In 2003 a research study conducted by Gamos, a UK consultancy specialising in development aid, uncovered an intriguing insight that would shape the future of financial exchanges in Africa. The study focused on the emerging behaviours associated with mobile phone use in three Sub-Saharan countries – Ghana, Botswana, and Uganda – and revealed an interesting phenomenon. People were utilising airtime as a virtual currency, creating a self-sustaining system of exchange.
Simon Batchelor, co-founder of Gamos, recalled the process 10 years later in an academic paper: “they would purchase a ticket in the capital city and text the code to their upcountry relatives. The relatives could choose to either put the code on their phone and gain airtime or sell the airtime to friends or merchants.”
This organic use of airtime as a currency, free from external influences, indicated a significant demand for financial services, particularly money transfers within the country.
Inspired by this untapped potential, and by further experiments undertaken by Mozambican mobile provider Mcel, Kenya’s telecom giant Safaricom launched M-Pesa, a mobile money service, as a pilot project in 2005. M-Pesa was at first a tool to share airtime – and then quickly developed into a system that fully retained the cash-in value of the registered electronic money.
The rest is history. Within four years, M-Pesa attracted a staggering 9m subscribers. Today, M-Pesa accounts for 30% to 40% of Safaricom’s service revenue and has largely contributed to making it one of East Africa’s most profitable companies.
Research by academics Tavneet Suri and William Jack also showed that M-Pesa increased per capita consumption levels in Kenya and lifted 194,000 households – 2% of Kenyan households – out of poverty.
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The road to a 1% transfer fee
M-Pesa has helped unleash a generation of mobile money investors worldwide. Everett Randle is a former principal at the San Francisco-based Founders Fund, which led the $200m Series A funding round of the US-Senegalese mobile money startup Wave. He explains the inspiration he took from the story of M-Pesa in an online blog, urging his audience to read Money, Real Quick: The Story of M-PESA by Tonny K. Omwansa and Nicholas P. Sullivan, published by Guardian Books in 2012.
With the arrival of investors such as Randle, mobile money has become a three-horse battle, in which each entity leverages its competitive advantages: telcos have extensive consumer bases, banks possess valuable banking licences, and fintech companies have agility and innovation.
Hence the story of mobile money over the past decade has been about driving down transfer fees, with a clear advantage for fintech companies – except in Kenya, where M-Pesa holds a quasi-monopolistic position.
“Compared to big telecom companies or banks that have launched their mobile money services, venture-backed fintech companies can respond more swiftly to market demands and emerging trends due to their leaner structures, shorter decision-making processes, and greater flexibility to adapt their strategies and offerings,” says Christele Chokossa, a senior analyst at Euromonitor International.
In 2017, France-based banking group Société Générale invested $21m to develop its mobile money service, Yup, across seven markets in West Africa. Five years later, the multinational shut down the service, citing its “unprofitability” due to the price war initiated by more nimble competitors. During that time, fintech firm Wave gained significant market share in Senegal after introducing a remarkably low 1% charge fee for mobile money transfers. Such operators are making life difficult for traditional mobile money providers.
Wave not only posed challenges to Société Générale but also faced the ire of French telecoms giant Orange. Orange vehemently accused the tech company of “value destruction” since it was compelled to reduce its transfer fees by 80% to match Wave’s pricing. Alioune Ndiaye, the head of Orange Middle East and Africa, stated in an interview with French radio station RFI that Orange Money, Orange’s mobile money service launched in 2008, had suffered approximately 20,000 job losses.
“I believe telcos have their role to play on a large scale, but fintech will always be nimbler in execution,” says Selma Ribica, managing partner at First Circle Capital, a fintech-focused VC fund. “In an innovation-friendly market, both should be allowed to operate, and eventually they will end up partnering for mutual benefit, leveraging each other’s strengths.”
No guarantee of success
Mobile money fintech entered the market in a disruptive manner, pressuring banks and telcos into expanding their digital offerings. But whether this strategy will bear fruit is not guaranteed.
“What we have seen is that fintechs entering mobile money markets with digital wallets have been aggressive in capturing market share quickly, often at the sacrifice of revenue,” says Ashley Olson Onyango, head of mobile money at the mobile operators’ organisation GSMA.
