Africa Blazes a Trail in Mobile Money

Africa Blazes a Trail in Mobile Money

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Africa Blazes a Trail in Mobile Money

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  • What’s at Stake and How to Proceed

    In sub-Saharan Africa’s emerging economies, mobile financial services represent a significant new development. There is no single path that will be right for all banks and MNOs, but they certainly can’t wait for the market to unfold and for competitors’ strategies to solidify.


    On the positive side, mobile financial services could allow African banks to capitalize on the trend toward financial inclusion and to start generating revenues from the tens of millions of Africans who have never used banking services before but may be in a position to do so as their incomes increase. Failure to develop a successful mobile-money offering could cause banks to miss this opportunity and could erode their existing customer bases as the banked population in Africa increasingly makes use of mobile money.

    In building mobile financial offerings, most African banks aren’t starting from a strong position. Their current services are designed to derive profit from a base of wealthier Africans, not from those Africans who are ascending to banked status for the first time. And to the extent that they devise good mobile offerings and keep their existing banking customers in the fold, banks may end up replacing some more-profitable transactions with less-profitable ones.

    Of course, cannibalization of this sort is something practically every industry occasionally experiences, with companies sacrificing one portion of their business when a new trend comes along. For instance, in the last few years, automakers BMW and Daimler have shifted their sales strategy to focus not just on selling cars but also on promoting car-sharing services, allowing drivers in some European cities to rent cars on an as-needed basis. In taking this tack, BMW and Daimler have acceded to a new market reality: that a segment of the driving population—particularly younger consumers—no longer wants to own automobiles.

    It’s different with mobile financial services because some customers will have a hybrid profile: they will access banking services through both traditional brick-and-mortar banks and mobile services. But the basic principle is the same: it’s better to get some revenues than none at all, even if you have to develop a less expensive (and less profitable) version of what you sell.

    In any event, it’s unlikely that many African banks can realize the full potential of mobile financial services operating on their own. Most banks don’t have a low-cost, secure communications infrastructure, and most lack the critical elements of an agent network. They have never had to serve the low-income, unbanked population segment and therefore don’t have a good understanding of what the segment needs. Some would probably even have a hard time entering into a partnership they did not clearly lead.

    Some of these are capabilities that MNOs do have, so banks should consider partnering with MNOs. (Another option for a bank is to set itself up as a mobile virtual-network operator [MVNO] and try to enter the mobile-money market that way. The MVNO approach has limitations, however. See the sidebar “The MVNO Option.”) In a partnership with an MNO, a bank would naturally fall into certain roles—such as handling the banking license and regulatory reporting, maintaining the balance sheet, driving product development, and overseeing back-office functions. The nature of mobile services means that the interface to the customer would likely remain the domain of the MNO.


    In lieu of entering into a partnership with an MNO, some banks may want to turn themselves into “virtual” telecommunications companies and provide phone service themselves. Here’s a brief assessment of this option.

    How It Works. The bank pays for the use of the MNO’s infrastructure.

    Upside. The bank has full control of the service—it doesn’t need to negotiate details with any partner.

    Downsides. This approach could be costly to implement, and the bank could face high switching costs. In addition, the bank might have to bear the full cost of developing the service itself and wouldn’t have the advantage of an MNO’s mobile-marketing know-how.

    Conclusion. Without the help of an MNO, not many banks could attain the critical mass and scale needed to make the MVNO option work. They would be better off partnering.

    As they move into mobile financial services, banks in sub-Saharan Africa must make a few overarching decisions. The first decision is whether to launch the service in a country where they already have a retail presence or to use the service as a vehicle for entering a market in a new location. A bank must also figure out what its innovation strategy will be: getting to the market first with a mobile financial service versus seeing what rivals offer and then trying to match or improve on it. For most banks (and for most MNOs), it will probably take several years to launch a product. (See the sidebar “From Green Light to Mature Offering: Four Phases and Several Years.”)


