Middle Africa Insight Series Banking 17 May Banking the Unbanked: Sizing the Potential of Mobile Financial Services in Middle Africa

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1 Banking the Unbanked: Sizing the Potential of Mobile Financial Services in Middle Africa Highlights The delivery of mobile financial services in Middle Africa continues to evolve strongly. Mobile Network Operators (MNOs) now offer a wide variety of services following initial, basic efforts that centred on an airtime top-up and domestic money transfer platform. Middle African banks are positioning themselves to compete with MNOs by using a three-point strategy (mobile banking, mobile money and mobile savings) to deliver mobile financial services to their clients and prospective clients. In our view, mobile financial services revenues in Middle Africa could grow from an estimated US$657 million in 2012 to about US$3.53 billion in 2017, driven by higher numbers of mobile subscribers, increased deployment of mobile money platforms and increased sales penetration of smartphones in the region. In addition to airtime top-up, we expect intra-country and intra-regional remittance transfers to become major drivers of revenues, especially in West and East Africa. However, the growth momentum could slow down if other Middle African countries adopt Kenya s recent introduction of a mobile money tax, a 10% excise duty on fees charged by MNOs. Introduction: Evolution of Mobile Financial Services in Middle Africa The delivery of mobile financial services in Middle Africa continues to evolve strongly. Mobile telecom operators now offer a wide variety of services following initial, basic efforts that centred on an airtime top-up and domestic money transfer platform. The success of the most celebrated mobile financial services innovation in Middle Africa, Safaricom s M-Pesa, highlighted to other telecom operators and banks the revenue opportunities arising from a client base increased through the introduction of mobile financial services. Following Safaricom s lead, many banks designed mobile financial services proposals, but lacked the required infrastructure and telecom operators to roll out services. They have, however, started to catch up, and the outlook for the medium term looks strong because of the large size of the unbanked population across Africa and strong demand for financial services. The majority of mobile subscribers in Middle Africa lack access to financial services. Although mobile penetration is estimated at 53%, access to financial services is low at about 24% of the adult population (World Bank). However, there is a positive outlook for financial access in the region as banks and MNOs aggressively compete to expand financial services to mobile subscribers by providing mobile financial services (dubbed Mobile Money ) to the unbanked. MNOs are leading the race; they are achieving greater success, as demonstrated by Safaricom s M-PESA scheme. Pan-African MNOs, including MTN, Airtel, Orange and Tigo, operate their mobile money businesses across several countries such as Ghana, Nigeria, Kenya, Uganda and the Francophone West African countries. In the same way, Middle African banks are rapidly launching mobile banking solutions aimed at bank customers, and we see this boosting transaction volumes and revenues of banks in the medium term. Chart 1: Mobile Financial Services in Middle Africa: Population Dynamics and Composition, % About 47.1% of the population is yet to have access to mobile telecommunication services. This represents a Greenfield opportunity (i.e. opportunity for deployment of mobile networking) for mobile telecom in Middle Africa Mobile subscription is estimated at 52.9% (24% with access to financial services; 28.9% without). The 28.9% presents an opportunity for banks and mobile network operators to bank the unbanked by offering mobile financial services Access to mobile financial services Source: Ecobank Research Access to financial Services Mobile Penetration Population Composition 15% of the adult population have access to mobile financial services, which they use mainly to send and receive money. SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLAIMERS & DISCLOSURES ON LAST PAGE Ecobank Research ecobankresearch@ecobank.com 9% of the 24% of adults with access to financial services are yet to have access to mobile financial services. Many of them are bank and microfinance customers.

