In September, the Communications Authority of Kenya (CA) made a decision that could transform the country’s mobile money industry forever. The CA gave Equity Bank, Kenya’s second largest bank by assets, permission to roll out Thin Sim, a new sim-card mobile banking product with Indian telecoms company Bharti Airtel. Equity’s subsidiary Finserve is trialling the product on a one-year pilot to make sure it is secure.
Thin Sim is an ultra-thin sim card that mobile phone owners will be able to put on top of their existing sim-card. Customers will then be able to access Equity’s mobile money product without making any changes to their mobile phone contract. Furthermore, the new service will be cheaper than Safaricom’s alternative. Equity Bank claims that it will charge a maximum of 25 Kenyan shillings ($0.28) for each transaction. This undercuts Safaricom, which charges KSh110 for transfers to other Safaricom customers and KSh275 for payments to non-customers. Singapore-based Taisys Holding will provide Equity with the slim sims.
“There is no sufficient evidence to block in the Kenyan market the entry of the Thin Sim,” the CA wrote on Twitter following its decision. “Save for the inherent vulnerabilities of all sim cards, there are no specific and confirmed vulnerabilities arising from use of Thin Sim.”
According to the CA, the Thin Sim meets basic standards and there is no evidence to back claims about traffic interception from the primary sim card when the Thin Sim is placed on top.
The green light for the launch of the product appears to be a defeat for Safaricom, the company that brought out the game-changing M-Pesa service in Kenya and dominates 70% of the mobile money market in the country. Safaricom had launched a petition against the introduction of Thin Sim, arguing that it could intercept information flowing between a user’s primary sim card and mobile phone and breach the intellectual property rights of primary Sims.
The CA’s decision is in line with the predictions of industry experts, who say that Kenya’s regulators have shown a strong desire to make the country’s mobile money market more competitive. In June the CA also ruled that Safaricom should end the exclusivity agreement it has with its 85,000 M-Pesa agents across the country, which has barred the latter from working with other mobile operators. In July, Orange and yuMobile customers began to be able to withdraw and deposit cash at M-Pesa agent outlets and stores.
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| There is currently no comprehensive and binding legislative framework in place on interoperability in most African countries. This is a major issue since almost none of the services are interoperable out of the approximate 125 independent mobile money services in the sub-Saharan region Diane Mullenex, Pinsent Masons |
“Safaricom did a great job opening up the market, but it is inconceivable that their [near] monopoly would have been allowed to continue for so long,” says professor Merlin Stone, an independent mobile money expert. “The monopoly is ending. The regulator is following what regulators do all over the world when they decide to end the monopoly of the incumbent. The Kenyan government realized that Safaricom needed its period of monopoly to attack a special problem: applying mobile banking to solve the financial inclusion problem. The job is done in Kenya, now it’s time for competition.”
Paul Makin, one of the original M-Pesa team members and now director of UK consultancy Consult Hyperion’s Mobile Money Practice (CHYP), says Kenya is seeing a “growing maturity in the market. It was never going to be the case that Safaricom would dominate forever. I expected to see it four to five years ago – the regulators in Kenya have been very understanding.”
Equity Bank will have its work cut out taking on Safaricom however, which has taken 17 million of Kenya’s 23 million mobile money users. M-Pesa transactions total roughly KSh2 billion a day. Many Safaricom customers won’t feel compelled to change to another service, although Equity Bank’s lower fees could prompt a wave of switchovers. Equity Bank will also have to work around Safaricom as much as challenge it.
“Interoperability will be important if the Equity product is to succeed,” says Makin. “Everybody will still need to be able to make transactions with people who use M-Pesa.” He adds that Equity will need to offer a service that is as comparable with a normal bank account as possible.
The desire of banks in Africa to gain low-cost access to telecom operators’ mobile money platforms is a central legislative issue, according to Diane Mullenex, who heads the international telecom department at law firm Pinsent Masons.
“While the market is subject to a fast-paced development, legislators are slow to address those issues,” says Mullenex. “Some states have already imposed an obligation of interoperability between mobile network operators and banks, such as in Ghana, Liberia and Nigeria.”
Rwanda’s national bank also recently passed a law requiring payment systems, banks and mobile network provider’s offers to be interoperable. Kenya’s CBK has been tentatively hinting that it wants to move in the same direction. In 2013 in its national payment system draft bill, it urged e-money issuers to enter into interoperability agreements and to deploy systems that are open.
Nonetheless, Mullenex’s optimism is tempered. “There is currently no comprehensive and binding legislative framework in place on interoperability in most African countries. This is a major issue since almost none of the services are interoperable out of the approximate 125 independent mobile money services in the sub-Saharan region,” she says, adding that African regulators seem to currently favour “test-and-learn approaches before defining stringent long-term legislation or regulations. If further regulations can be anticipated in the near future, there is a strong likelihood that they similarly create incentives for operators without necessarily imposing any specific obligations on them.”
Why has the narrative pitting banks against telcos in the mobile money arena crystallised in Africa recently? Banks and telcos, in theory, strongly complement each other: telcos have huge customer bases, while banks possess formidable product experience and deep customer insights.
Alistair Newton, an analyst at technology research company Gartner, argues that the inability of telcos and banks to coordinate with each other is, to some extent, inevitable. “Their objectives are misaligned. Telcos are always chasing short-term profit increases. Banks have a longer-term view. Banks are also inherently more conservative,” he says.
