The only surprising thing about the failure of payment service provider Red Dot was the apparent suddenness with which the company departed.
For months – if not years – it had seemed that the company was on its last legs. Fewer terminals were active and agents had reported that it was becoming increasingly difficult to get their deposits back. They were the warning signs of a company in a death spiral.
Why did this happen? Despite investing tens of millions of dollars just a few years ago, Red Dot had become increasingly irrelevant. Its primary offering – the ability to pay bills and buy phone credit through an agent terminal – had become less compelling as newer companies and technologies appeared on the scene, offering to do pretty much the same thing, only easier, faster and cheaper. There were fewer and fewer reasons to use a Red Dot terminal.
This is normal in business, particularly in the technology space. Some ventures succeed, many fail. Speaking to Frontier back in 2015, when Red Dot had already invested upwards of US$25 million in its terminal network, founder Mr John Nagle admitted as much. “It takes a long time for our business to transition into a profitable model because you need scale,” he said.
Unfortunately for Nagle, Red Dot never managed to build the necessary scale of transactions before the money ran out.
The bad news is that agents who had paid deposits for terminals, or deposited money with Red Dot, are unlikely to get their money back. Neither a criminal nor a civil suit will change that.
Red Dot’s crash has also spooked many consumers who are unfamiliar with financial technologies and the intricacies of Myanmar’s regulatory framework. The sector has already struggled to overcome a lack of trust from consumers and this will be a further setback.
The good news is that Red Dot was not a mobile money provider offering an e-wallet into which customers deposit money. This has limited the damage, both to consumers and to the development of the fintech sector in Myanmar. Yes, thousands of agents have lost money – typically a few hundred dollars each. But if Red Dot had been operating an e-wallet, those losses would have been multiplied by a factor of hundreds, even thousands.
In theory, e-wallet users should be protected. Myanmar has sophisticated, well-drafted guidelines. The Mobile Banking Directive of 2013 enables mobile money providers to partner with a licensed private bank, and customers’ funds are held in an account at that bank (one example is TrueMoney, which partners with AGD Bank).
The Mobile Financial Services Regulation of 2016 enables companies from outside of the banking sector to provide mobile money services. It’s often referred to as an operator-led model, because licensees are typically the major mobile operators. Telenor’s Wave Money and Ooredoo’s M-Pitesan are among the licensees, while MPT and Mytel are said to be planning e-wallets of their own.
Even though the operator-led model lets non-bank financial institutions offer e-wallets, licensed providers still need to keep customer deposits in a trust at a registered private bank. This is significant. Under both models, if the mobile money provider goes bust, customers would still be able to get their money.
This is why Frontier campaigned in 2017 for the Central Bank to address the status of OK Dollar, which had launched an e-wallet the previous year but had no licence to do so. As it was outside the licensing framework, there were zero protections for customers. As one person observed at the time, it was essentially a mobile-based hundi service – hundi referring to the informal, unregulated money transfer networks that have operated throughout Asia for centuries.
OK Dollar has since been licensed, bringing some degree of oversight to its activities. But there is still a large ecosystem of unlicensed fintech providers, as well as licensed operators who appear to be happy to flout the rules. They are doing so with impunity, because the Central Bank has so far taken a mostly hands-off approach.
Red Dot should be a wake-up call for the Central Bank. The fintech sector has got off relatively lightly, but it might not be so lucky next time.