2 The current low penetration of mobile financial services in Middle Africa confirms our medium-term outlook, which is for robust expansion. The World Bank Financial Inclusion Database shows that 15% of the adult population in Middle Africa receive money through the medium of mobile phones (Chart 1); 11% send money using mobile phones while a lower percentage (3%) pay bills via mobile phones. The proliferation of mobile financial services products in Middle Africa is a strong indication that it is poised for rapid penetration in the region, and we see this directly boosting the transaction volumes and revenues generated by banks and MNOs. State of the Industry: It is a Necessary Partnership The Partnership: MNOs enter into two agreements with banks prior to launching mobile money in Middle Africa: Contract a bank to be the sponsor of the MNO s mobile money service, in conformity to regulatory requirements (largely legislated by central banks). Contract a bank to hold Trust Accounts for the mobile money service. Banks, because of mobilised deposits, benefit greatly from this agreement. Pan-African banks such as Ecobank and UBA reciprocate this business practice by contracting the MNOs to use their platforms to deliver mobile banking services; this gives customers access to their bank accounts through the MNO platforms. Leading Lights: MNOs are the leading lights of the mobile financial services industry in Middle Africa. Since 2008, the success of Safaricom s M-PESA has continued to motivate MNOs to deploy mobile money platforms across the region. Currently, MNOs account for over 80% of live mobile money deployments in Middle Africa (see Chart 2). While the majority of MNOs operate their mobile money businesses in a single country, Pan-African MNOs are launching their operations across countries. Surprisingly, Airtel is leading the race, with live mobile money deployments in 12 countries, ahead of MTN, which has live deployments in 11 countries (see Chart 3). Chart 2: Distribution of live deployments in Middle Africa. Chart 3: MNOs: Number of countries with live deployments. Banks, 9.8 % Independent, 7.3% MNOs, 82.9 % 2 0 Airtel (Bharti Airtel) MTN Orange Tigo Source: GSM Association & Ecobank Research The Catch-up Strategy: To deliver mobile financial services to their clients and prospective clients, Middle African banks are using a three-point strategy that categorises mobile financial services into three main product lines: mobile banking, mobile money and mobile savings. This positions the banks to effectively compete with MNOs. In addition to servicing the needs of bank clients through mobile banking, banks compete with MNOs to reach the unbanked segment of the population by offering mobile money and mobile savings schemes. This strategy shows a strong desire by banks to compete for their share of Middle Africa s mobile financial services revenue. However, the competition is producing partnerships rather than winners and losers. Whilst banks lack the necessary infrastructure to roll out mobile financial services, MNOs lack banking licences and regulatory support in most parts of Middle Africa. This has resulted in the current necessary partnership between banks and MNOs in the delivery of mobile financial services. In Nigeria (see Table 1 below), Ecobank partnered with Etisalat, GLO and Airtel to deliver Ecobank Mobile Money, while GLO partnered with a host of banks to deliver the GLO Txtcash mobile payment platform. However, we expect the nature of competition between banks and MNOs engaged in the provision of mobile financial services to be shaped by regulatory changes in the long-term. Middle African MNOs operating mobile money currently appeal to regulators at every opportunity for the redesign of a regulatory framework that would recognise them as part of the financial system. The MNOs are seeking increased autonomy in the running of mobile money, in a Ecobank Research ecobankresearch@ecobank.com 2

