The country has a thriving mobile money culture

In a textbook example of synergy, Kenya leads Africa in terms of both mobile money take-up and financial inclusion: it has the highest usage rates on the continent, with more than 61% of adults counted as users, according to an IMF report on the topic. And in no other African country does a larger share of the population enjoy access to financial services of any type (75%), which the IMF attributes to the popularity of mobile phone payments.

Mobile money has clearly been a great success in Kenya, but attention has shifted within the country to the question of what comes next. One of the key trends has been a closer set of interactions between telecoms operators and lending institutions. Even as mobile operators increasingly channel transfers, payments and even insurance through their networks, banks too are beginning to move into the telecoms sphere. Safaricom, Kenya’s leading mobile operator, now offers a number of mobile money platforms for varying purposes ranging from simple transfers to agricultural insurance, while Equity Bank, one of the country’s larger retail banks, has applied for a mobile virtual network operator licence. “Safaricom is moving closer to the territory of banks, and that’s a reality,” said Jared Osoro, the director of research and policy for the Kenya Bankers Association. “But for financial institutions there are plenty of synergies they can take advantage of.”

Kenya Alone 

Interestingly, the phenomenon of large-volume mobile money activity appears to be a uniquely Kenyan one. Globally, growth in the number of mobile money platforms has not created corresponding growth in the number of users, or in increased profitability for the network operators that offer them. The “2013 Mobile Money Adoption Survey”, conducted by the London-based GSM Association (GSMA), found 208 mobile money services operating in 83 countries, compared with 178 in 74 countries at the end of 2012. However just nine of them had more than 1m active users, and only five operators reported that mobile money revenues accounted for more than 5% of their total. For Safaricom, the operator of the M-Pesa system, mobile money accounts for about 18% of total revenues.

GSMA’s findings revealed that mobile money systems take time before they pay off – operating a mobile money platform means profiting from many small commissions on many small transactions. According to the IMF study, the key to Kenya’s success is that transaction costs are lower. The IMF cites a study by the Central Bank of West African States that compared the cost of a $200 transfer. With MPesa it was $1, while in other countries in West Africa it was anywhere from double to 20 times that rate.

New Moblie Transactions

Within Kenya, adoption of mobile money, electronic payments and other combinations of commerce and telecoms are on the rise. This includes the government, which has instituted electronic filing for taxpayers, making the Postal Corporation of Kenya’s electronic payments system the exclusive method for all state e-payments. This is a system modelled on one adopted in Brazil, and shuts out private-sector players such as M-Pesa, which had as of mid-2013 signed contracts with several ministries to handle payments.

An electronic payment system for all government institutions and most transactions is a priority. However, the deadline for implementation was extended in April 2014. The Public Payment Act mandates the switch, and anti-corruption efforts are a key rationale, as a digitised system would improve accounting for financial flows. A report by Kenya’s auditor general found that in 2011/12 more than KSh338bn ($3.9bn) in spending could not be accounted for, and KSh561bn ($6.4bn) was unsupported by documentation. In addition, of the 252 financial statements of institutions that were audited, one-third contained fraudulent expenditure.

Ensuring Competition 

In the private sector, Safaricom’s success has prompted concerns about competition – there are five other mobile money platforms in Kenya, but M-Pesa has a 72% market share of accounts and employs 85.9% of all field agents. And while its transaction fees may be low in an international context, Kenyans are increasingly frustrated with those tariff levels. “At first M-Pesa was life changing, but now people are more often thinking of the associated costs,” said Peter Gross, regional director for Africa for Microensure, a company that helps establish and manage microinsurance programmes available through mobile platforms. “That concern is challenging the next phase of growth.”

Airtel, the second-largest telecoms operator by market share, recently filed a complaint with the Communications Authority of Kenya (CA), the sector regulator, alleging M-Pesa charged excessively high fees for cross-network money transfers. Safaricom offered compensation in a settlement before a hearing, and terms were not disclosed. Safaricom currently charges as little as KSh3 ($0.034) for money transfers of amounts less than KSh50 ($0.57), and fees increase from there for transfers to mobile platforms other than M-Pesa, for transfers of larger amounts and for withdrawals from agents. The largest transaction size is KSh70,000 ($800), which can be transferred at a cost of KSh110 ($1.24), or withdrawn from an agent at a cost of KSh330 ($3.76). Prices were raised in February 2013 after a 10% excise tax on transaction fees was introduced.

Airtel also appealed to the regulator to open up M-Pesa for use as a universal platform. In March 2014 the CA made that a condition for approving an acquisition by Safaricom of yuMobile’s network assets, India’s Essar Telecom’s brand, although the regulator later dropped that requirement (see analysis). In July 2014 Safaricom opened up access to MPesa in what Nzioka Waita, the firm’s corporate affairs director, described as a “commercial decision”.

Virtual Infrastructure 

Competition is fierce amongst network operators and price wars have been common in the past several years, but the competitive culture surrounding the mobile payment space is beginning to expand into other areas. Kenya is introducing mobile virtual networks in 2014, for example. Equity Bank is among three firms that have been licensed to become a mobile virtual network operator (MVNO), and it is planning to introduce a mobile money platform to compete with M-Pesa. Whilst achieving the scale of M-Pesa may be difficult, the bank benefits from the largest retail branch network in the country as well as the largest network of banking agents – representatives, such as shopkeepers, who offer basic banking services on behalf of the lender in remote locations – all of which give it a sizable existing network of outlets.

Cashlite Telecoms 

Similarly, electronic payments using technologies including smartphones, as well as others like near-field communications (NFC), are also in development. Companies such as the global payments processing giant MasterCard and local lenders including Equity Bank and CFC Stanbic are introducing these options.

Mobile money is in a relative sense less established as a method of cashless payments, and this could be an area where rivals may find it easier to compete. Equity Bank announced in January 2014 an agreement with MasterCard to issue at least 5m credit and debit cards and point-of-sale (POS) machines to consumers and businesses. MasterCard and Visa are increasingly competing for consumers in a market segment that has been penetrated only at the high-net-worth levels. Both companies are planning to introduce their products on university campuses, for example.

Plans also include using smartphones as an alternative to handheld POS machines. For smaller retailers the expense of having a POS machine can be a factor, as they can cost up to $600 in Kenya, whereas smartphones can be had for roughly $100. Equity Bank has decided to give 300,000 smartphones to retailers, as well as ATM cards to customers. Both will be NFC enabled, allowing for tap-and-go transactions. Equity plans to give the phones to supermarkets, restaurants, kiosks and other retailers. CFC Stanbic, part of the Standard Bank of Africa’s continental holdings, is targeting retailers with an electronic payments service that will allow them to accept M-Pesa payments without the need to settle transactions with an M-Pesa agent.

Another cash transaction that banks and telecommunications companies believe can become cashless is transportation, and Equity is working with Google on a pilot project.

Matatus, the Swahili name for minibuses, are a common option for transport. Instead of collecting cash, some matatu operators have been given an NFC-enabled smartphone that riders can touch prepaid cards to. The cards can be topped up by Equity Bank agents, and receipts can be sent to customers via SMS. The programme, called BebaPay, is currently available only at certain bus stops, but Equity plans to expand its use over time.