“The assumption is that VC funds have afforded them [the opportunity] to burn cash while gaining market share, but the long-term sustainability of this is yet to be seen,” she says.
A recent state-of-the-industry report by GSMA warns of the risk of fluctuating transaction fees for mobile money providers (MMPs) and calls for diversification of their product offerings. “The sustained growth in mobile money transactions throughout 2022 will only translate into revenues if transaction fees remain constant year on year,” says the report: “with increasing competition and regulatory measures, such as taxation and zero rating, pricing pressures may impact profit margins for MMPs.”
Neo-banking for the people
Profitability is thus not assured, putting both consumers and businesses at risk. Twenty years after people started using airtime as a currency, and despite numerous startups entering the field, there hasn’t been much change for the average mobile money user, except for the increasing number of services available – approximately 144 in sub-Saharan Africa.
MMPs could upgrade by offering savings products and loans, turning them into branchless neobanks and filling the gap left by traditional retail banks. “MMPs have better distribution and customer care, better adapted to acquiring the mass market and collecting loan repayments. It would be hugely beneficial for local economies if we can reduce the ‘credit starvation’ we currently experience,” says Ribica.
On the other hand, formal banks, which lack the agility to innovate in their operations, would focus on lending to high-income individuals and intermediating in large transactions. “This could ultimately offer a first step for MMPs towards transitioning to banks and increase the size of the market for everyone, rather than threatening banks’ current customer segment,” says Onyango.
But this model implies giving out full banking licences to mobile money providers. And despite the progress made by regulators in African jurisdictions in recent years, granting full banking licences comes with great risks.
Supervision is challenging
“Obtaining a full banking licence is complex, as applicants need to satisfy more intricate risk management and capital requirements. If mobile money operators want to upgrade to a full banking licence, they will have to prepare accordingly,” says Ribica.
In April 2022 Wave became the first non-telco, non-bank to get an e-money licence in the West African Economic and Monetary Union (WAEMU) region. The licence allows Wave to offer a wider variety of financial services like merchant payments, savings, credit, and remittances, although always in collaboration with banks in the WAEMU financial ecosystem.
Supervision challenges also present obstacles to granting full banking licences to MMPs. In 2019 the Reserve Bank of Zimbabwe imposed a three-day ban on mobile money-to-cash transactions after accusing mobile money agents of charging high rates for cash-in and cash-out transactions, effectively devaluing the Zimbabwean dollar against the US dollar.
At the time EcoCash, a subsidiary of Zimbabwean telco Econet, controlled 95% of the market and had over 5m transactions a day, moving more than $200m.
“It might be overly ambitious to view MMPs as the ultimate neobank in the medium term due to key existing challenges, such as finding proper regulatory frameworks,” says Christele Chokosa. “As a result, my perception of neobanks in the medium term leans more toward a collaborative and integrated ecosystem, where MMPs, venture-backed fintech companies, and established players often collaborate to deliver comprehensive mobile money services to customers.”
Collaboration with traditional banks
Collaboration between banks and mobile money providers is becoming common practice. On 10 May, Kenyan fintech Fingo signed a partnership with pan-African bank Ecobank to integrate its software within the bank system. This allows Fingo, which raised $4m in seed funding in 2021, to claim that it’s Kenya’s first neo-bank with the required licence.
But Fingo is moving into a space already occupied by M-Pesa. Even if it allows interoperability – meaning that M-Pesa users can transfer their funds onto their Fingo account – for the Kenyan consumer it offers only a new tool. Moreover, Fingo operates solely on smartphones, in a country where the marked penetration of these is still low, with only 19% of traders reporting access to a smartphone, according to development research firm Sauti East Africa.
Ribica believes that for mobile money providers to become successful neobanks, they would have to be lone rangers. “I envision that they would have to be fully independent from telcos operationally, and potentially raise external commercial capital, which would set the right incentives for growth,” she says.
Banks, telcos, and new disruptive fintech companies are deciding whether mobile money will meet the financial needs of low-income individuals, against the backdrop of evolving regulatory frameworks.
“MMPs are facing these strategic decisions in the context of changing regulations, competition, and the general fintech evolution,” says Ashley Olson Onyango.
“It’s an exciting time to see how MMPs will adapt to these changes and the strategic decisions telcos are making regarding their mobile money businesses.”