3 bid to boost their overall income from the sector. Currently, the evolving regulatory system for mobile money favours banks in most parts of Middle Africa. Table 1: Mobile money deployments and partnerships in Middle Africa Country Operator Name Launched Bank Partners Technology Partners Benin MTN Mobile Money 2010 Ecobank Fundamo, Gemalto Botswana Mascom (MTN) Myaka Mascom Money 2011 Fundamo, Gemalto Botswana Orange Orange Money 2011 Comviva Technologies Limited Burundi Econet Wireless EcoKash 2010 Utiba Burundi ONAMOB (ONATEL) MobiCash 2012 Burundi Commercial Bank Onatel Cameroon MTN Mobile Money 2010 Afriland First Bank Fundamo, Comviva Cameroon Orange (France Telecom) Orange Money 2011 Comviva Technologies Limited Chad Airtel (Bharti Airtel) Airtel Money 2012 Ecobank Chad Tigo (Millicom) Tigo Cash 2012 Orabank Utiba Côte d'ivoire MTN Mobile Money 2009 Societe Generale, Ecobank Fundamo, Gemalto Côte d'ivoire Orange (Cote d'ivoire Telecom) Orange Money 2009 BICICI (BNP Paribas Subsidiary) Comviva Technologies Limited Côte d'ivoire Celpaid Celpaid Cote d'ivoire 2011 Banue Atlantic Côte d'ivoire Moov (Etisalat) Flooz 2013 BIAO DR Congo Airtel (Bharti Airtel) Airtel Money 2012 DR Congo Vodacom M-PESA 2012 DR Congo Tigo (Millicom) Tigo Cash 2012 Utiba Djibouti Djibouti Telecom Mobicash 2010 ICB & BCI Gabon Airtel (Bharti Airtel) Airtel Money 2012 Gabon BICIG BICIG Mobile 2012 Ghana Tigo (Millicom) Tigo Cash 2010 Utiba Ghana MTN Mobile Money 2009 CAL Bank, Ecobank, Fidelity Bank Fundamo, Gemalto Ghana Airtel (Bharti Airtel) Airtel Money 2011 Ecobank, Standard Chartered, UBA Oberthur, Hamisco Ghana Afric Xpress (AX) TXTNPAY 2009 Afric Xpress Services Guinea-Bissau MTN MobileMoney 2010 BOA Bank Fundamo, Gemalto Kenya Airtel (Bharti Airtel) Airtel Money 2009 Citigroup, Standard Chartered Oberthur, Hamisco Kenya Safaricom M-PESA 2007 Bank of Africa, Equity Bank Vodafone Money Transfer Kenya yu (Essar Telecom) yucash 2009 Obopay Kenya Orange (Telkom Kenya) Iko Pesa 2010 Equity Bank Equity Bank Transactional Platform Kenya Mobile Pay Ltd. Tangaza 2010 Liberia Lonestar (MTN) Mobile Money 2011 Ecobank Libera Limited Fundamo, Gemalto Madagascar Airtel (Bharti Airtel) Airtel Money 2012 Madagascar Orange Orange Money 2010 Comviva Technologies Limited Madagascar Telma mvola 2010 BFV Societe Generale, Tiavo Utiba Malawi Airtel (Bharti Airtel) Airtel Money 2010 National Bank of Malawi, NBS Bank Oberthur, Hamisco Mali Orange Orange Money 2010 BNP Paribas Comviva Technologies Limited BICIM (BNP Paribas group) Mozambique mcel (Mozambique Cellular) mkesh 2011 Fundamo, Gemalto Namibia MobiPay MobiPay 2010 Niger Airtel (Bharti Airtel) Airtel Money 2010 Ecobank Oberthur, Hamisco Niger Orange Orange Money 2010 Comviva Technologies Limited Nigeria Glo Mobile (Globacom) Glo Txtcash 2011 UBA, Stanbic IBTC, Fidelity Bank, FCMB, Sterling, WEMA Gemalto, Kabira Nigeria Ecobank Nigeria Plc Ecobank Mobile 2012 Etisalat, GLO, Airtel Nigeria Zenith Bank EazyMoney 2012 Visafone, Etisalat, MTN, Airtel Visafone Nigeria First Bank of Nigeria Firstmonie 2012 MTN, GLO, Airtel, Etisalat Fundamo Nigeria Cellulant Ltd. G. E. S. S Nigeria Etisalat (EMTS) Mobile Commerce 2012 Nigeria Stanbic IBTC Bank Plc Mobile Money 2012 Nigeria GT Bank Mobile Money 2011 Fortis Microfinance Bank, Etisalat MTN Nigeria Pagatech Paga 2011 Nigeria etranzact PocketMoni Rwanda MTN Mobile Money 2009 Commercial Bank of Rwanda Fundamo, Gemalto Rwanda Tigo (Millicom) Tigo Cash 2011 Comviva Technologies Limited Senegal Orange (Sonatel) Orange Money 2010 BNP Paribas Comviva Technologies Limited Senegal CSI 2008 Senegal Societe Generale de Banues au Senegal Yoban tel 2012 Credit Mutuel du Senegal Obopay Sierra Leone Airtel (Bharti Airtel) Airtel Money 2010 Zenith Bank Oberthur, Hamisco Sierra Leone Splash Cash Splash Cash 2009 Guarantee Trust Bank More Magic Somalia NationLink Telecom e-maal 2011 Comviva Technologies Limited Somalia Telescom, Somaliland Zaad 2009 Comviva Technologies Limited Somalia Golis Telecom Sahal Somalia Hormuud Telecom Zaad Swaziland MTN Mobile Money 2011 Stanbic Bank Fundamo, Gemalto Tanzania Airtel (Bharti Airtel) Airtel Money 2011 Citibank, Standard Chartered Oberthur, Hamisco Tanzania Postal Bank Tanzania Tigo (Millicom) Tigo Pesa 2010 Comviva Technologies Limited Tanzania Vodacom M-PESA 2008 National Bank of Commerce Vodafone Money Transfer Tanzania Zantel (Etisalat) Zpesa 2009 E-Fulusi Uganda Airtel (Bharti Airtel) Airtel Money 2012 Citibank, Standard Chartered Oberthur, Hamisco Uganda MTN Mobile Money 2009 Stanbic Fundamo, Gemalto Uganda UT Mobile (Uganda Telecom) M-Sente 2010 DFCU Bank, Post Bank CelPay Uganda Warid Telecom (Abu Dhabi) Warid Pesa 2012 Standard Chartered Uganda Housing Finance Mcash 2012 MobiCash Uganda Orange Orange Money 2013 Standard Chartered Comviva Technologies Limited Zambia Celpay Celpay 2002 Barclays Fundamo Zambia Zoona Zoon 2009 Zambia Airtel (Bharti Airtel) Airtel Money 2011 Zambia MTN MTN Mobile Money 2012 Bank ABC Zimbabwe Econet Wireless Ecocash 2011 Zimbabwe NetOne One Wallet 2011 Gemalto Source: GSM Association & Ecobank Research Ecobank Research 3

