Will The Real Banks, Please Stand Up?
Reprinted from Business DailyBy Toru Mino, F10
July 10, 2009
The amazing growth and success of Safaricom’s M-Pesa mobile money transfer service has made Kenya a focal point of growing international interest in mobile commerce and sparked excitement over the transformative potential of mobile banking for unbanked populations around the world.
M-Pesa is certainly an impressive and innovative service applied to a very clear value proposition within Kenya, peer-to-peer money transfers.
But is Safaricom, or any other Mobile Network Operator (MNO) for that matter , the best positioned organisation to lead the m-banking revolution in Kenya?
Though Safaricom has some distinct advantages in the mobile money space, as financial regulations change to allow banking through agents, Kenya’s banks should realise that if they move quickly to embrace the new channels they have the potential to offer a more complete mobile banking solution than MNOs, at a lower cost.
Safaricom begins with some advantages. It controls 80 per cent of the 15 million mobile phone market in Kenya, along with much of the SMS and data infrastructure that mobile banking solutions rely on.
More significantly, the scale and continued growth of M-Pesa’s agent network, already approximately 10,000 strong, makes the service a powerful branchless banking tool and is perceived as a major barrier to entry to any competitors within the mobile money space.
More Expensive
In comparison, the total number of ATMs in Kenya barely surpasses one thousand.
Yet this same agency system which serves as an intimidating barrier for new entrants may also allow non-MNO players the best opportunity to compete with M-Pesa.
The major challenge for M-Pesa’s agent network is cash management, especially in remote areas and Safaricom has largely transferred this burden on to their agents.
M-Pesa is predominantly used for domestic remittances and rural users tend to withdraw cash from agents significantly more than they make deposits.
Rural agents then become responsible for providing cash to a significant portion of their communities as people move away from less convenient or more costly money transfer systems.
At the same time, obtaining cash is likely to be more expensive for rural agents than for their urban counterparts, due to their remote location relative to bank branches or ATMs.
As research by Olga Morawczynski and CGAP is bringing to light, these agents are already strained by the need to supply the significant amount of cash sent via M-Pesa into their communities.
Servicing their clients requires frequent, time-consuming trips to the nearest bank branch, in the absence of which there will be regular service outages as M-Pesa users are forced to wait agents can replenish their cash balances from M-Pesa deposits or other business activities.
The problem of agent cash management would potentially afflict any organisation that attempted to create an m-banking or branchless banking service, but Safaricom is particularly ill-suited to solve these challenges.
To balance the bias towards withdrawals at rural centres, there must be complementary products to encourage rural m-banking users to either keep more money in electronic form or to deposit more cash into the system.
One obvious way would be to incentivize deposits into the system in the form of savings.
Savings can be encouraged by offering interest or other benefits.
Unfortunately, as Safaricom is not a licensed financial institution, they are restricted from earning interest on the deposits in M-Pesa, and are therefore unable to pay interest out to users.
In fact, to avoid too much attention from banks and regulators, Safaricom avoids advertising the deposit holding capability of their system, branding it only as a money transfer mechanism.
Besides savings, users could be disincentivized from cash withdrawals by allowing more cashless transactions to occur. For example, consumers could be encouraged to make payments for goods and services through M-Pesa instead of cash.
While this is occurring on a small scale, either informally or through M-Pesa’s bill pay system, Safaricom faces specific challenges to growing this functionality of the service.
For one, M-Pesa was developed by Vodafone specifically for peer-to-peer transfers from one phone to another.
The system has not been designed well as a customer-to-merchant framework.
Such a framework would require merchants to easily generate payment prompts to their customers through existing systems and then reconcile the payment with their inventory and accounting systems.
It would also require that merchants be allowed to easily open institutional accounts with M-Pesa that sidestep the KSh 35,000 deposit limit.
While this functionality could be developed, Safaricom does not actually own or control the M-Pesa platform, instead licensing the M-Pesa software from Vodafone.
This means they do not have the access or rights to create and distribute the supplementary tools that would integrate with merchant’s systems or to otherwise adjust the system to facilitate merchant interactions.
An opportunity therefore exists for an institution which can offer savings incentives and create a flexible technology platform to provide mobile banking services with lower agent management costs than Safaricom.
The associated cost savings would give such an organisation the ability to offer a lower tariff structure to end users while providing a more viable agency proposition to remote areas of Kenya.
Such an institution would likely be a bank or a partnership between a bank and an MNO as it is this kind of partnership that would solve the infrastructure access challenges that a purely bank-led system might face without intervention from communications regulators.
The question is, can a Kenyan bank move quickly enough to develop and adopt the platforms necessary to take advantage of this opportunity while it exists?
• The writer is a Master’s of International Business student at The Fletcher School, Tufts University.