Mobile payments in emerging markets

Transcription

1 WHITE PAPER October 2015 For professional investors Mobile payments in emerging markets Where two dogs fight for a bone... Jeroen van Oerle Elie Aloko Patrick Lemmens

2 TABLE OF CONTENTS Executive summary 2 Introduction 3 Bank, MNO or fintech as winner? 7 Investment implications 12 Appendix A: Mobile payments background 13 Appendix B: key players in mobile payments 15 Mobile payments in emerging markets 1

3 Executive summary Mobile payments in emerging markets are marked by a battle between mobile network operators (MNO) and banks. Financial inclusion (offering money transaction services to the unbanked) has become a business opportunity, thanks to mobile payments. This technology makes it possible to reach low income individuals in a cost-efficient way. A big advantage for emerging market banks is the time and ability they have to react to the disruptive rise of mobile technology in developed markets. In many emerging markets, fintech does not yet have a chance to become disruptive due to a lack of internet infrastructure and smartphone penetration. But this does not imply there is no competition for banks. Financial inclusion is not an investable trend Despite the fact that the mobile payment market in emerging markets is growing fast, it is not evident that a compelling investment case can be made. The most important reason is that mobile payments are mostly viewed as a strategic business opportunity instead of a standalone business model. For MNOs, voice, SMS and data are the major revenue drivers while the contribution of mobile payments to revenues is still insignificant. Safaricom in Kenya is quite a unique success story with its M-Pesa payment offering which represents 25 percent of its revenues; this is one of the highest we ve seen in emerging markets. Payments are a good way to increase customer stickiness and reduce airtime costs by optimizing network usage, but are not a core activity. We argue it does not make sense to invest in an MNO for its mobile payments if the size of the market in terms of transaction volumes is not attractive. The same goes for banks, although the upsell opportunities resulting from a mobile payment offering are more evident in this case. Avoid incumbents offering remittance services and banks underinvesting in technology Mobile payment technology is disrupting the global remittance market. Incumbents such as MoneyGram and Western Union have long benefited from strict regulations protecting their business model. Given that most remittance flows were cash-to-cash, there used to be little alternative. When mobile payments made their entrance the alternatives became abundant. Cash-to-cash is now being replaced by account-to-account and this has a big impact on fees. Regulation is also changing. International cash-out remittances (where money leaves the sending country) are being allowed by more regulators than in the past. We think incumbents should be avoided. Also banks that do not invest in technology in order to keep up with changing consumer demand should be avoided. Many state owned banks are far behind when it comes to technology integration. Unfortunately there are no clear performance indicators available to compare the level of technology integration amongst banks, yet. Mobile payments in emerging markets 2

4 Introduction Large difference between emerging markets and developed markets Mobile payments in emerging markets are different from mobile payments in the developed world. To developing countries, mobile payments are a way to reach a group of 2 billion unbanked people in a cost-efficient way. The biggest difference between developed and developing countries is the type of companies involved. In developed markets, most attention goes to financial technology companies like Paypal, MasterCard, Square and many more. In developing countries, the battle for the wallet is between mobile network operators (MNOs) and banks. Given the low level of internet and smartphone penetration in many emerging markets, fintech is not yet an important category 1. Regulation is a key enabler in emerging markets As discussed in an earlier white paper 2, the way we pay is influenced by sociodemographics and culture as much as regulation and technology. In emerging markets, mobile payments are a business opportunity as well as a political ideology in the form of financial inclusion. However, the room regulators give to mobile payment initiatives differs very much. Some regulators give complete freedom and stimulate as much competition as possible in order to improve the macro economy. Other regulators do not allow any form of mobile payment. Currently, most regulators allow micro payments to be facilitated by whoever develops a solution, but once the value becomes larger, restrictions are applied. This has implications for the disruptiveness of technology. In emerging markets we believe mobile, although disruptive in nature, is on the sustaining innovation track for MNOs and banks. Although the trend might be clear, investing in it is not straightforward In this paper we will first look at the differences in service provision capabilities between the three main players (MNOs, fintech and banks). Secondly we have analysed 30 emerging market countries with a large enough domestic market to make mobile payments an interesting market opportunity (World Economic Forum data). In those markets, we look at multiple data-points in order to assess which of the three players is most likely to capture the wallet of the unbanked. In some countries we see a leading role for MNOs, in others for banks, but investing in these companies for mobile payments alone is not always possible. 1 In some countries smartphone penetration is high. These are Brazil, Turkey, Russia, Malaysia and China. 2 Fintech: the Robin Hood of payments?, Jeroen van Oerle and Patrick Lemmens, August Mobile payments in emerging markets 3

