Kenya’s telcos separating mobile money businesses, could this trigger evolution?

George Bodo
By George Bodo

A Sub-Saharan Africa focused thought leader and the founder of Callstreet Research and Analytics.

Posted on Wednesday, 21 December 2022 10:52

An employee counts money inside a mobile phone service centre operated by Kenyan telecom operator Airtel Kenya at the Sarit Centre within the Westlands district of Nairobi, Kenya January 29, 2021. REUTERS

The three mobile telecommunications companies (telcos) in Kenya are separating their mobile money businesses from telecommunications.

For Safaricom, a listed company, spinning-off and listing M-Pesa as a separate entity presents more valuation upside for its shareholders. 

The rationale behind this is very simple: M-Pesa, released into the blue-sky, presents more growth upside in the telecommunications business.

Genghis Capital, in a recent note to its clients, valued M-Pesa business at $5.9bn and estimated an additional post-listing premium of $3bn, effectively placing the business’ fair value estimate at nearly $9bn. 

Telkom Kenya, which was re-nationalised at the end of 2021 (by way of the Kenya Government buying back the 60% previously held by Helios Investment Partners) could also consider listing its mobile money business, dubbed T-Kash, upon the separation.

‘Trigger a natural evolution’

Aside from unlocking additional value to shareholders, the separation of the mobile money business from telecommunications will trigger a natural evolution of the current licensing framework. 

Under the National Payments Regulations (NPS), 2014, an applicant for the payment service provider (PSP) in Kenya must, inter alia, present a certified copy of a valid licence from the Communications Authority of Kenya (CA), the telecommunications sector regulator.

Not surprising because the regulations governing the national payments system were largely designed around M-Pesa, whose host, Safaricom, is a licensee of the CA. 

Furthermore, the regulations do not specify the type of licence to be presented to the Central Bank of Kenya, which makes this requirement ambiguous and almost triggers a call for the rewriting of the law to provide for stand-alone PSPs.

To circumvent the ambiguity, a number of potential payment service providers applicants have been going for a little-known licence category known as Value-Added Service (VAS).

But with telcos now required to separate their mobile money business from telecommunications business, this represents an evolution of the existing regulations.

Looking ahead

In the long term, an applicant for a payment service provider licence will be able to apply directly to the central bank without having to hold a valid telecommunications licence from the telecommunications sector regulator.

This also changes the competitive dynamics of the mobile money game.

Specifically, opening up the payment space should be able to address the challenges of affordability and interoperability over time.

Interoperability has already been achieved on two fronts.

First, in April 2018, telcos moved to make their wallets interoperable.

Secondly, in mid-2022, the Central Bank of Kenya announced the full interoperability of mobile money services in Kenya, achieved through merchant interoperability by three mobile money providers.

The next frontier is (mobile money) agent interoperability.

And for anybody looking to play in the e-money issuance space or person-to-person (P2P) transfers, interoperability lowers market entry barrier(s).

And while it may not be easy to dislodge M-Pesa from the game, such a move will gradually chip away the dominance over time.

Cost, however, remains a significant pain point for mobile money users, especially on P2P transfers.

Customers transacting on amounts of KSh1,000 ($8.3) and below incur the highest P2P transfer costs.

These customers form the largest number of transaction volumes.

The high costs also emanate from the fact that telcos maintain a costly agent distribution network as well as the cost of the agents acquiring and keeping cash.

A central bank digital currency (CBDC), which is currently under consideration by the Central Bank of Kenya, could effectively address the cost element.

Main options

Going by the discussion paper released by the apex bank (on CBDC) in February 2022, the main design options that have emerged thus far include:

  •  a direct model where nearly all aspects of a CBDC are managed by a central bank;
  • hybrid model where some functions are shared with third-party or private sector institutions such as banks;
  • an intermediated model where the central bank role is purely to process wholesale transactions.

Broadly, countries with more developed payment systems can leverage private sector capabilities by using intermediate or hybrid models.

This allows the central bank to focus on providing the core infrastructure while the private sector focuses on the distribution and account management aspects of CBDCs.

To address the two envisioned challenges of affordability and interoperability, as well as considering the current state of development of the domestic payments ecosystem and architecture in Kenya, it would be best if the CBK adopted the direct models in its roll-out.

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