Mobile Money The African Success Story

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1 Imagine a city worker who has to send money back to his family in the rural area where there are no banks. Typically, this would involve slow, unsafe and unreliable methods of transporting lump sums of money from one location to the next. It becomes an inconvenient and tedious task with multiple middle men and no guarantee of the money arriving intact. This is where the Mobile Money comes in; offering fast, safe, affordable and reliable means of performing financial tractions in unbanked areas. Most network operators have national wide 2G coverage which blankets rural areas. With a basic 2G mobile device, the city worker can send money to his family in the rural area via his mobile network provider and the money can be redeemed by his family without having a bank account. This article investigates the dynamics of mobile money services in Africa, highlighting its successful run, economic impact and the key factors that have encouraged its development in the region. Conversely, this article will also discuss the challenges faced by mobile money services in other regions and why it has not witnessed the same success as in Africa. (Part 1) 2016 / 06 Author: Michael Mudau & Sele Douglas, Detecon CASA We make ICT strategies work

2 What is Mobile Money? To simply define mobile money, it is an electronic mobile financial service that permits users to store, send and receive money using their mobile devices; very much similar to owning a sort of electronic wallet. There exist several mobile financial services; these are not to be confused with mobile money. These services include the likes of mobile insurance, mobile savings, mobile crowd sourcing, mobile micro loans and mobile credit. In order for a service to be classified as a mobile money service it must meet the following criteria; The service must offer one of the following financial products: domestic or international transfer, mobile payments including bill payments, bulk disbursement and merchant payments. The service must majorly rely on a network of transactional points outside traditional bank branches and ATMs i.e. customers must be able to use the service without having been previously banked. (Mobile banking services that ONLY offer alternative platforms to access traditional banking products do not qualify) The service must offer an interface for initiating transactions for customers on any basic 2G capable mobile device. 1 How does mobile money work? These mobile money services are typically operated by a Mobile Network Operator (MNO) in partnership with a third party agent (a locally based representative or store registered with the operator as part of its mobile money network). Mobile money users may register with these agents and deposit cash with them to load as credit unto their mobile network profiles. The deposited cash may then be transferred to another party as payment by simply entering the recipient s mobile money account details, the cash amount required, and then simply sending it as a text. The recipient can then convert this text into cash at their local agent located in their region. Mobile Money Transaction Flow MNO Sender enters receivers mobile money account details + amount to transfer and sends via SMS MNO server authenticates deposit/transfer Authentication Server Receiver is notified that cash amount has been delivered to mobile money account via SMS Agent A Agent B Sender Sender deposits money with CICO agent CICO agent pays receiver amount transferred Receiver 1 GSMA State of the Industry; Mobile Financial Service for the Unbanked Detecon International GmbH 2

3 Market Overview This type of financial service creates an avenue to receive and transfer funds with mobile devices for the previously unbanked population and areas that are underserved by financial institutions. It s certainly an attractive premise for rural and economic impoverished areas as well as urbanized regions with lower saturated banking sector. These possibilities have garnered attention from African MNOs, much so that more than half the live mobile money services globally reside in the Sub-Saharan Africa region. It has become such a popular service that in some Sub-Saharan African countries, mobile money accounts exceed the number of traditional banking accounts due to mobile money services not only being used for fund transfers but also other transactions such as airtime top-ups and various bill payments. More than 20% of mobile connections in Sub-Saharan Africa are linked to a mobile money account 2. Nairobi Kenya, also referred to as the Silicon Savannah (a play on San Francisco s Silicon valley) has been the epicentre of mobile money transactions in the region. Quickly realizing the potential of mobile money services, the dominant operator Safaricom has lead the mobile money market in the region. It has done this by capitalizing on its region specific dynamics, owing 23% of its total service revenues in the first half of 2016 to mobile money services and boasting a 12% growth in chargeable mobile money transactions per customer per month and also an 88% mobile money subscription penetration of its total subscriber base 3. Live Mobile Money Services Three or More Mobile Money Services Two Mobile Money Services One Mobile Money Service No Mobile Money Service Remarks Sub-Saharan Africa accounts for more than half of the 255 live mobile money services across the globe Over half of all mobile operators in the region have already launched a mobile money service Of all the regions, Sub-Saharan Africa records the highest level of mobile money penetration There are more registered mobile money accounts than banks accounts in Burundi, Cameroon, the Democratic Republic of the Congo, Gabon, Guinea, Kenya, Lesotho, Madagascar, Republic of the Congo, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe Tanzania has more registered mobile money accounts than any other country in the region at 1,208 accounts per 1,000 adult inhabitants 2 GSMA The Mobile Economy, Safaricom Financial Results H1 FY16 Detecon International GmbH 3

