Mobile phones are transforming Africa. In a continent that lacks a proper network of fixed telephone lines or a functional high-speed Internet coverage, mobile telephony, more especially the SMS, have absorbed all needs for communication, trade and productivity. The rise of a new generation of technologies performing many financial transactions from mobile phones is a game-changer, opening a new avenue for development. Kenya is probably the best model on the continent. But only specific conditions made it possible. Can this model be exported?
The seven billion inhabitants have 6 billion cell phone but only two billion bank accounts. In Bangladesh, for example, 57% of the 150 million inhabitants have cell phones but only 13% have a bank account (sources: CIA World Factbook). Mobile banking can offer savings services to billions of unbanked consumers. Transactions are instantaneous and secure and costs are low. Mobile phones can be used as virtual credit cards: they can store confidential information from the client or institution safely, not to mention that the SIM card itself is already a chip card that shares some features from credit cards. A customer’s bank account number can be stored on the SIM card, the same way as a secret PIN. Sophisticated and Internet connected mobile phones can be used as online bank terminals and provide their owners with instant access to their account and the ability to perform remote payments and transfers.
In Africa, there were no mobile subscribers in 2000. In September 2010, there were already 506 million users and according to Informa Telecoms & Media, by 2014, this number could very well reach 800 million. This major trend combines with another: due its very dispersed populations, their geographical isolation, transportation infrastructure shortcomings and poor financial literacy, sub-Saharan Africa has the lowest penetration of deposit-taking institutions in the world: 16.6% against 63.5% in developed countries, according to the African Development Bank. Only 20% of families have a bank account and in some countries, the minimum deposit can reach half the per capita national income. Mobile phones can remove most of these barriers.
Thanks to a very high penetration rate of mobile phones, South Africa is by far the country where mobile banking is the most used, but it is in another country, Kenya, that we witness the most striking progression. In this country’s slightly more than forty million inhabitants, who are dynamic but still very poor (Kenya appears in the last quarter of all world rankings of income per capita), 80% of the population owns a mobile phone and 16 million Kenyans are connected to the mobile Internet through a wide range of very affordable prepaid cards with both voice and data services. As consequence, there are 21 million subscribers of mobile banking (two thirds of mobile subscribers) and among them, five million unbanked Kenyans. For example, during the months of January and February 2013, about one hundred million mobile banking transactions were recorded in Kenya, for a total amount of $3.3 billion. Extrapolated over a full year, this corresponds to one third of the GDP (source: Communications Commission in Kenya).
The outbreak of mobile banking should be compared to the country’s conventional banking system. Kenya has 43 banks totaling approximately 2000 branches while there are at least 83,000 mobile banking shops offering more or less the same services. According to the central bank, there are at least thirty of these shops for each ATM. Bank deposits in the country – $20 billion in the Kenyan Central Bank – will be quickly overwhelmed by the amount of mobile transactions. No doubt that mobile transactions, thanks to their combination of speed and ease (shops stay open 16 hours a day, seven days a week), as well as their affordability, are transforming the economy. Not only does this once virtually underground activity appear in full light, participate to formal economy where it is recognized, but it has been proven that consumers at the “bottom of the pyramid”, far from being unproductive social assistance recipients, are capable of ruling in favor of technologies and of boosting growth. A joint study by the World Bank, the London Business School and the Deloitte firm shows that whenever 10 mobile phones are added in a population of one hundred Africans, the country’s GDP grows at a rate between 0.6 and 1.2%.
The SMS economy and the Kenyan model
In Africa, the SMS, the cheap instrument par excellence, has become a formidable social, economic and financial accelerator. The “SMS economy” is flourishing and projects have multiplied: Mxit, a South African social network operates by SMS; TxtEagle (recently renamed Jana), a global subcontracting and crowdsourcing network for global emerging markets; mPedigree, a Ghanaian service that verifies the dangerousness of a drug from its bar code sent by SMS to a central server.
The phenomenon has reached a first peak in 2007 amid the global financial crisis, when a Kenyan mobile operator, Safaricom, launched M-Pesa, a money transfer service via SMS. The sender goes to a Safaricom agent, who credits his mobile account in exchange for cash and sends a SMS to the recipient that allows him to withdraw money from the agent located in his neighborhood. The success was stunning. It is true that Safaricom had enjoyed during its first seven years of existence of a monopoly supported by the state, which allowed it to earn huge profits without fear of any competitors.
In 2013, one of every three Kenyan has a M-Pesa account. It is definitely proven that the banking gap reflected a weakness of supply rather than a low demand. Accordingly to the intuition of C. K. Prahalad in his famous The Fortune at the Bottom of the Pyramid. This Indian economist was the first to explain that the poorest have financial resources and their collective number makes them both a potentially huge market and a financial player, both powerful and overlooked.
