The runaway success of mobile money products like M-Pesa, which first took off in Kenya, has inspired dozens of copycats around the world. Many countries in Africa, Asia, and Latin America now have services allowing people to store and transfer money using their cellphones. But there’s something different about Ecuador’s new Sistema de Dinero Electrónico. It’s being operated not by a private phone carrier or financial company, but Ecuador’s left-leaning government.
M-Pesa-like products have been hailed for bringing millions of people into the formal financial system, enabling commerce between people in different locations, and cutting theft and tax avoidance. But Diego Martinez, an economist in Ecuador’s central bank, says the government wanted its own service, because it thinks it can reduce the transaction costs that come with private offerings.
“We did it from the government because we wanted it to be a democratic product. In any other countries, it is provided by private companies, and it is expensive. There are barriers to entry, like [expensive fees] if you transfer money from one cellphone operator to another. What we have here is something everyone can use regardless of the operator they are using,” he says.
Under the program, anyone can walk into a participating bank and exchange their cash for electronic money that is stored on their phone. They can then use that to make payments to other people or to buy goods and services. For example, taxi drivers in the country’s capital, Quito, accept payments through the system.
Launched in February, 47,800 people have used the system so far, according to Martinez. Twelve banks, both public and private, are converting cash, with more expected to come on board in the next six months (the government plans to raise the fees it pays banks for cooperating). But so far the system isn’t as successful as it might have been, both because of a lack of awareness and because of rumors about the ultimate intent of the idea. Some critics have claimed Dinero Electrónico is an attempt by the government to reduce dependence on U.S. dollars, which is the country’s currency after Ecuador was forced to ditch its own currency, the sucre, in 2000.
“The last few months there was a campaign against it,” Martinez says. “They said we want to replace the dollar as a currency and some people panicked because they thought the banks would close their doors. It was political. Now they realize we don’t want to replace the dollar, they will start using it more.”
The critics seem to be only partly correct about the government’s intentions. The digital cash system is an effort to reduce the use of physical dollars, which the central bank needs to bring in from the U.S. to replace paper bills past their use-by date. That’s expensive: Ecuador spends at least $3 million a year re-circulating its currency. On the other hand, every transaction that takes place through the system is still denominated in dollars. The government, in other words, isn’t replacing dollars but simply promoting a paperless version of them.
Fees for using the service range from two cents for amounts between $1 and $10, to 10 cents for amounts between $301 and $2,000. That certainly appears to be less, relatively speaking, than M-Pesa.
In theory, it would be possible for countries to completely rid themselves of cash and all the disadvantages that go with it. But Martinez thinks it will be decades before that happens in Ecuador, because cash still accounts for about 40% of payments and use of cash among the poor, particularly in rural communities, is high. Whether Dinero Electrónico ultimately takes off will depend on whether banks or other agents agree to covert cash, and whether people have places where they can use digital money. Despite the success of M-Pesa, many mobile money systems haven’t grown as dynamically because people either haven’t seen the benefits or they’ve been wary of moving away from cash. As with any financial product, the decisive factor isn’t necessarily technology. It’s whether people trust it.