoing support annuities.
It is no great stretch of the imagination to assume now that just about everybody in the developed world who wants a mobile phone, has one. At the same time, the GFC has caused households and businesses to reassess their spending habits, and excessive mobile phone bills are an area that can be looked into. For global telcos, the challenge now is how to grow subscribers and also maintain margins.
One way to control mobile phone bills is to use the pre-paid system rather than open-ended contracts. This is particularly useful for parents trying to control teenagers – arguably the most prolific users of mobile phones. But while this in itself reduces potential revenues for carriers, the carriers are now facing another, even more fundamental problem.
Young people are now turning to social networking sites, such as Facebook, as a means of communicating with friends. One need only post one message to Facebook friends (eg, “I’m going to the movies tonight, who’s in”) to achieve the same result as phoning or texting all of them. Again this reduces carrier revenues. And now that the new “smart” phones, such as the iPhone and its look-alikes, are taking over, everyone can have a computer with an internet connection in their pocket.
Worst still, the exponential rise of smart phone applications (“apps”) means smart phone users need never go near their home computer, so customers are enjoying virtually “free” internet services with the telco carriers simply acting as reluctant conduits.
For ESV nevertheless, the rise in popularity of pre-paid mobile is a boon. But let’s just jump back a bit.
Everyone might have a mobile phone in the developed world, but its a different story in the emerging and third worlds. You might be surprised to learn that 80% of the world’s population still does not have access to a telephone. Here the mobile phone is stepping in.
Why would emerging countries go to the expense of moving to the first step of telephone communication, and start laying down land lines? No need. Governments in emerging countries are simply adopting a telecommunications entry straight in at the mobile phone level. By encouraging competition, just as is the case in the developed world, mobile phone services become cheap enough to be afforded by even the lowest on the global socio-economic spectrum. It is thus no surprise the fastest rate of growth of mobile phone take-up is in the emerging world. And the billing method of choice of the world’s poorer mobile users is pre-paid.
You might also be surprised to know that we have reached the point at which there are very few populated places left on earth, except maybe for that “shadow” in your own living room, that cannot pick up a mobile signal. Reception is clear as a bell on the top of Mt Kilimanjaro, as it is in the populated areas of Africa and all other inhabited continents. Mobile signals now embrace the great majority of the earth.
What this means is that wherever you go in the world, no matter how poor and squalid a township you’re in, you may not find a grocery store, you may not find a restaurant or bar, you most likely won’t find a bank, but you’ll always find a hole in the wall selling pre-pay mobile phone cards. Anthropologists searching for lost tribes in Western Papua have been surprised to stumble upon cannibals texting each other about the next feast.
What this leads to is another surprising statistic. There are now more people in the world who own mobile phones than have bank accounts.
The next step in the logic chain here is that mobile phone “credits” are transferable. If a telco carrier issues pre-paid credits, it matters not a jot where those credits end up. On that basis, they become a substitute currency. Already the third world has realised that if you don’t have actual banknotes to pay for your groceries, you can pay with mobile phone credits instead. The shopkeeper still ends up with the money. And shopkeepers and those holes in the wall can also cash-out into banknotes if required.
Leaping back into the first world for a moment, consider also that any “apps” purchased on a smart phone, or indeed any other purchase over the internet that might require a credit/debit card transaction, could realistically be paid using mobile phone credit instead. Thus telco carriers have an opportunity to seize the day and exploit the mobile phone as a charging device, bringing them back in from the cold.
Clearly as a market leader in charging and recharging pre-paid mobile phones, EVS stands to win again.
Now, let’s return to the top of Mt Kilimanjaro once more. What if native guides asked the tour company to pay them in mobile phone credits, debited into their phones or as phone cards, instead of a cash amount debited into their bank account? The local village economy can operate on passing around such credits, until finally someone has to make the one and a half day pilgrimage to the bank. But not every single wage earner has to make that trek.
Do you see where this is heading?
Now consider that across the globe there is an enormous population of migrant workers – with legitimate visas or otherwise – who have left their families behind in their poor communities to find work in more prosperous provinces (such as Chinese rural peasants moving to Shanghai) or in more prosperous countries. These workers then send money home each week or month. Philippinos, for example, are among the world’s most prolific migrant workers. So much so that repatriated wages now account for a surprisingly large proportion of the Philippines’ annual GDP.