4 Key Success Factors for Mobile Financials Services Are Middle African Banks Ready? Our analysis of three successful mobile banking businesses in emerging markets including Africa and Asia (Banco do Brazil (BB) Mobile Banking, Maybank Mobile Banking in Malaysia, First National Bank South Africa Mobile Banking) suggests that there are eight key success factors for bank-led mobile banking businesses. We considered these mobile banking businesses successful in terms of the rapid growth of mobile banking customer and transaction volumes, and the breakeven period for the mobile banking business line. The eight key success factors are: Large Customer Base: The successful mobile banking businesses have large customer bases, ranging from less than 1 million to 21 million customers. Clear Target Market: The successful mobile banking business lines have a clear target market, usually the bank s internet banking customers or the whole customer base. Strong Leadership Team: A strong leadership team to direct the business line is a feature of the successful mobile banking businesses. Marketing Promotion: Consistent marketing and promotion in the first year is critical to the success of mobile banking. Banks that failed to do this recorded lower adoption of the product during the first year. Technology Choice: Technology choice is critical to mobile banking success. The successful models start with a technology that can be used across different mobile handsets, usually a mobile web platform which requires only a mobile web browser, found on most phones. Internet and Mobile Banking: Mobile banking is seen as a natural progression or alternative delivery channel for internet banking clients. Some successful mobile banking models have therefore combined internet and mobile banking as one product offering. Operator-independent: The successful mobile banking models are independent of telecom operators, meaning that all bank customers can use the service irrespective of the mobile network operator they subscribe to. Registration Convenience: Convenience of registration is also critical to the adoption of mobile banking. Some of the successful models have different channels for registration including bank branches, ATMs and mobile phones. Mobile Network Operators: Charting the Path to Success: Some of the factors outlined above, including large customer base, strong leadership team, marketing promotion and registration convenience, are also applicable to MNOs deploying mobile money platforms in Middle Africa. In addition, research conducted by the GSMA shows that mobile money business grows rapidly and succeeds when it is led by an MNO. Another key factor contributing to rapid growth of mobile money deployments is the customisation of services to fit local needs in a diverse demographic and socioeconomic environment. Launched in June 2009 by Telesom in Somaliland, Zaad is one of the most rapidly growing mobile money services in Middle Africa. In addition to a subscription rate of nearly 40% of Telesom mobile subscribers at the end of the third year (June 2012), there has been significant activity on the Zaad mobile money platform. According to the GSM Association, Zaad executes over 34 transactions per customer every month and this is significantly above the global average. The key success factors for Zaad are: Clear Target Market: The target market for Zaad is existing Telesom subscribers and prospective subscribers. Leadership: The leadership designed a winning strategy, focusing on informal businesses that let customers pay for goods and services using Zaad; and employers that pay salaries via Zaad. Low Financial Access in Somaliland: Financial access, at an estimated 2%, remains very low in Somaliland. This creates an enabling environment where Zaad can thrive in the absence of strong alternatives. Word-of-mouth Marketing: Businesses and employers are doing word-of-mouth marketing for Zaad by encouraging business associates and employees to join the Zaad mobile money platform. Internet and mobile money: Telesom introduced a web-based account management platform for Zaad customers. Revenue Dynamics in Middle Africa Revenue Sharing Model: 50/50 will be a fair game The revenue-sharing model for mobile financial services favours the frontline partner for the product. In most countries, the players share the revenues using the 80/20 rule in favour of the frontline partner, the firm originating and leading the mobile financial services offering. Whilst banks are frontline partners for mobile banking, telecom operators are the same for mobile money. However, the existence of mobile savings changes the game and as a result the model is often seen as a joint venture, with revenues probably shared equally between the partners in a 50/50 structure (see Chart 4). Ecobank Research ecobankresearch@ecobank.com 4

