Safaricom's popular mobile money-transfer service may finally have met its match as innovation in the banking sector catches up.
Deep in sprawling Githurai, a low-income residential estate on the outskirts of Kenya's capital, Nairobi, a cashier sitting in a small cubicle at a cement outlet is busy counting a wad of cash as dozens of customers queue.
once the platform becomes operational M-Pesa might be forced to review its pricing
A mean-eyed but careful security guard monitors the booth – an agency for Kenya's second-biggest lender by assets, Equity Bank.
The premises is also an agency for the country's mobile money-transfer service, M-Pesa. At the booth customers can load money onto their phones to pay bills, buy things or send it to relatives, or convert money received via M-Pesa into cash.
So far, so familiar – but Kenya is sitting on the verge of yet another mobile money revolution. Equity Bank (#86), Kenya's largest lender by accounts, is to launch its own mobile banking platform with Airtel, offering its full suite of services – including, crucially, loans – by mobile phone to its eight million customers.
It is the first serious challenge to M-Pesa since the launch of the popular money-transfer system by Safaricom seven years ago.
Equity Bank is not the first to offer real-time loans by mobile phone.
In November 2012 Commercial Bank of Africa (CBA, #113) partnered with Safaricom to launch its M-Shwari platform, a complement to M-Pesa that offers savings and micro-loans.
But it's the cheapness of Equity's products that will keep M-Pesa on its toes. It says it will lend money for only 1-2% interest per month compared to M-Shwari's 7.5%.
Peer-to-peer transfers will be charged at 1% at capped at KSh25, whereas M-Pesa customers can pay up to KSh125 for the transaction. Equity will also allow its mobile bankers to receive international remittance payments.
The buzz – and the resistance – the planned Equity Bank product has generated in the telecoms and banking market could only be a hint of the expected shake-up in the two lucrative sectors.
In April, Equity Bank and two other service providers acquired mo- bile virtual-network operator licences to enable them to roll out the mobile banking solution.
A consumer lobby has contested these licences in court, arguing that they were issued 'without public consultation' and before the banking regulator, the Central Bank of Kenya, granted approvals.
The other two licences went to Mobile Pay Limited, owned by Tangaza Money, and Zion-cell Kenya. This will heighten the battle for control of mobile money in Kenya.
Despite the onslaught by banks and other operators, Safaricom is still clock- ing up millions of dollars from M-Pesa.
In the year ending March 2014, the company said M-Pesa revenues hit $305.2m, up 21.6% from the previous year.
Equity's rivals, mainly Kenya Commercial Bank (KCB, #60) and CBA, want to get a bigger slice of the mobile money business.
CBA's M-Shwari platform has attracted new customers to the bank, allowing it to overtake Equity Bank in the number of borrowers: CBA closed 2013 with at least 897,000 loan accounts compared to Equity Bank's 840,000 borrowers.
It is worth pointing out, however, that today CBA is still far less profitable than Equity, which ranks second after KCB. Some of this may be due to the difficulty of controlling risks with mobile credit.
At a briefing in February, CBA admitted that 140,000 M-Shwari customers had defaulted on their loans.
Borrowers are expected to pay their 7.5% interest at the end of a 30-day period or be rolled over for another month at 7.5%. After this they are struck off the register and banned from using the service.
KCB runs two mobile banking platforms – Mobi Bank and M-Benki – which allow customers to transfer money from their bank accounts to their mobile phones and vice versa.
They can also transfer money to other bank accounts, whether with KCB or any other lender.
The court case aside, Equity Bank says it hopes to partner with other banks in expanding the use of the new service.
This will deepen the country's payments systems, which are increasingly shifting to mobile phones.
In its partnership with Airtel, Equity Bank will lease up to 60% of the telcom's network capacity, and Airtel will issue its subscribers with the bank's branded SIM cards.
Given that four years ago the bank ventured into a similar product in collaboration with Safaricom, but which flopped, the market will be watching keenly how this innovation plays out.
