Paying the piper

As mobile penetration continues to outstrip banking facilities across emerging markets by some measure, mobile operators are jumping on the bandwagon to provide mobile banking services to the massive unbanked population. With an estimated 200 million more mobile users than bank customers in the MEA region by 2012 according to analysts, Michelle Mills assesses the factors that have helped the industry-changing M-Pesa mobile remittance service become a sensation in Kenya, and what operators keen on replicating M-Pesa’s success need to know

Mobile-assisted banking has been around for about a decade but with limited appeal in developed economies, where banking services are readily available to most segments of the population. In recent years, the strong correlation between the scarcity of banking infrastructure with the escalating volume of mobile phone users across Africa and the Indian sub-continent, has led to the deployment of several banking and remittance services where the mobile phone acts as a digital wallet. The latter has been defined as ‘transformational mobile banking’ where the mobile phone is central to the service and where no previous relationship with a bank is required, as opposed to ‘additive mobile banking’ where the phone provides a channel to existing bank accounts.

It is ‘transformational mobile banking’ or mobile remittance services, which provide the opportunity for operators in emerging markets, where the dearth of banking infrastructure and inaccessibility of services means the majority of the population is unbanked. Thus, the bank penetration versus mobile penetration is considered the single largest market dynamic and indicator when assessing a country’s potential for person-to-person money transfer services. Dubaibased telecoms advisory firm Delta Partners suggests the revenue potential for mobile remittance (m-remittance) services could reach US$645 million in the MEA by 2012.

Kenya was a strong candidate for launching a transformational mobile banking service, taking into account the country’s banking sector versus its level of mobile penetration. Kenya has only 800 bank branches across a population of 38 million, with Delta Partners estimating that banking penetration in Kenya is 10 per cent, compared to 32 per cent mobile penetration.

Other populous nations with low banking penetration versus mobile penetration include Ghana – 16 versus 33 per cent; Morocco – 28 versus 59 per cent; and Nigeria – 15 versus 30 per cent.

M-Pesa, the most wellknown and the most successful m-remittance scheme deployed to date, was launched in Kenya in March 2007 by Safaricom, a 35 per cent-owned Vodafone affiliate with an 80 per cent share of the mobile market. M-Pesa users are able to make deposits and withdraw cash from their accounts through a network of almost 5,000 agents; transfer money to other mobile subscribers; as well as top-up their airtime or pay their Safaricom bills.

Four million of Safaricom’s subscribers, or more than one third of the total base, have registered as M-Pesa users, while the value of transactions has steadily risen each quarter to reach KES9.6 billion (US$136 million) in the third quarter of 2008.

“This is an unprecedented take-up rate for such a service and subscriber growth is still strong almost two years after launch – between June and September 2008, there was a 29 per cent increase in the number of users,” states Daniel Jones, analyst at UK-based telecoms consultancy Analysys Mason.

“However, the total quarterly value of transactions per subscriber has decreased over time, falling 50 per cent over one year to stand at KES2,600 in Q308. This is to be expected as heavy users are likely to be early adopters of the service.”

It is important to note that while Safaricom has seen a slight increase in ARPU since the introduction of M-Pesa, a large share of this is taken by agents’ commission. Analysys Mason estimates M-Pesa ARPU only accounted for 5.2 per cent of Safaricom’s blended ARPU of US$7.10 in Q308. Therefore, the most significant impact for mobile operators offering an m-remittance service is likely to be in subscriber acquisition and retention, rather than as a considerable increase in ARPU.

Daniel Jones of Analysys Mason says Safaricom’s extensive agent network, low cost and ease of use, ability to gain trust, and the lack of regulatory intervention from the Central Bank at the outset, have all contributed to the successful uptake of M-Pesa 

Jones says other factors that have influenced the popular uptake of M-Pesa include an extensive agent network, low cost and ease of use, Safaricom’s large market share, its ability to engender trust, and the lack of regulatory intervention. Its extensive network of almost 5,000 agents includes Safaricom retail outlets, all Post Office Savings Banks branches, petrol station chains and other existing agents in the distribution network. M-Pesa outlets outnumber bank branches in Kenya by six to one.

The average transaction value in Q108 was US$41, while the fee to transfer funds to a registered M-Pesa user was just KES30. Therefore, the cost for the domestic remittance represented approximately one per cent of the transaction value. Other fees usually cost between 0.5 to four per cent of the transaction value.

Safaricom’s market leadership means that 80 per cent of all mobile subscribers in the country can avail of the benefits of M-Pesa, while non-Safaricom subscribers can also receive funds transferred from an M-Pesa user. Jones notes that as the operator extended its services into the storing and sending of money, subscriber trust was paramount, and this was manifested in the perception of credibility the company held, its agent network, and the number of successfully completed transactions.

