Sofia Lotto Persio looks at how innovations in mobile payment technology are enabling a growing population to access banking services.
East Africa is emerging as the continent’s hotbed for banking innovation. To understand the scale of change, one has to start from there, and with M-Pesa, the stepping stone of the mobile payment revolution.
The service was first developed in 2007 with the help of £1bn of funding from British international development funding agency UK Aid, which was matched by an investment from Vodafone. Vodafone then partnered with Kenyan mobile network operator Safaricom to develop the solution in the East African country, whose central bank governor was acutely aware of the necessity for such a solution, having commissioned a study on financial inclusion which revealed that as much as 40% of the adult population remained unbanked.
For the non-Swahili speakers out there, pesa means money, and M-Pesa is a mobile payment system allowing intra and inter-country money transfers. The key aspect of the service is that users do not need a bank account. As such, it has brought access to financial services to a whole population of previously unbanked people.
Central bank support was a major factor in ensuring M-Pesa’s approval and licence, but this on its own could not ensure the mobile app’s success. A bigger challenge was convincing Kenyans to switch from hard cash to digital mobile money – but it did not take long for people to realise how much more convenient mobile payment transactions could be, particularly as the post-election violence of 2007/08 and the consequent difficulties in accessing and transferring money made it necessary to find a safe way to perform money transactions.
This might just have been the push the technology needed to become more widespread and mainstream. According to an M-Pesa case study conducted by the International Finance Corporation (IFC) just 14 months after launching in Kenya, the app had 2.7 million registered users and 3,000 agents. “M-Pesa was key during the crisis, but I would somehow dispute that this was what triggered the uptake,” Claire Alexandre, head of commercial and strategy, mobile payments (M-Pesa) at Vodafone, tells GTR. She looks to Tanzania, where M-Pesa launched in 2008, for evidence that M-Pesa can also reach scale in a market with a different political situation – although, she concedes, with different penetration levels. The IFC study shows that 14 months after the Tanzania launch, registrations had reached 280,000 users, who were transferring US$5.5mn per month through about 930 agent locations. While these are far inferior numbers to Kenya, 20% of Tanzania’s Vodafone revenue is now derived from M-Pesa, which shows that the service did eventually grow to a significant size. “It shows that once you go over all the different hurdles you can create a commercially sustainable service which can really have a great impact on people’s lives,” says Alexandre.
Regulatory environments can represent a major hurdle for new initiatives to operate and gain ground. When M-Pesa launched in Kenya, there was no fit-for-purpose regulation in the country, so Safaricom got a letter of no objection which provided the regulatory basis to launch the service. That proved to be a blessing and a curse. “This meant that every single development of M-Pesa had to be cleared with the central bank,” explains Alexandre. She adds that markets with an existing regulatory framework are preferable to those without one, because then the service can be regulated directly. Otherwise, tight co-operation with the country’s central bank is needed to lay out the appropriate regulatory infrastructure.
Regulation is thus an important factor in M-Pesa’s strategy for expansion. Other factors relate to the level of mobile phone use, the amount of people who are unbanked, and, of course, whether or not the country is included in the Vodafone coverage area. Countries in which there has been some form of internal migration will be prioritised, although there are also countries in which the number of unbanked people is not as high, but large portions of the banked population cashes
out the money received to their accounts. Alexandre explains that M-Pesa’s development follows a step-by-step approach. The first step is setting up domestic peer-to-peer transactions. The second is enabling international transactions from abroad (often from countries in the northern hemisphere) to support remittance services. The final step is allowing intra-African and south-south transactions, which involves significant regulatory challenges, as regulators need to agree to allow capital to leave the country.
M-Pesa is currently available in 11 countries worldwide including India, Albania and Romania. Within Africa, it is also operational in Egypt, the DRC, Ghana, Lesotho, Mozambique and South Africa. Since March 2015, M-Pesa clients in Kenya and Tanzania have been able to transfer money to one another, and more recently Safaricom announced a partnership with MTN Uganda which will allow MTN Uganda clients to send to and receive money from M-Pesa users. “We have now enabled other countries which have never done international transfers via mobile before: Vodacom Lesotho and M-Pesa customers can now receive international money transfers from South Africa. We hope this will contribute to the decrease of fees for the senders and hopefully it will also contribute to reducing by 5% the price of international money remittances in the next five years,” says Alexandre.
Besides remittances, there are other financial services being developed on the back of M-Pesa’s mobile network. Security company G4S in the DRC pays its staff using M-Pesa, and the tax authority in Tanzania collects some of its taxes and fines through the service. M-Pesa also offers a charging mechanism for off-grid electricity providers, creating a seamless system to, for instance, pay for solar power-generated electricity. As mobile payments allow for previously unfeasible business models, these kinds of services will become increasingly available.