In Kenya, the base of the pyramid is organizing. This is evidenced by the recent alliance between Safaricom and Equity Bank, a young (1984) commercial bank specialized in microfinance, which has managed to retain 5.7 million customers in East Africa. Equity Bank has based its success on a simple but revolutionary idea: attract customers by offering them to open an account, even without any initial deposit. This bold marketing move has allowed them to exceed in 2013 many larger banks working in Nairobi since 1963. The alliance between Safaricom and Equity Bank triggered a reversal of paradigm. While in developed countries, it is the bank account that serves as collateral for a mobile phone, in Kenya, it’s the phone and a subscription to the M-Pesa service that allow you to open an account at Equity Bank and access to all the services of a physical bank, especially debit cards and ATMs. This is rather good news for banks. Competition from mobile telephony can turn into an opportunity by bringing them new customers – provided that suitable partnerships are created.
The success of Safaricom and of M-Pesa, largely due to the strong public support that the operator received in Kenya, may be difficult to imitate elsewhere. In South Africa, Tanzania and Uganda, for example, the adventure would not have been possible because the law restricts banking activities to … banks. The question arises, however: will mobile phone technology be capable of catch up the banking deficit, something emerging countries urgently need to support their growth and modernization? At first glance, the market is huge. In reality, only a handful of emerging countries saw mobile payment take off. The World Economic Forum has identified only four countries where mobile payments involve over 10% of the population: Kenya, Ghana, Tanzania and the Philippines.
The example of India provides an insight into the difficulty to export the Kenyan model. Given the size of its population, its residual poverty, administrative complexity and the poor quality of its infrastructure, India would benefit greatly from adopting mobile banking. On a total population of 1.2 billion, there are 900 million mobile phones and only 250 million bank accounts. And yet, India isn’t part of this leader group even if in other areas of financial innovation, such as micro-credit, it was part of the precursors.
However, the development of mobile payment stalls. This is primarily an issue related to the players: in Kenya, Safaricom has enjoyed a monopoly position that allowed it to move quickly and invest while avoiding excessive risks, with the hope of a strong retribution. Besides, Safaricom was an outsider on the market of banking services. The issue wasn’t to protect a market but to create one. The situation is very different in India. The banking institution is politically very powerful and mobile payments were first authorized only for micropayments – up to 5000 rupees. Second, on the Indian market, no less than ten mobile operators compete with each other and this competition, which could theoretically trigger dynamism, actually impedes growth, as we shall see.
Mobile operators that compete for the future market of “mobile banking” and the privilege of creating national standards are not alone. Indian banks are gradually taking the initiative themselves. To develop the so-called over the counter payments, they have developed an interbank platform called IMPS (Interbank Mobile Payment Service), which is used especially for the Indian Railways portal. The strategy consists in transforming small businesses into virtual branches of large banking networks. In many places in the Union where it wouldn’t be profitable to open a real branch, local groceries, the ones already selling prepaid phone cards, could become the new bank branches.
Banks, therefore, strive to build partnerships with mobile operators so that these stores are able to sell mobile financial services as well. In theory, this alliance is mutually beneficial: banks access a virgin market at low cost. Meanwhile, operators can retain customers and reduce the churn rate, very high in the market of prepaid cards. But reality is less cheerful.
Grocery stores find that fees for financial services are far less interesting compared with the sale of telephony minutes. They also fear that after acquiring an electronic wallet, subscribers will never return to the grocery store. And last, there is no interoperability between banks and mobile operators.
To try to save this lever of growth, India has relaxed its regulations to authorize banks to appoint local agents – business correspondents: these can be individuals, NGOs or startups. One of these agents is EKO Financial Services; it uses mobile phones to transfer money from migrant workers to their families. But the system quickly seizes up because the agents – far too numerous – are struggling to ensure that their network of points of sale is provided with enough transactions to be profitable. The Gates Foundation calculated that with less than 30 to 50 mobile financial transactions per day, a point of sale such as a grocery store is not economically viable. That is a far cry from the quasi-monopoly that allowed M–Pesa to revolutionize Kenya.
As we can see, the future of mobile banking in emerging markets is not written yet. Regulatory, technical and economic barriers are still many. The intermediate-traditional occupations, those threatened by the rise of mobile telephony will defend themselves tooth and nail. Besides, competition between mobile operators and banks is just beginning.
One thing, however, is clear: the need for mobile financial transactions is continuously rising. In the European Financial Review, Sunil Gupta, a professor at the Harvard Business School, sets out a non-exhaustive list. According to him, for example, remittances represent a global market of $300 billion that mobile banking covers only partially. As for government benefits to the poor, they represent a global market that will exceed one trillion dollars in 2015, according to Gupta. The practice of distributing these subsidies in cash costs to India between 5 and 7% of its GDP. Mobiles could reduce these costs by a third, while simplifying and securing the payment chain.
The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through ProfitsC.K. Prahalad
- Sunil Gupta, The Mobile Banking and Payment Revolution (The European Financial Review, Feb. 20th, 2013)
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