5 Financial inclusion is a business opportunity Financial inclusion in emerging markets equals the ability to transact The definition of financial inclusion in developed countries is not the same as that in emerging markets. This has consequences for the provider of mobile payment services. As can be seen in figure 1, the most basic form of financial inclusion is the availability of a secure method to transfer money. In many emerging countries, money transfers still take place via informal transfer methods such as mail or by trusted individuals. A secure method to transfer money together with bill payments can be provided by mobile network operators, fintech as well as banks. When moving up the ladder in terms of financial inclusion services, only the banks can provide the full spectrum. However, in many emerging markets there is no need for the full spectrum. About 2 billion people are still excluded from the most basic financial services 3. In our view, financial inclusion in its most basic form has finally become a profitable business opportunity thanks to the introduction of mobile payment technology. Figure 1: Hierarchy of financial needs USD 60 billion business opportunity Given the fact that only the bottom of the hierarchy is relevant to many emerging markets, we will concentrate on this. Global mobile payments represent a value between USD 250 and USD 300 billion and are growing at high-teens rate. Emerging markets currently 3 Global Findex, 2014 Mobile payments in emerging markets 4

6 represent about USD 60 billion in fee related mobile payments. Although the absolute market opportunity is high, the large number of users in emerging markets means the average transaction value amounts to between one and two dollars. This requires very cost efficient payment transaction services. Figure 2: Overlap between the unbanked and emergence of mobile money services Source: McKinsey, 2010 (left) and GSMA, 2014 (right) Opportunities are limited by market conditions and regulations As can be seen in figure 2 there is an interesting overlap between the spread of unbanked people and the start of mobile money services by MNOs. Competition is increasing rapidly with 80% of mobile payment providers launching services in the past three years. As we will discuss in more detail later on, the business opportunities are not equally available to MNOs, banks and fintech companies. Local market conditions and regulations determine who will eventually be able to offer mobile payment services. For most emerging markets the technology to rout payment transactions is the USSD/SMS channel as opposed to the mobile internet channel which is dominant in developed markets. This implies that either mobile network operators start their mobile money service and search for banks in order to comply with local regulations or banks search for mobile network operators in order to rout their services. About 60% of mobile money services are MNO driven, the rest is bank driven 4. Fintech companies can also compete, but this requires smartphone penetration as well as availability of affordable mobile internet. Only in China, Turkey, Brazil, Malaysia and Russia do we find mobile internet routed transaction services. We believe countries like Chile and India are also moving in that direction. Disruption in remittance will negatively impact MoneyGram and Western Union In terms of mobile payment service growth, person-to-person transfers (mostly remittance 4 GSMA, 2015 Mobile payments in emerging markets 5

7 from city workers to rural family) and international remittances stand out. The number of overseas workers from emerging markets is large and growing. Total remittance flows in 2014 were USD 580 billion and are expected to grow at 4-5% annually 5. In 2013 the value of international remittances via mobile phones surpassed 10 billion dollars, which is still less than 2 percent of global remittance volume. Despite the fact that mobile remittances are faster and much cheaper than using services like MoneyGram and Western Union, the adoption of it has been slower than expected. An important explanatory factor is regulation. Many countries allow cash-in transactions but no international cash-out transactions. Figure 3: Remittance flows top sending and receiving countries This time adoption will grow fast We think international remittance flows via a form of mobile payments (either SMS based or WAP based) will grow fast in the coming years as we see regulation changing into that direction. A good example can be found in China, with the second highest remittance flows in the world. In China cash-to-cash is replaced by account-to-account remittances due to the high penetration of mobile phones and regulatory approval which opens up the micro payments market. This puts incumbents such as MoneyGram and Western Union at risk in our view. Especially when taking into account that internationally operating wallets provide free money transfers from account holders to account holders, irrespective of geographical location. The pressure on fees can already be observed in figure 4. Figure 4: Fee pressure Western Union despite growing remittance market 5 The World Bank Mobile payments in emerging markets 6

