Ecuador’s new Sistema de Dinero Electrónico is different


The huge success of mobile money products like M-Pesa, that was first introduced in Kenya, has inspired dozens of copycats all over the world. Many countries in Africa, Asia, and Latin America now have services allowing people to store and transfer money using their mobile phones.

M-Pesa-like products have been welcomed for bringing millions of people into recognized financial system, allowing commerce between people in different locations, and reducing embezzlement and tax avoidance.

Ecuador’s new Sistema de Dinero Electrónico is different. Operated by Ecuador’s government because it thinks it can reduce the transaction costs that come with private offerings according to Diego Martinez, an economist in Ecuador’s central bank.

“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 mobile phone 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 mobile 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 already, according to Martinez. Twelve banks, both public and private, are changing cash, with more anticipated to come on board in the next six months with the government planning to raise the fees it pays banks for collaborating.

The government is circulating low-fee paperless currency optimistic it will ease the costs and weakness of the cash economy.

Shortage of awareness and gossips about the definitive intent of the idea has slowed the potential success of the system.

Some critics have claimed Dinero Electrónico is an effort 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 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. This is expensive as Ecuador spends at least $3 million a year re-circulating its currency.

In contrast, 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.

Transaction 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, this appears to be lower than MPESA rates.

Martinez thinks it will be decades before Ecuador completely frees themselves of cash, which still accounts for about 40% of payments and the use of cash among the poor particularly in rural communities, is high.

Whether Dinero Electrónico eventually takes off will depend on whether the 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 have been wary of moving away from cash. As with any financial product, the influential factor isn’t essentially technology. It’s whether people trust it.

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