4 What are the challenges of mobile money? With so many mobile money success stories in Africa, one might ask why this is not a global phenomenon or why mobile money service penetration is not as high in other regions. To answer this, there are a number of challenges that regions need overcome to fully realise the potential of mobile money services; Overcoming Regulatory Barriers: In countries with non-enabling regulatory environments, mobile money service providers face difficulties in launching and scaling mobile financial services. The regulatory framework needs to support the inclusion of nonbanks as a platform for providing financial services. This will involve the collaboration of the telecommunication sector regulator and the banking sector regulator to create an open and level regulatory environment that allows non-bank financial service providers (especially MNOs) into the financial services market, supports the growth of mobile money services and realises the benefits of increasing financial inclusion in the economy. Creating the ideal regulatory environment is easier said than done as there are significant security risks that need to be considered to ensure the stability, integrity and safety of an economy s financial system. The regulatory structure should not be consigned by just the banking and telecoms sector regulators, but the framework needs to be an integral part of the country s national strategy to foster economic growth, financial inclusion and job creation. Building an Operational Foundation: Committing to long-term investment and building strong operational foundations to support the sustainability and scaling of mobile money is an essential process of enabling mobile money services. The network of mobile money third party Cash-In and Cash-Out (CICO) agents needs to be present before the service can be fully realized. The regulator might be tempted restrict either the type of legal entity (commercial, non-profit, individual, or other) that is permitted to act as a CICO agent, or the criteria that a CICO agent must meet in order to operate (e.g. a business license or minimum capital). Although it is important to have expectations on the type of qualifications an agent requires, placing large compliance or financial constraints will stifle mobile money services from scaling. Unreasonable limitations should not be placed on mobile money CICO agents as services should be able to operate on low-cost distribution at low-overhead agent points. Service Delivery Interoperability: Driving industry collaboration, service providers and policy makers need to work together on the design and implementation of an interoperable environment, ensuring that interoperability brings value to the customer and the service provider. There is no question that both customers and mobile money providers could benefit from the interoperability of mobile money services; the problem lies in knowing when and how interoperability will make commercial sense for providers and creates value for customers. The role of the policy maker here is to facilitate co-operation between service providers, ensuring that interoperability between mobile money service operators creates convenience for the end-user. The challenge of building an interoperable environment for mobile money services is usually one for more developed markets as this requires an already established and stable foundation of operational agents. The execution timing of an interoperable environment should be considered as the benefits are more likely to emerge from a more mature mobile money deployment with functioning agents, third party networks and an active customer base. Diverse Range of Services: Delivering a broad range of digital transactions that make mobile financial service more central to the lives of users will foster the adoption of mobile Detecon International GmbH 4

5 Conclusion money services in the region and attract more users. From a commercial point of view, the range of mobile financial services a user can access effectively creates an on-ramp for digital financial inclusion which in turn creates financial incentive for other operators to engage in mobile money service delivery. Simply explained, the more services, the more customers, the more service providers. Some regulators may hesitate to authorise non-bank providers because they do not offer a full range of financial services to customers. The main reason stated is that it would be better for customers to be traditionally banked and utilize a more complete suite of financial services (e.g. loans, interest bearing savings, insurance, etc.). However, if mobile financial services from non-bank providers create access to other financial services that banks and other financial institutions (like insurance companies) offer, it will validate the inclusion of mobile money as an important aspect of the financial sector, filling the gap of financial services available to the unbanked population. For mobile money to experience high penetration and scalability in any region, these challenges must be met head on and confronted by not only the MNOs and the policy makers but on a national level with the inclusion of mobile money as a recognisable and validated financial service. The inclusion of mobile money in a country fosters financial inclusion, economic growth, job creation and other socioeconomic benefits such as security and convenience. Mobile money is an African phenomenon that has rarely been duplicated in other regions. Although the penetration rates differ in each African country, the urge to work on increasing services is realized by the governments and the operators alike. To truly change the financial lives of underserved rural inhabitants, mobile money needs to become a pivotal monetisation instrument, easily accessible by basic devices and available across the region. With regulatory collaboration making mobile money more central to the financial lives of its users, greater financial inclusion, economic growth and economic empowerment in a country may be achieved. Detecon International GmbH 5