5 Chart 4: Revenue-sharing for Mobile Financial Services in Middle Africa Banks Mobile Network Operator 120% 100% 80% 60% 20% 80% 50% 40% 80% 20% 50% 20% 0% Mobile Banking Mobile Money Mobie Savings Source: Ecobank Research Beyond the direct revenues from mobile financial services that the partners share, banks also derive revenues from the deposits that they mobilise through mobile financial services. Although banking regulators in Middle Africa prohibit banks from sharing such revenues with MNOs, some banks enter into private agreements with them. It is clear that this kind gesture by the banks is not enough for some MNOs, who continue to campaign for better recognition by regulators. We see that regulators in Middle Africa have their own unique difficulty in keeping up with the pace of innovations in the sector, because of inadequate funding and lack of specialised departments for mobile financial services. In the long term, we anticipate a convergence of banking and telecom regulatory bodies and the design of a regulatory framework enabling MNOs to offer mobile financial services without necessarily partnering with banks. Until then, banks in Middle Africa will continue to access cheap funding from the deposits that they mobilise from mobile financial services, which is expected to grow in prominence. The Safaricom Yardstick: Revenues to hit US$3.5 billion in 2017 The Safaricom growth story has shown that mobile financial services revenues can significantly contribute to the revenues of banks and MNOs within five years of launching the platform. M-PESA s contribution to total Safaricom revenues has been on an upward trajectory since launching in March 2007, improving from contributing 4.2% of revenues in 2009 to 15.8% of revenues in In absolute terms, M-PESA revenues grew from US$36.39 million in 2009 to US$ million in 2012 on the back of consistent growth in the numbers of Safaricom subscribers and M- PESA customers, as shown in Chart 5. Chart 5: Safaricom: Trend for mobile financial services Chart 6: Middle Africa: Projected trend for mobile financial services 20 Safaricom subscribers (millions), left axis MPESA customers (millions), left axis MPESA revenues (US$'million), right axis Estimated mobile subscribers (millions), left axis Estimated mobile finncial services suncribers (millions), left axis Estimated revenues (US$' billion), right axis Source: Ecobank Research In our view, mobile financial services revenues in Middle Africa could grow from an estimated US$657 million in 2012 to about US$3.53 billion in 2017, as shown in chart 6. Our revenue projections are based on the following: Further penetration as a result of continuous mobile money deployments. Currently, just 37% of the region s 166 MNOs have deployed mobile money platforms. Middle Africa has the largest percentage of planned mobile money deployments in the world 43.1% planned against 56.0% live deployments (GSMA). Upon fruition, this will boost mobile money penetration and also provide further platforms for banks to deepen their mobile banking businesses. We estimate that the overall number of subscribers for mobile financial services will increase from million at the close of 2012 to million in We believe that the number of customers will be significantly higher than official figures suggest, as people do not need to register to be able to use mobile money. Mobile money agents conduct transactions on behalf of unregistered customers in the region. Ecobank Research ecobankresearch@ecobank.com 5

6 Middle Africa is the world s fastest growing smartphone market, with annual growth of 44% since 2000 according research conducted by the GSM Association; and we expect the increased adoption of smartphones to boost the potential for mobile banking in the continent. Smartphones enable users to install mobile banking applications that make it easier to execute transactions. Microsoft recently signed a partnership with Chinese manufacturer Huawei to offer affordably priced smartphones in Africa, while Samsung is rapidly expanding its distribution network in the region. According to the GSM Association, the rapid growth in smartphone shipments to Middle Africa will see key countries Nigeria and Kenya boasting 29% and 28% smartphone penetration respectively in Opportunities: Where