With the battle lines clearly drawn, some observers are confident that banks can establish a stronger position in Africa’s mobile money market. Stone even thinks that telcos could start to reassess the lucrativeness of mobile money if the playing field levels out. “The margins available in a fully competitive situation with open transfer between systems are probably not high enough to sustain the interests in a purely telco offer. Telcos are not sure that their claim that offering mobile money sustains customer retention is correct,” he says.
However, others think that for this to be a reality the unbanked need to be a higher priority for financial institutions. Eugene Danilkis, CEO of banking and technology provider Mambu, also argues that in particular banks should focus on the needs of underserved small businesses not yet making use of mobile money.
“It’s a small market but it will grow quickly,” he says. “Banks should be looking at mobile products that will allow companies with low working capital to move around their small money streams at a low cost.” Danilkis also claims that banks and telcos should both be more open to experimenting with different technology solutions by sponsoring projects by startups and techies. “Banks and telcos are not set up to experiment and innovate in the dramatic sense, but they can fund projects, and the most successful can be transformed into new products,” he says.
Some are sceptical about the ability of banks to rise to the challenge because of their supposed conservative philosophy. Stone says that banks will be less interested in the unbanked and “more interested in taking the most profitable end of the market: customers where there is enough money to migrate to wider banking services. With regulators very conscious of the costs of mobile money, there will not be enough margin to attract banks into the mass mobile-only market.”
Many see that attitude as detrimental. “When banks have the attitude that they are just going to chase customers tied to Safaricom and other monopolies, the whole thing is reduced to a numbers game,” says Newton. “In the long term, Safaricom is in the strongest position to do it cheaper. Their trump card is their infrastructure. If you are a bank providing a service through a platform you don’t own or control, then you are always going to be vulnerable in a price war, and your revenue streams from mobile money – if you want to keep your prices down – are going to be lower.”
Nonetheless, Newton argues that banks in Africa have the potential to come up with their own platforms to eliminate this problem. “What the telcos have that the banks don’t boils down to a messaging system to send alerts to the sender and recipient of money. Banks will develop their own digital wallets and maybe they can come up with some sort of messenger or data-based alternative to an SMS system,” Newton muses.
In South Africa, competition between banks and telcos is also hotting up but the situation is reversed: banks dominate the industry and telcos are vying for a more prominent position. A survey by South Africa-based market research firm World Wide Worx in 2012 found that banks had by far the greatest stake in mobile money. FNB’s eWallet was top with 51.1% of the market, followed by Absa’s Cash Send with 29% and Standard Bank’s Instant Money with 17%. In contrast M-Pesa trailed behind with just 4% of the market.
A leader elsewhere, M-Pesa’s mark on the industry in South Africa remains relatively faint. Within the first year of launching in 2010, the service had captured fewer than 100,000 users; over the last four years that number has risen to around 1 million. However, Vodacom is due to relaunch an improved version of its service in South Africa by the end of the year with an emphasis on distribution. The new product is being launched in conjunction with the opening of more than 8,000 agents at various retail and informal outlets across the country, so that customers will always be just hundreds of metres from an agent at any given point in time.
“It’s not good enough to have an agent at the nearest big town or at a handful of big retail outlets,” says Vodacom Group CEO Shameel Joosub. “Kenya and Tanzania taught us that if you need to take a taxi to use the service, it will fail. Instead, you need to have agents where people live and work. We’ve worked hard to learn from our experience with the service so far, and have come back with something that we think is truly compelling.”
The new M-Pesa service is also intended to be easier to use. Customers will be able to register themselves by typing their name and ID number into their phone. They will only have to register in person at one of the country’s 1,000 locations if they want to access more complex services and increase their transaction limit, in contrast with the earlier version, where customers had to travel to one of a limited number of sites to register for the service in person with an identity card.
Meanwhile, in March telco MTN got the green light from South Africa’s regulator to offer fully accessible bank accounts via its mobile money device. In June it also announced the launch of a new mobile money Visa card, which can be bought at Pick n Pay and Boxer Stores across the country. The cards will be able to be used for ATM withdrawals and transfers, as well as to buy airtime and internet bundles and pay for electricity.
South Africa’s banks are clearly bracing themselves for more competitive times ahead. Vuyo Mpako, head of innovation and channel design at Standard Bank, says: “Banks are no longer just competing with our banks. There are many nontraditional channels and players that have come into the market, and this trend is still going to grow.”
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| It is an exciting space and there are a lot of opportunities; the telcos realise this. It’s a race for the clients, but an advantage banks have is a deep understanding of customer needs George Chirwa, Nedbank |
Nonetheless, many of South Africa’s leading financial institutions insist that they can fend off competition from telcos. “It is an exciting space and there are a lot of opportunities; the telcos realise this,” says George Chirwa, head of digital and mobile at Nedbank. “It’s a race for the clients, but an advantage banks have is a deep understanding of customer needs.” He adds that in South Africa there is a strong demand for more complex mobile banking services, which banks are best positioned to offer. “People know how to send money and how to get airtime, and are now looking for more sophisticated offerings. As a bank we want to take clients along a journey and slowly migrate to a new level of mobile banking,” he says. However, taking a view of trends across Africa, even though competition is clearly picking up, observers warn that analysis must remain sober. “We are certainly going to see more players in the markets in Africa. But whether there will be more success stories is another question,” says Newton at Gartner. “We may see a lot of work going into mobile money from those rivalling monopolies with limited output. For example, with M-Pesa in South Africa, the output has been very limited so far. So we may see that the value is outweighed by the cost of developing and rolling out products.”
Professor Stone also points to “an element of hype and branding in what is going on today. Existing players will face increased competition, but for some that will be counterbalanced by expansion of their market”.
