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This is a personal blog. Although the authors are affiliated with Coda Payments, the views expressed here are their own.


The “too many mouths to feed” fallacy

Every so often I hear someone say something like this when talking about mobile financial services:

Developing a viable business model for mobile-enabled savings has also presented difficulty to stakeholders. Given regulatory constraints, bank-integrated mobile savings require cooperation between banks and mobile network operators (MNOs), and possibly other local agents to reach rural populations. A larger number of “mouths at the table” therefore reduces the surplus for all players involved, and may result in higher transaction fees or lower interest rates for end consumers.

This is one of the most elementary mistakes you can make in business or economics, but people make it all the time in the world of mobile financial services. To illustrate the absurdity of this line of thinking, imagine what the same logic would imply about, say, the car industry.

Car making requires cooperation between literally thousands of firms: steel mills who create the raw material, electronics specialists who wire up circuitry, and textile mills that fabricate the cloth for the seats. This large number of “mouths at the table” reduces the surplus for all players involved, and may result in higher prices for end consumers.

Obviously, the logic is exactly backward. Far from increasing costs, the disaggregation of supply chains reduces costs, because it allows firms to specialize. Apple sources components from several hundred suppliers (pdf), and it performs no manufacturing. I can assure you that, were it to instead vertically integrate and make all its iPads, iPods, and iMacs itself, those devices would be much more, not less, expensive. 

What we are seeing in financial services today is a much-needed disaggregation of the value chain for financial products in which nonbanks chip away at banks' vertical integration by competing in segments of the value chain, such as distribution, where they can operate more efficiently (pdf). In theory and in practice, this leads to lower prices for customers. The more mouths the better.

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