will the revenues come from? There are several mobile financial services opportunities that banks and MNOs could exploit. In addition to airtime topup, we expect intra-country and intra-regional remittance transfers to become major drivers of revenues, especially in West and East Africa. Intra-regional remittances in West Africa total more than US$3.0 billion, whilst those in East Africa exceed US$1.1 billion per year. Although banks and MNOs have already positioned themselves for intra-country remittance transfers, remittance business volumes on the mobile money platform are currently low because of the dominant position of Western Union. However, the outlook is encouraging as people are slowly switching from the bank-based transfer to the mobile money transfer platform. Banks and MNOs also configure mobile money/banking as a corporate payment platform for cash disbursement and collection in Middle Africa. The cash collection platform for mobile banking/money not only suits the needs of utility service providers including water, electricity, telecom and satellite TV, but also provides solutions for tax authorities and transport businesses. For instance, the key clients of the mobile banking bill payment platform for Tanzania s National Microfinance Bank include Tanzania Revenue Authority (property and personal tax), Vodafone (post-paid bills), DAWASO (water bills) and DSTV (monthly subscription). We expect banks and MNOs to position the mobile payment platform as a cash disbursement platform for organizations with offices/subsidiaries across the continent as well as those engaged in regular social transfers to individuals. Potential Risks and Challenges Will Middle Africa follow Kenya s lead in setting a mobile money tax? Some Middle African countries take their cue from Kenya, which is leading the mobile financial services innovation in Middle Africa. If African countries extend this practice to Kenya s recent introduction of excise duty on fees charged by MNOs, the ongoing evolution of mobile financial services will experience a significant setback. The Kenyan government recently introduced a 10% excise duty on the fees charged by MNOs and Safaricom reacted by raising fees on M-PESA transactions by 10%, thereby passing the tax effect to consumers in a move that could adversely affect transaction volumes. We think that, in a continent where fiscal deficit is a huge challenge, most countries in Middle Africa are unlikely to resist the temptation to follow Kenya s example. This could potentially slow down the momentum of mobile money growth in Middle Africa. The regulatory conundrum Banking regulators in Middle Africa continue to maintain that any form of banking must be undertaken by licensed deposit-taking institutions, which excludes MNOs. Central banks require MNOs to have a sponsoring bank (s) for any mobile money services proposal before it is considered for approval. Although banks are happy to perform this role, MNOs are pushing for better recognition across the continent. However, we expect this arrangement to continue for the foreseeable future as regulatory authorities are careful about the consequences of fully opening the financial system to MNOs, which are not registered to engage in deposit-taking activities. We also reiterate that regulatory authorities are cautious as they cannot keep-up with the pace of mobile money innovations because of the absence of funding to create specialised departments focusing on the sector. Conclusion There has been an ongoing rapid evolution of the mobile financial services industry from 2008 onwards, mainly driven by MNOs that account for over 80% of live deployments in the region. However, Middle African banks are catching up, with the introduction of their own mobile financial services products and, by virtue of being the sponsors of the MNOled mobile money platforms in line with regulatory requirements, they are accessing cheap funding from mobile money deposits. The outlook for the sector is bright in Middle Africa as only 37% of MNOs and a handful of banks have deployed mobile money platforms. However, there are risks to this potential growth and the most prominent is the Ecobank Research ecobankresearch@ecobank.com 6

7 recent introduction of a 10% excise duty on fees charged by MNOs in Kenya. This could slow down the pace of growth if other countries, in a continent where most countries are struggling with fiscal deficits, follow Kenya s lead. Ecobank Research ecobankresearch@ecobank.com 7

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