Equity Bank CEO James Mwangi believes the product cannot suffer the same fate as the doomed M-Kesho: "We now have control over the infrastructure. We have removed the middleman and, therefore, cannot blame anybody for the pricing of our products," he said at the announcement of the partnership with Airtel in May.
"Equity is primarily a financial services provider, not a telecoms operator. All we have done with the mobile virtual networks is to digitise 12 of our existing products and offer another channel for financial transactions."
Bankers get proactive
Analysts suspect that mistrust between Safaricom and Equity Bank may have 'killed' M-Kesho.
The authors of a recent book on the subject argue that Safaricom and Equity wanted to share revenues 50/50 but they later fell out over the profit-sharing formula.
So, is the initiative in the battle for mobile money shifting from the telecom companies to the bankers?
The banking lobby – in the form of the Kenya Bankers Association – is seeking a new platform that would allow real-time interbank money-transfer services.
In mid-April, the lobby invited bids from firms to offer the service that, once implemented, will allow banks to compete directly with M-Pesa – which derives its core competitive advantage from real-time settlement.
"In our view, once the platform becomes operational M-Pesa might be forced to review its pricing; in the medium-term we expect M-Pesa to retain a significant portion of its market share riding on its expansive agent network," said analysts at Standard Investment Bank.
And the rest of East Africa is catching up. More firms seek to play in the space, especially in Tanzania, Uganda and Rwanda, where competition among mobile operators to dominate the mobile money-transfer services market is broadening at a quicker pace.
Some players are teaming up in efforts to provide cross-platform services.
In the coming months, the Bank of Tanzania is expected to release new regulation to increase oversight on mobile payments, and to make it mandatory for mobile-phone companies to offer money transfer services across networks.
Tanzania has 31.8m registered mobile money accounts but only a third are active.
Vodacom is the market leader with 5 million customers using M-Pesa, while Tigo Pesa is second with an estimated 3.4 million subscribers, beating Airtel Money and Zantel's EzyPesa.
Recently, Tigo, Airtel and Zantel signed a partnership agreement.
Safaricom's M-Pesa is available to customers in more than 20 Tanzania banks, and a recent report by the GSM Association shows that Tanzania will overtake Kenya as the world's leader in money payments in 2014.
The value of mobile money transactions in Tanzania stood at $17.7bn 2013 (equivalent to 54% of Tanzania's GDP), much lower than Kenya's $21.9bn (49% per- cent of Kenya's GDP) in the same year.
Across East Africa customers are also paying their insurance, social security, pay-TV services, electricity bills and water bills on mobile banking platforms.
In Uganda, mobile banking services have penetrated rapidly over the past two years.
Banks including Bank of Africa Uganda and Barclays Bank Uganda are trying to recover lost ground by rolling out 'mobile wallet' products.
These offer customers access to integrated banking and mobile money networks suitable for flexible cash transactions in times of crisis, and banks stand to reap big from new sources of fee income and the retention of clients that had been swayed by lower transfer charges in recent years.
So far, MTN Uganda and Airtel Uganda have partnered with Crane Bank and Barclays to offer integrated transaction platforms to their clients, but techno- logy-related risks are yet to be addressed.
These include frequent system failures and fraud incidents experienced by local mobile money services, plus security risks tied to certain ATMs located in crime-infested areas.
Lack of sufficient coordination between the banking and the telecoms regulators has complicated matters, with the latter notably trailing on risk surveillance in a fast-changing industry dominated by young users, weak fraud-control systems and relatively poor earnings among operators.
Data by the Bank of Uganda shows the number of transactions in the mobile money services segment stood at 399.5m by close of December 2013, while the total value of transactions stood at $7.5bn during the period.
The number of registered customers rose to 14.2 million in the same period. These trends are now being seen across the continent.
The Alliance for Financial Inclusion reports that nine African countries can now claim more bank accounts created through phones than through traditional banks: they are Cameroon, DRC, Gabon, Kenya, Mada- gascar, Tanzania, Uganda, Zambia and Zimbabwe.
The race between telecoms companies and banks, and the alliances they will build between themselves, has only just begun. ●