    Four Phases and Several Years

    Any bank or MNO that wants to offer a mobile financial service has to go through a four-phase process. Here’s a look at what must be accomplished along with the likely time frame for each. After each phase, the strategic choices regarding business model, governance, and infrastructure for the subsequent phase should be reviewed on the basis of market success, customer response, and economics achieved.

    Phase One: Understanding Existing Capabilities. After a decision is made to build a mobile-financial-service solution, the company must make a realistic assessment of the capabilities it has versus the capabilities it will need. From there, it must decide how it is going to add the capabilities it doesn’t have—by developing them, acquiring them, or partnering. It is imperative to have a vision of the fully built product in this phase in order to reduce the risk of expensive and disruptive infrastructure overhauls in subsequent phases.

    Duration: This phase will require two to four months.

    Phase Two: Preparing the Payment Platform and Launching in the Market. Either on its own or with a key partner, the company builds and launches a fully functioning payment system that has the transaction and security pieces in place. Ideally, the design of the system allows for growth and is flexible enough to accommodate future regulatory requirements.

    Duration: This phase will require 7 to 15 months.

    Phase 3: Getting the Platform to Scale. The selection of the right use cases is critical to get users to try the service. This is also the stage at which the agent network must be developed and trained. And it’s the time to start teaming with other players—including, potentially, retailers, utilities, and the government.

    Duration: This phase will require 12 to 18 months.

    Phase 4: Opening the Platform to Other Financial Services. With a critical mass of users, other use cases can be added. Opening up the ecosystem will involve many additional partnerships. Third parties can be instrumental in offering lending, savings, insurance, and other financial services.

    Duration: This phase is open-ended.

    Another crucial decision for banks is how to build a mobile-financial-service business. They can base their approach on one of four organizational archetypes:

    • They can develop the mobile financial service in-house, using their existing organization.
    • They can develop a mobile financial service in a unit that is physically separate from the existing organization.
    • They can fund the service’s development using a corporate-venture-capital or incubator model, making a decision later to bring the service back in-house, divest it, or continue to operate it as a partial shareholder.
    • They can acquire an offering that has been developed externally and that is in an early stage of development or commercialization.

    Every approach has its challenges and no single approach has proved infallible, but building the service outside the bank’s core organization, and as a separate business, has a lot to recommend it. Such a structure allows for faster decision making, offers a better chance of ensuring a low-cost mentality, reduces the chance of turf wars, and ensures that no one undermines the emphasis being placed (in many cases, for the first time) on a low-income customer segment.


    For MNOs, mobile financial services represent a chance to diversify their revenue streams and create a path into other areas, such as mobile music services and e-commerce. In this way, they can sidestep one of the risks that MNOs face in any market, including Africa: becoming mere data utilities or “bit pipes.” As data utilities, they would be vulnerable to price competition and to a superior way of transferring bits that might come along.

    The good news for MNOs is that they—unlike banks—already have a lot of what’s required to put together a credible mobile-financial-service offering. For starters, they have the necessary secure, low-cost communications network. With the mobile outlets selling their service, they already have the beginnings of an agent network. They know how to market to Africans in the lower-income segment, because they are already doing it. They have good brands and a good understanding of consumers.

    However, a few things are missing in the mobile-financial-service offerings that MNOs have introduced. Because these offerings are generally built on top of MNOs’ billing systems, they aren’t compliant with banking regulations. This is not an issue currently because these offerings are treated as mobile-wallet or mobile-money solutions—not as banking products with depositors. However, that will change as the amount of money in these services increases and as regulators take more notice of them.

    For the moment, most MNOs seem to be treating mobile financial services as a secondary strategy—something they do to support their primary strategy of creating income from voice and data services. The rudimentary nature of most MNOs’ mobile financial offerings reinforces this impression. Further, most MNOs have opted to use their billing systems as the backbone for their mobile-money offerings rather than building separate systems—a decision that will prevent the offerings from developing into full-fledged financial services. And most MNOs have done nothing, so far, to make their mobile-money offerings interoperable with those of other MNOs.