8 Who will win: bank, MNO or fintech? MNOs and banks go head to head on mobile payments Mobile network operators (MNOs), financial institutions (mostly banks) and third party service providers (fintech) try to capture their piece of the mobile payments pie in emerging markets. Interestingly, mobile network operators have not been able to gain traction at all in developed markets. For example, Vodacom and Telenor have launched mobile payment solutions via USSD/SMS in developed countries, but until now those services have not gained adoption. There are simply too many alternatives in developed countries. The real battle in emerging markets is between MNOs and banks. Although cooperation would be a better alternative, the incentives to offer mobile money services are often too different in order to find common ground. Appendix B shows the key players and their roles, limitations and constraints in more detail. Agents and the regulator are key players in emerging markets payments In many emerging markets the number of point-of-sale terminals and ATMs is much lower than in developed countries. Also, the geographical dispersion differs, with very low rural emerging market penetration. For these reasons the so called agent model has been introduced. In Kenya, for example, there are over one hundred thousand agents that take and provide cash to mobile money users. These agents provide liquidity, which is essential especially for low income customers and those that rely on remittances for income. Agents are not working exclusively for one MNO or bank, but they are trained and checked upon by those that refer business to them. Because bank branches do not have sufficient reach, banks are also looking into this model by means of recruiting agents and cooperating with MNOs for payment services. As can be seen in figure 5, mobile money agents are the number one financial access point in emerging markets. Figure 5: Mobile money agents most important in developing markets Mobile payments in emerging markets 7

9 Case study: Mobile payments in Kenya In 2007, by coincidence, Vodacom/Safaricom in Kenya discovered it was possible to use its USSD channel to make payment transactions. Their payment solution, M-Pesa, was adopted very fast. The reasons for M-Pesa s success have been studied extensively, and there are several contributing factors: a large unbanked population; a demographic profile with significant numbers of adults migrating to cities like Nairobi in search of work, while retaining strong familial and financial links to their home villages; a mobile network operator with significant market share and a broad agent network; high mobile phone penetration; and a facilitating regulator that wanted good money transfer coverage. About 85% of Kenyans currently have a mobile payment account. M-pesa makes up 70% of Kenyan transaction volumes (estimated at USD 24 billion per year which represents about 40% of GDP), but represents only 2.3% of transaction value since high value transactions are mostly facilitated by banks. Competition is increasing in the form of Equity Bank (via Airtel), Orange and Yu cash. Despite the success in Kenya, M-pesa has not taken off in other emerging countries. Regulatory differences have proven to be a big hurdle. Not a profit opportunity but a strategic business opportunity Mobile payments are not free of costs to the provider. Compliance with KYC (know your customer) rules, maximum transaction amounts and spending limits require mobile services to be very cost efficient. For many MNOs and banks, mobile payments in and of itself are not profitable. Through the introduction of mobile payment services, MNOs found that they benefited from a brand perspective and had a reduction in the churn as well as airtime costs. For banks, brand building and customer service are important reasons to introduce mobile payment services. The ability to cross sell services that are higher up in the financial inclusion ladder is the real reason why banks started offering mobile payments. Fintech is actually the only group of companies that really focuses on payments as a standalone profit opportunity. This makes it hard to compete against those that offer near free transaction services. Mobile payments in emerging markets 8

10 Figure 6: The number of live mobile services per region (majority is initiated by MNOs) Source: GSMA, 2015 Regulators have a double agenda Financial inclusion is high on the agenda of policy makers in emerging markets. Several studies have found that economic growth increases when more people are able to (officially) participate in the payment ecosystem. Next to growth, the value of having good coverage for payments has also shown itself during natural disasters. It takes less time to rebuild an antenna than to rebuild the old infrastructure. Rwanda and Haiti have shown that in case of natural disaster, mobile payments prevent bank runs because liquidity is restored very quickly and people can keep on transferring money in and out of the natural disaster area. In countries that have passed the first step of financial inclusion, the regulator often becomes less facilitating. Micro payments are tolerated, but transaction limits, know-yourcustomer requirements and maximum account limits cap profit possibilities for MNOs and fintech companies once their services grow bigger. Due to the established relationship between the regulator and banks, it is not likely that regulators give up their level of control to technology companies. Regulator holds back full financial inclusion As can be seen in figure 7, about half of the emerging market governments are not enabling mobile payments. This implies existing banks feel no pressure to incorporate mobile payment solutions and MNOs have to comply with very strict regulations in order to launch their service. Although this sounds counter-intuitive, the regulatory landscape is changing fast though. India for example has changed regulation since December and is now enabling mobile payments for eleven new entrants. Five out of these eleven are MNOs and the rest are banks and tech companies. In non-enabling countries it will be hard for MNOs to offer a mobile payment solution. Mobile payments in emerging markets 9

