Is USSD the Future of Financial Inclusion?

Since almost every cell phone can use USSD, the protocol could enable deeper mobile banking penetration in communities lacking mobile data

With the limited smartphones and low mobile internet penetration rate in Nigeria, financial institutions and mobile networks are increasingly promoting USSD for financial inclusion. But is this text-based technology worthwhile? Perhaps they know something we don’t.

Financial inclusion has come a long way in the past decade. Still, the World Bank Group estimates a staggering 17 percent of adults in Africa, 24 percent in East Asia and Pacific, and 31 percent in South Asia remain unbanked. In Nigeria alone, the unbanked number about 37 percent.

Since almost every cell phone can use USSD, the protocol could enable deeper mobile banking penetration in communities lacking mobile data. But how does USSD stack up against mobile data, or fixed internet financial inclusion? How is it possible to bring finance technologies (AKA FinTech) into the waiting hands of the world’s unbanked population?

What Is USSD?

USSD or Unstructured Supplementary Service Data is a live, text-based, real-time cellular connection to a computer network without data. Developed on cellular networks during the mid-1990s, it’s implemented as a default option on every network per 3GPP standards and often works alongside SMS. That means almost anyone with a mobile phone has access to it.

USSD contrasts SMS or MMS, which is not a live connection; can be forwarded; is typically stored upon receipt; and may depend on data connectivity for rich services

USSD is particularly powerful because it can bridge a mobile phone user and back-end applications or APIs for Banking, Insurance, Pension etc.

The Limitations

USSD can only handle 186 characters per message and is limited to a 180-second session on most mobile networks. Users navigate and select from a premade menu of options.

Despite these limitations, you can still access Twitter and other streaming social media posts; read Wikipedia articles; pay bills and send or receive money from individuals; make international money transfers; and pay for goods and services such as bus rides

And that’s the key: it provides a feature phone user without a data plan the same opportunities as a smartphone user with a data package and access to mobile apps.

Is USSD Safe for Banking?

Banking relies heavily on verification and security. To incorporate those aspects in USSD transactions, banks and other financial institutions are getting inventive.

For example, the Central Bank of Nigeria (CBN) is driving end-to-end encryption (E2EE) as standard with all transactions.

There are also one-time-password (OTP) or PIN checks and registration of an associated bank account with phone number on USSD. Also, users must now follow regulation on biometric and logging forms of ID for mobile providers to recover an old phone number. This prevents sim-swapping, which is a major security concern for USSD payments.

Developing Economies Benefit From USSD Services

The USA and the UK still have an unbanked population of about 5.4 percent and 1.9 percent, respectively. But that said, they boast a high and affordable internet penetration rate, reduced distance to banking institutions, and strong digital payment capabilities.

European, Chinese, or North American economies can therefore switch to a digital payment system more easily than developing economies. USSD will not be a game-changer in these developed nations – they nearly skipped it altogether.

But what about developing economies?

Nigeria in 2020

Nigeria has a population of over 210 million, with just as many mobile phone subscriptions across the four major telecom operators. It also had a peak mobile internet subscription rate of 154 million users.

This level of internet penetration is incredible for the banking and finance sector of Nigeria, and its people. Yet the recent Nigeria Inter-Bank Settlement System Plc (NIBSS) report reveals USSD Transactions grew by 80% in 2020 and accounted for about 35% of all transactions.

Source: NIBSS Insight (3rd Edition): Instant Payments – 2020 Annual Statistics

It’s as if USSD adoption is growing effortlessly. A good percentage of USSD users already have internet-enabled smartphones, but they continue to use USSD for “single touch” payment transactions.

That’s because USSD works on all types of mobile phones. It immediately reaches over 850 million mobile connections in Sub-Saharan Africa, whilst there are only 300 million mobile internet users.

The Future of USSD Technology

Mobile technology is booming. So, it is reasonable to believe that internet and smart penetration will continue to increase in developing countries. However, the internet is still very expensive. How quickly its cost will decrease relative to wages in such economies is uncertain. To illustrate, internet and smartphone penetration rates are high in South Africa, but most users till prefer USSD because it’s cheap and simple to use. The average monthly cost of internet in most countries in Sub-Saharan Africa is almost as high as 80-100 percent of the national minimum monthly wage.

Unless that changes, demand for USSD will keep growing as an internet alternative or complementary channel for financial inclusion in developing countries. With companies pumping energy into USSD innovation, I believe there may even be a renaissance on the horizon.

Kehinde Orisanaiye is CEO/Founder at Lavatel (UK) and HollaTags (Nigeria).