The M-commerce reality in the MEA

The promising growth in M-commerce services is strongly driven by the latent need for banking solutions for those unaddressed by the financial sector thus far. Most banks have traditionally focused on the high-end customer segment, limiting themselves to a small proportion of developing countries’ population.

This feature is an extract from a Delta Partners whitepaper authored by partner Javier Alvarez, principal Bart Janssen, associate Guido Arons and the Delta Partners Intelligence Unit

Mobile operators on the other hand, despite entering the same markets decades later, have created unmatched inroads across various levels of the socio-economic strata and succeeded in surpassing the banked population.

With this in mind, we feel the immediate opportunity lies in bringing financial services to the telephonically connected yet unbanked population. We estimate this market to have a considerable potential of US$1.3 billion by the year 2012 in the MEA region alone, with a split of 58 per cent and 42 per cent between Africa and Middle East respectively.

Remittance flows are driven by the degree of globalisation and a growing trend towards multi-spatial households. As the growth of migrant workers increases, this drives the global demand for money transfers. According to the World Bank, the global remittance market in 2007 was estimated at US$337 billion, registering healthy CAGR of 13 per cent between 2003-07 with a year-on-year growth in 2007 of 19 per cent. Strong net remittance inflows were registered in Africa (US$29 billion), Latin America (US$49 billion) and Asia (US$62 billion). In 2007, the Middle-East registered a net outflow of between US$13 billion – US$29 billion outflow versus US$16 billion inflow.

Business models – available strategic options
In order to execute m-commerce offerings successfully, operators will first need to gauge and understand the direct benefits in terms of higher revenues and the indirect benefits of improved customer retention and loyalty. An operator’s seriousness is highly linked to long-term vision and marketing strategy towards a successful launch.

In order to decide upon the best way forward, these benefits need to be assessed against investment requirements in the near and long-term future. Based on the operator’s overall strategy alignment, the initiative can be treated as a core, add-on or limited involvement.

– Core: Under this strategy, mobile operators (potentially after a soft launch) offer an exhaustive portfolio of M-commerce services, whereby the portfolio becomes a core element of an operator’s value proposition. Hereby the operator adopts a dominant position in the overall value chain

– Add-on: In this set-up, mobile operators would consider m-commerce as a driver for value added services and develop partnerships with banks, retailers and utilities, in order to leverage the competencies require

– Limited involvement: This strategy would result in operators reaping the benefits from increased data traffic or wholesale activities such as hosting of third party operators, virtual operators or banks, for example Dutch Rabobank launching an MVNO for M-commerce services. Though this option has the lowest risk profile, the financial returns are likely to be limited. Tier two operators may be interested in such options as these help ride on the twin benefits of low risk exposure and idle network capacity.

Aiming towards the best fit: Which model should an operator adopt?
Based on the operator’s strategic choice out of the above three options, four business models exist: mobile operator-dominated, bankdominated, hybrid and independent third party.

In our opinion, the mobile operator-dominated model has various advantages over the bank-dominated ones, especially in developing markets. Additionally, the full control of the M-commerce interface, which allows operators to provide fully secured transactions, also has the ability to appeal to consumers at large. Mobile operators can leverage upon their existing strengths of: Robust national infrastructure; significant experience in managing an expansive distribution network; and experience in running high volume/low value transactions.

However, banks do have a slight advantage when it comes to customer trust in such financial solutions. Hence, market assessment is crucial before deciding on a certain model, while success is never solely decided by the model chosen but the operator’s implementation. In the highgrowth economies of MEA, operators with a strong brand name and wide distribution network should capitalise on the headstart they enjoy visà- vis the banks and adopt the mobile operator-dominated model. This would enable them to acquire a sizeable chunk of the US$1.3 billion m-commerce opportunity by 2012, while also strengthening their overall positioning in the market.

Managing stakeholder interest
The evolutionary roadmap of M-commerce activities is expected to bring with it advances in technology, improved security systems and a wider range of service offerings. Despite all the changes, the crucial factor for the success of an operator driven m-commerce initiative would be the roles played by the remaining key stakeholders of the ecosystem.

Consumers: The most important group of stakeholders to be actively managed. Affordability, accessibility of services and convenience of use are the leading criteria in ensuring a good consumer experience.

Distribution network: The active management of the distribution network is a necessity in achieving sufficient traction for service take off and postlaunch acceleration. Since these distributors are the final interface to the end-consumer, they need to be adequately incentivised for them to consider pushing M-commerce products and services more effectively. Low-start up costs, attractive commission structure, reliable and hassle-free processes, simplicity of execution, all add to improving the overall comfort level of this group.

Regulators: Compliance with the regulatory climate in each country is a must. To be able to ascertain legality of financial transactions coupled with professional management of the ‘funds in float’ are important tasks in way of ensuring regulatory compliance. Some effective ways in governing the above can be:
– Complying with official ‘know your customer’ procedures
– Developing robust processes and protocols in co-operation with financial systems, in order to ensure the highest levels of security and risk management tools

Conclusion
The most important and widespread advantage of M-commerce solutions is the benefits it brings to emerging economies in terms of capturing the unofficial cash flow in the system. For the consumers, it eliminates the need to carry physical cash, minimises money-laundering opportunities, improves savings and eases money transfers. Additionally, the system brings with it long-term tangible benefits for the government as well. A larger segment of banked and connected population leads to a decrease in poverty levels, improved quality of life, increased tax collections and enhanced consumption and GDP levels. The largest beneficiaries in this regime, especially in an operator-dominated model, are indeed the mobile operators themselves. In our opinion, m-commerce enables them to increase penetration rates and total revenues, strengthen and broaden their overall value proposition, maximise network utilisation, improve ARPUs, introduce new VAS revenue streams and reduce churn.

Delta Partners believes that leading operators in the emerging markets of MEA are best positioned to leverage upon all the benefits of m-commerce, and would do well to act fast and create a competitive edge for themselves. However, the success of this endeavour rests upon striking the right balance between operator commitment and collaboration by other entities of the value chain.