11 Figure 7: Regulatory environment for mobile payment services Source: GSMA (2014) Banks are best positioned Enabling regulatory environment? YES/NO YES YES Banks MNOs Fintech High number of banked inhabitants High credit and debit card penetration High level of savings High penetration level of point- of-sale terminals High level of mobile phone penetration Large rural population Large remittance flow to poorest 40% Low average transaction levels Low branch density High smartphone penetration level High mobile internet penetration Low average transaction levels We believe banks are best positioned to take the lead in most emerging markets, as can be seen in figure 8. First of all, banks have seen what fintech and MNOs did to reach unserved customers and learned quickly how to service unbanked people in a cost-efficient way. Secondly, regulators like the idea of an already regulated industry to take the lead in financial progress. We have witnessed this in several large countries like India, China, Brazil, Venezuela and Russia. Finally, as overall wealth in emerging markets grows, the level of financial inclusion grows as well, which implies banks are best positioned to offer the broader range of financial services. We think that there will be many countries in which two models are active at the same time during the coming years, but we expect bank-led models to come out as long-term winners. Obviously, within the banking sector only those that invest in technology will survive, others will get further and further behind. We expect competition from fintech in the future, as we see smartphone penetration levels increase cross emerging markets. However, several emerging market banks are well prepared for the fintech surprise. Mobile payments in emerging markets 10

12 Table 1: Most likely leader of mobile payments in selected emerging markets Bank MNO Fintech Russia Romania Brazil Turkey Albania Turkey Romania Colombia Chile Bulgaria Peru China Brazil India Malaysia Mexico Argentina Colombia Venezuela Chile China India Thailand Malaysia South Africa Nigeria Algeria Indonesia Pakistan Philippines Vietnam Egypt Nigeria Morocco Tunis Ghana Angola Tanzania Kenya Banks might not be in the lead everywhere, but they are always involved In most of the countries we list in figure 8, multiple mobile payment solutions will be or are being offered. In fintech countries there is always a banking initiative/cooperation behind it. In China for instance Alipay and Tenpay control about 70% of the mobile payment market, but that market in itself is small in terms of value versus the banking market. The Chinese government looks at fintech as an enabler of financial inclusion and stimulates micro payments, just like in Kenya and India where the regulator allows MNOs to take on that role. However, once the value of payments increases, we think the government will become more restrictive and rout back services to financial institutions. In that way, banks will always remain part of the value chain. Mobile payments in emerging markets 11

13 Investment implications Winners can be identified, but mobile payments hardly drive their performance To half of the MNOs, mobile payments represent less than 1 percent of revenues. For those MNOs that have a higher revenue contribution from mobile payments, the numbers are not mind blowing either. On top of the list is M-Pesa which represents about 25 percent of revenues for Safaricom. MTN in Uganda earns 15 percent of revenues from mobile money and Telenor receives around 6 percent of revenues from mobile payments. We don t think it makes sense to invest in an MNO for its exposure to mobile payments. For banks, mobile payments are a first step into cross selling. Often mobile payments are heavily subsidized and are not used to generate additional revenues. Investment wise, banks with mobile payment solutions are interesting if their technology offering stands out from peers. Fintech is often private, too small or part of a larger consortium in which case it is not driving revenues and performance either. Well positioned banks Itau and Bradesco Brazil Vodafone Well positioned MNOs Kenya, India, Tanzania, Afghanistan Akbank and Garanti Turkey Telenor Pakistan, India Sberbank Russia MTN Alior Poland Movistar ICICI and HDFC Bank India Claro Uganda, Ghana, Nigeria Mexico, Colombia, Argentina, Peru Colombia, Argentina, Peru BBCA, Bank Rakyat Indonesia Bharti Airtel India, Kenya, Gongo BPI Philippines Vivo Brazil Kasikornbank Thailand Telkomsel and Indosat Indonesia ICBC China Mobifone/ Viettel mobile Vietnam Capitec and FirstRand South Africa Tigo Tanzania Equity Bank Kenya Guaranty Trust Bank Nigeria Losers can be avoided We think international remittances are being disrupted by mobile payment solutions from MNOs, banks or fintech companies. We have seen continued pressure on transfer costs for Western Union and MoneyGram despite the increase in remittance volumes. We expect cheap or free solutions to become available soon in emerging markets as we see regulation moving in that direction. Despite a lack of clearly communicated performance indicators, banks that have no record keeping or target setting with regard to the usage of technology should be avoided. For example, many (ex) state banks are far behind in terms of technology integration. But also banks that spend millions of dollars to create their latest app without translating customer data into business optimization are losing out in the long term. Mobile payments in emerging markets 12