The obvious method of achieving the repatriation is to deposit wages in a bank account in, say, Hong Kong and then a family member withdraws from the same account at the Manilla branch of the same bank. Apart from all the usual banking fees, those wages must pass through a foreign exchange transaction as well. The smaller the amount of money, the wider the spread is on forex transfers. These third world migrant workers are bled every time.
Remember there are more mobile phone accounts in the world than bank accounts, implying there are an awful lot of people in the world who simply don’t have – perhaps don’t even qualify for – a bank account. How does one then transfer wages?
The most common source of non-bank global cash transfers is via Western Union – the US service with a clear monopoly over the business globally. So powerful is Western Union that it is able to apply legal intimidation to scare off any competitors, and to subvert the regulatory process to ensure its monopoly remains intact.
Western Union charges 16% commission on all cross-border transfers.
You are probably way ahead of me by now. If Tanzanian villagers can transfer currency amongst themselves in the form of mobile credits, thus avoiding a bank, why couldn’t Philippino migrant workers repatriate their minimal wages by the same method, thus avoiding not only a bank, but also Western Union and its 16% commission?
The problem is now you are moving into the realm of different telco carriers in different geographical locations, and the inevitable cross-currency requirement. How does one set up a phone credit platform that can handle such transfers without needing the likes of a bank or a Western Union to be fundamental in the process?
But wait, one bright spark at ESV said one day, such a platform already exists! And it has existed for years.
When you go overseas and want to remain in touch on your mobile phone, you switch to Global Roaming. The Global Roaming Exchange, or GRX networks, handle your international phone bills and sort out any cross-carrier, cross-currency requirements. You simply end up with an amount on your bill in your own currency. The way GRX works is not to treat every cross-currency phone call as needing a subsequent forex transaction through a bank, but rather all charges are pooled into a “virtual” global currency – not unlike the IMF’s special drawing rights basket of global currencies, but obviously with a much bigger basket than just four. The GRX network operator then makes one periodic net currency transaction with a bank in sorting out its own revenues. In other words, it’s the GRX’s problem, not yours.
I assume you know what’s coming. ESV has entered into a relationship with Belgacom – the Telstra equivalent in Belgium – to provide a global money transfer network using pre-paid mobile phones. Belgacom, with 500 GRX operators, boasts the largest Global Roaming network in the world. Under the agreement, Belgacom uses ESV software to provide the service. The carriers on either side of a call (actually its SMS technology that implements the transfer) charge a 2% fee. The network provider charges a 1.5% commission on each transfer, split 50/50 between Belgacom and ESV. Thus the total commission on any transfer is 5.5%.
You might be wondering just what Western Union’s reaction has been to this development, and yes, the lawyers have been on the phone. But this time Western Union has met its match. Not only has Belgacom/ESV patented the money transfer platform, it has the endorsement of none other than the World Bank. And that endorsement includes the concession of recognising that not all migrant workers repatriating wages are actually legal aliens.
Now for some numbers.
Such international remittances now exceed both foreign aid and foreign direct investment in dollar terms. Flows have now reached US$320bn and are estimated to grow to US$700bn by 2012. Earlier this year a study by respected British telco research house Juniper Research estimated that a mobile phone money transfer market would, in a worst case scenario, reach US$73bn by 2011.
To date there are half a million banks in the world, and one million ATMs, but there are three billion mobile phone subscribers (and that number is accelerating).
The greatest proportion of international remittances are sent from the US, UK and the Middle East. The top ten receivers of those funds account for 45% of the total market, and they are (in descending order) India, China, Mexico, France, the Philippines, Indonesia, Brazil, Pakistan, Morocco and Bangladesh.
Naturally such a service is not limited simply to people sending wages around the globe. Coming back to our iPhone discussion, what about other transactions?
EServGlobal was established in 1991 and listed on the stock exchange in 2000. The company has steadily grown its gross profit over the past four years, booking close to $100m in FY08 on total sales of just over $175m. Given the GFC has hit the selling of pre-paid software just like anything else, FY09 sales are expected to be only back to FY07 levels of $150m. ESV’s share price, on the other hand, has fallen from a high of $1.40 in early 2008 to its FY04 level of 37c today.
But the global money transfer service, named HomeSend, will not be launched until next month. You do the math.
