M-banking in Africa

Friday, February 15

Expectations for a rapid rollout of mobile banking (or m-banking) services have been revived by the extraordinary success of Kenyan mobile phone operator Safaricom's M-Pesa money transfer facility, leading to renewed predictions that the mobile phone and banking sectors are in the process of convergence.

M-Pesa was introduced by Safaricom in Kenya in March 2007. The service provides an SMS-based, low cost, person-to-person, money transfer facility, which also allows the user to purchase prepaid goods and services (eg mobile top-up time and utilities). It has seen subscribers increase from around 100,000 around its launch to more than 3.6 million by July 2008. During that time M-Pesa has moved some 21 billion Kenyan shillings (288 million dollars) around the country.

M-Pesa is still only a mobile money transfer facility. However, Safaricom, which is 40% owned by UK-based Vodafone, is now seeking to expand M-Pesa to embrace remittances, mortgage payments and other services. While such ambitions fall far short of the deposit-taking and transactional roles carried out by retail banks, they are still a challenge to them.

Predictions have existed since the 1990s that mobile phones' ability to transmit data offers the prospect of rolling out rudimentary financial services to the vast reservoir of unbanked or underbanked individuals in Africa, signalling the next phase of the continent’s economic transformation.

The experience of MobileMoney, which has now been in operation for about three years, illustrates the problems of the m-banking sector across Africa to date:

1. Take-up. Far from reaching the unbanked, m-banking services have largely been targeted at existing customers, and even in this case takeup rates have been low. Moreover, active use of accounts has tended to drop off, and most customers limit their usage to airtime top-ups and person-to-person payments.
2. Complex transactions. Despite the considerable technological advances in the past decade, using a mobile handset to conduct transactional banking remains considerably more complex than using an ATM. Easier technology and more customer education would be required for m-banking to develop mass appeal.
3. Regulatory compliance. In developing new the financial payments systems mobile operators have escaped the regulatory burden faced by banks because they do not, strictly speaking, take deposits. Any attempt by mobile operators to branch out beyond cash transfers or purchases of prepaid products into providing a wider range of financial services would encounter this regulatory burden. In addition to meeting liquidity reserves to protect depositors, mobile operators would also have to comply with a bewildering and costly array of secondary legislation, including know your customer (KYC) rules; anti-money laundering regulations; and countering the finance of terrorism legislation.

In South Africa and elsewhere in Africa, the cost of KYC compliance has been a key factor in depressing the uptake of m-banking services. Both Vodafone and Nokia have been lobbying African governments for a reform of the regulatory framework, but they are unlikely to escape it entirely. As a result, the business model deemed most likely to deliver the much vaunted m-banking breakthrough will be a mobile-bank joint venture.

Visa and MasterCard, the world's two biggest payment systems, have been watching m-banking developments in Africa closely, recognising that handsets are likely to emerge as a distinct payments channel. That competition could arrive earlier than anticipated, from a number of African firms, hoping to ‘leapfrog’ credit cards where no payment infrastructure exists.