14 Appendix A: Mobile payments background Airtime top-up most used in emerging markets There are six types of mobile payments available. The relevance of these payment types depends on the availability of technology and the provider of the service as well as the stage of financial development in a country. Mobile network operators (MNOs), banks and fintech companies are able to offer these types of payment: P2p transfers Bill payment Bulk disbursement (governments paying their employees) Merchant payment International remittance Airtime top-up Airtime top-ups, p2p money transfers and bill payments are the most relevant mobile payment types in emerging markets. The global usage of these six payment types provides us with an interesting observation. As can be seen in figure A1, mobile payments are mostly used to make airtime-top up transactions. Via this way, money is being added to the prepaid card of another user by means of sending an amount via SMS/USSD. This person can then use the money to call and text, or he can go to an agent to convert the money back to physical currency. However, the true value within payment transactions is in p2p transfers. In December 2014, the total global mobile transaction value was USD 16.3 billion with 717 million transactions performed. The value of transactions is much lower in developing countries than in developed markets. The volume (and thereby adoption of mobile payments), however, is much higher in emerging markets when compared to developed markets. Figure A1: Global product mix mobile payments (December 2014) Source: GSMA (2014) Mobile payments in emerging markets 13

15 The six types of mobile payments are made possible by four main technologies: SMS/USSD based transactions Direct mobile billing Mobile web payment (WAP) Near Field Communication In emerging markets the SMS/USSD based transactions dominate. This is a big difference between emerging markets and developed markets, as in the latter SMS/USSD technology is hardly used. In order to use SMS/USSD based transactions, a mobile network is required. Companies that can provide these services are mobile network operators (MNOs) and banks in cooperation with MNOs. The dominant flavors in emerging markets are either an MNO with a credit bank or a bank with a network operator. Figure A2: Mobile payment technology pros and cons Source: IBM (1020) Mobile payments in emerging markets 14

16 Appendix B: key players in mobile payments Players Roles Limitations and constraints Mobile network operators (MNOs) Provide infrastructure and communications service Provide agent oversight and quality control Issue e-money (where permitted by law) Exercise leadership in drawing mobile money ecosystem together Financial institutions Offer banking services via mobile Hold float or accounts in customer s names Handle cross border transactions, manage foreign exchange risk Ensure compliance with financial sector regulation Agents Perform cash-in and cash-out transactions Handle account opening procedures, including customer due diligence Report suspicious transactions in accordance with requirements Identify potential new mobile money applications Regulators Provide enabling environment for mobile money Protect stability of financial system Demonstrate leadership to encourage and protect behavior change Customers Use mobile money to improve their lives Source: Jenkins, 2008 Regulatory limitations on providing financial services Shareholder pressure for faster, higher returns Strategic focus that may not include mobile money Narrow customer base Lack of experience with or interest in low-income customers Stringent regulatory requirements with significant compliance burdens Liquidly shortfalls Basis business skill gaps Lack of customer trust in some countries Limited ability to partner with large corporations Lack of experience with convergence of financial and telecommunications regulatory schemes Lack of financial and technical capacity Lack of awareness Limited financial literacy Cultural and psychological resistance Mobile payments in emerging markets 15

17 Jeroen van Oerle Elie Aloko Patrick Lemmens Trend Analyst at Robeco Trends Investing Africa Equity Analyst at Robeco Emerging Markets Investing Portfolio Manager Robeco New World Financial Equities Important information This publication is intended for professional investors. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. This document is intended to provide general information on Robeco s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free of charge at Mobile payments in emerging markets 16