“Safaricom has a long history in the Kenyan market, a national brand and its leadership is perceived as politically credible, putting it in a strong position to gain the trust of subscribers. Successful services are likely to be run by incumbents, rather than new entrants, unless the new entrant brings with it a strongly credible brand,” Jones asserts.

Jones says another unique feature of the Kenyan market at the time of launch was that Safaricom was able to launch M-Pesa without regulatory interference from the Central Bank, and as a result, was allowed to flourish. However, last December local news sources revealed that Kenyan banks had banded together to call for M-Pesa to be shut down, as the success of the money transfer system was threatening their businesses. Bank sources claimed that M-Pesa was trying to be a bank and should therefore come under the Central Bank of Kenya’s (CBK) stringent regulations. They also alleged the system was vulnerable to fraud.

Safaricom’s CEO Michael Joseph dismissed the claims and insisted the service did not fall under the CBK’s definition of a bank, as users may deposit money for any length of time, but do not receive any interest. He has also assured customers that M-Pesa complies with all the anti-money laundering requirements, and that funds are held in a trust account managed by the Commercial Bank of Africa. Despite these assurances, Kenya’s ministry of finance is undergoing an audit of the m-payment service, a process which Joseph has welcomed.

“I think it does make sense to increase the regulation of M-Pesa and I don’t think it would be possible to deploy M-Pesa in its current state in a country like South Africa or the UK because of the way it is structured,” contends Hannes van Rensburg, CEO of Fundamo, a South Africa-based mobile banking and payments solutions company. “I think it is doing a very good job and one could perhaps do a few things to improve the governance of it, but to close it down would be very stupid.”

Hannes van Rensburg of Fundamo believes the industry will see a rise in the interconnection of mobile payments systems across borders in the coming years, such as M-Pesa users in Kenya receiving funds from Western Union customers in the UK

Fundamo has worked with several operator and financial sector clients in the deployment of m-payment schemes across the African continent in the past 10 years. Van Rensburg says that the case of envious banks trying to shut down an m-payments system is not new, with cases in the past of banks alarmed by the appeal of mobile banking services, doing their best to halt operations and petition the regulators.

“I remember a case in Zambia where the Central Bank stopped some of the functions of our client for some time, while it reviewed the service, because of a complaint made by one of the banks. Fortunately the review was positive and the Central Bank lifted the sanctions,” recalls van Rensburg.

“A Central Bank has a very important responsibility because if the ecosystem of money collapses in a country, then everyone
will suffer. So it has a very important role to play, but at the same time there is a responsibility to bring financial services to people who did not have them in the past, and mobile phones
have provided that means. Therefore, I think what is required is a well-balanced view between regulating services and making financial services available to more people,” he adds.

Fundamo is currently providing the technical solutions for systems that are being deployed in Mozambique, Benin and Guinea. Its clients include Celpay – a financial services company that works on behalf of banks to provide an account that is primarily accessed by mobiles – in the Democratic Republic of Congo (DRC) and Zambia, MTN Banking in South Africa, as well as other clients in Cameroon, Ivory Coast and Uganda.

By October last year, more than four million Safaricom subscribers had registered for M-Pesa, with total transactions for Q308 amounting to KES9.6 billion (US$136 million).

Van Rensburg notes that in South Africa there was a very rigid regulatory dispensation, a well-developed banking infrastructure and most banks had mobile-assisted banking deployed. Thus, the mobile banking product that was run by MTN Banking was developed in such a way that it took cognisance of a much more mature market.

“Whereas, the DRC is a market where there is good, but not as rigorous regulation, there are probably two ATMs in the whole of the country. It is constantly unstable with skirmishes and wars, and the banking infrastructure is not well-developed. So the product looked very different in the DRC, but was much more successful than the product in South Africa. All the banking customers put together in the DRC are fewer than the subscribers on the Celpay network alone,” van Rensburg reveals.

On a technical level, van Rensburg says that combining a telecommunications system with a banking one is a complex problem to solve, with challenges such as security, transactional throughput, high volumes, deposit-taking regulations and mechanisms for settlement being some of them.

Looking ahead van Rensburg envisages further interconnection between m-payment systems around the world. Fundamo’s technology allows transactions from ‘any-to-any’ and includes connections from systems operated in Africa to Mastercard, Western Union and G-Cash in the Philippines, for example. He cites a development where M-Pesa users are able to ‘cashout’ from some of the ATMs in Kenya, while Vodafone recently announced a partnership with Western Union and Safaricom that would enable consumers in the UK to make an international transfer via Western Union to M-Pesa subscribers.