    No MNO in sub-Saharan Africa would erect a wall preventing its customers from placing voice calls to the customers of other networks; such a policy would lead to mass customer dissatisfaction. Yet such restrictions are the norm among the mobile-money services that have sprung up. On a short-term basis, this is understandable. The MNOs are probably patterning their mobile-wallet services after m-pesa, which has succeeded with a captive system that allows only m-pesa–to–m-pesa money transfers. But m-pesa is not an easily replicated model, for reasons already discussed. And on a long-term basis, having a closed system and treating mobile financial services as a secondary strategy are ill-advised ideas that will backfire.


    Big banks and MNOs aren’t the only ones looking for a foothold in Africa’s emerging market for mobile financial services. Some newcomers have also stepped in. One of them is Take Your Money Everywhere (TYME), an operator of branchless banking solutions. In 2012, in partnership with the South African Bank of Athens, MTN (a mobile-network service), and Pick n Pay and Boxer Superstores (two South African retail chains), TYME introduced a simple system called Mobile Money. The system allows customers to send money, buy airtime and electricity, and deposit or withdraw cash at so-called till points maintained by the retailers.

    TYME’s strategy is simple: anyone 16 or older can qualify for a basic account if they have an active cell-phone number just by keying in a valid South African ID. As of March 2014, Mobile Money already had 2 million customers, with an average balance of about 80 South African rand (roughly $7) in active customer accounts. TYME has put in place a tiered approach to meet regulators’ know-your-customer (KYC) requirements, with a lighter process for basic accounts and fuller KYC processes for customers looking to do more. Among the services that TYME is developing or considering are loan, insurance, and savings products and the enablement of cross-border remittances.

    TYME partnered with a local investment company in Namibia and supported the development of EBank. EBank received its banking license in the spring of 2014 and is now in operation, with the goal of adding more Namibians to the country’s banked population.

    Are TYME and the other mobile-financial-service start-ups that are beginning to operate in Africa friends or foes? To bigger banks and MNOs, they could be either. The only sure thing is that they are forces to be reckoned with and examples to learn from.

    MNOs may have more options than banks in terms of potential partners; their options include financial institutions and possibly third-party service providers. But they almost certainly need to partner, and they need to treat mobile financial services as a priority. (See the sidebar “How One Newcomer Is Making Waves” for a look at what both established banks and MNOs are facing competitively.)
    The Key Strategic Questions

    As they start to stake out their positions in the market, banks and MNOs need to answer a few key questions.

    For banks, the questions are as follows:

    • Do we want to roll out mobile financial services in the markets we’re already in, or do we want to take the opportunity to target other countries in sub-Saharan Africa?
    • Do we want to design a service that is innovative and stands out to consumers? Or would it be better to follow the lead of others in terms of product design and to innovate and try to create advantages for ourselves in other areas?
    • Should we operate our mobile-financial-service unit as a stand-alone unit outside of the bank or house it within the core bank organization?
    • With which companies should we look to partner for telecommunications and distribution? 

    For MNOs, the following questions are foremost:

    • With which companies should we partner—traditional banks or nontraditional financial players including start-ups?
    • Have we identified the use cases that will matter most in the countries we’re targeting?
    • Does our product-development plan take into account the likely increased involvement of regulators?
    • Should we pursue mobile financial services as an independent source of profits, or should we initially look at it as a driver of our telecommunications revenues?
    • Does our long-term strategy include an emphasis on interoperability—that is, on allowing our customers to exchange money with customers of other mobile financial services?

    It’s true that the current numbers are relatively small and that the shape of the market is still to be determined. But with the technology having arrived, with mobile penetration already deep and growing, and with a huge portion of the population approaching bankability, there is no question of the direction in which sub-Saharan Africa is heading. Before long, mobile financial services are going to be big in this part of the world. The vendors that want to establish a strong market position are going to need to find the right partners and develop an offering. Those things won’t happen in a few weeks; they will take months and in some cases longer. The time to begin is now.