The need for partnership
As M-Pesa’s growth has gained momentum, banks have started paying attention, too. A few banks have partnered with Safaricom to enable M-Pesa’s customers to access banking services through their mobile accounts. In 2010, Kenya’s Equity Bank developed the M-Kesho platform, which allows M-Pesa users to access a savings account that pays interest, and includes credit and insurance facilities. In 2013, Commercial Bank of Africa entered its own M-Pesa partnership, creating the M-Shwari service. Shwari means to smoothen or make something better in Swahili, and M-Shwari offers a paperless banking service through M-Pesa, including opening and managing a bank account, transferring, saving and loaning money.
The development in mobile technology is diminishing the need to set up traditional banking models. “Mobile technology obviates the need for physical infrastructure, which means that Africa has the potential to leapfrog developed countries in the evolution of financial services,” says Ashley Veasey, chief information officer for Barclays Africa. “Mobile solutions do not mean that traditional banking branches are defunct; there are still those older customers who are well served by them, but clearly, there is great potential to have a positive impact on the country and the continent as a whole.”
When first introducing a new service, there can be antagonism from the incumbent market players – in this case, the banks. There may also be an inevitable phase of innovating processes, but one that does not last too long. “Relatively fast you see that some of these financial services providers realise there can be a win-win situation and there is no reason not to connect with us in one way or the other. You see a redefinition of the supply chain of the financial services,” Alexandre says.
A partnership between the two can leverage the players’ strengths: while the bank continues to provide essential, complex financial services, the mobile operator has a convenient real-time system allowing the transfer and storage of money. Both systems can be used by the same customers for different purposes. “Telecoms generally deal with technology better than banks do; banks are not very quick in adopting new technology for obvious reasons, like security issues,” explains Peter van der Krogt, co-founder of Financial Access, a financial services advisory firm active in developing economies. “In telecoms and IT, banks have to keep their minds open or they’ll become dinosaurs. This kind of outsourcing is something quite new for banks to grasp. Banks still have an idea that they can do better themselves,” he tells GTR.
According to van der Krogt, it is also important for new players to win over the corporates, so that they will champion the platform with their banks. But even once banks are sold on the idea of outsourcing their platforms, providers need to address banks’ issues in the areas of risk, compliance and security. He speaks from the experience of supporting the adoption of eBiashara, a digital supply chain finance solution enabling suppliers to get paid early and buyers to improve operational control, optimising cashflow while minimising risks throughout the value chain. “A lot of people have a say in the process and it is sometimes difficult, with tens of signatures needed before the process goes into operation. To get all the partners in a bank aligned is a lot of work,” he adds.
Veasey acknowledges the disruption in the banking market in Africa, which echoes that of other regions, too. “We have to embrace this disruption and find new ways to add value to our customers’ lives beyond providing financial products and services,” he says. “Collaboration is critical. Like many industries today, banks have to reinvent themselves for a changing world, and take advantage of technologies that are transforming the industry. Traditional banks are standing on a burning platform; if they hope to survive, they have to stop thinking solely in traditional terms and start thinking and acting like innovators.”
The bitcoin factor
One cannot write about banking innovation without mentioning bitcoin and blockchain, and in the African context, that mention attracts the same excitement and scepticism as it does in every other region in the world, suggesting that these are truly global technological developments. But in Africa, given the relative lack of legacy banking in the system, the implementation of blockchain-based solutions could be smoother than elsewhere. Edward George, head of research at Ecobank, believes bitcoin could become a pan-African currency. “If you can do bitcoin transactions you can have whatever your local currency is, transfer it to bitcoins, immediately do the transfer and immediately change it back into the other currency so there is no currency risk at all,” he tells GTR. “Why would you go into dollars when you can go into bitcoin?”
Start-ups like BitPesa are already enabling individuals and businesses to send payments to and from Kenya, Tanzania, Uganda and Nigeria using the cryptocurrency. BitPesa accepts bitcoins from abroad and exchanges them for local African currency, also selling bitcoin in Kenya, Nigeria and Uganda. “Cryptocurrencies such as bitcoin and the likes of blockchain, which enable users to transact securely without a third party, are gaining momentum,” says Ashley Veasey, chief information officer for Barclays Africa. He mentions a company called Everledger as an example. Everledger uses blockchain technology to register the ownership of diamonds, creating a digital ledger of proof of ownership and related transaction history. As this record cannot be altered, it allows financial institutions and consumers to track the movement of diamonds through the supply chain. Everledger also simplifies verification, and should help address fraudulent claims. “This could be a considerable boon for the insurance industry, owners, claimants and law enforcement alike,” says Veasey.
According to him, other technological advancement worth watching are wearables, most notably watches (such as Apple Watch) and apps that enable novel ways of making cashless, cardless payments as well as convenient transactions in a range of industries such as insurance, retail, hospitality and banking. “Many bitcoin users are early adopters and there are a lot of early adopters in Africa,” explains Claire Alexandre, head of commercial and strategy, mobile payments (M-Pesa) at Vodafone. “I think the only difference is that you have much more cash usage in Africa, so the challenge – for anyone, whether you are a bitcoin provider or a traditional financial service provider, is going to be the same thing.”