Why Safaricom could eat commercial banks' lunch if M-Pesa is split

If the fresh clamour to break apart telco's money units as separate business from the telecoms service is successful, Safaricom and its smaller rivals will be required to form separate entities to manage any other business they engage in outside telecommunications services.

They will then be licensed to only offer voice, data and SMS services by the telecommunications regulator, Communications Authority of Kenya (CA) while mobile money services such as M-Pesa will be licensed by the banking regulator, akin to banks.

Past legal attempts to split Safaricom have failed amid mounting concerns that Safaricom has become too big through its dominant market share in voice, mobile data and mobile money.

But the calls gained currency last week after the banking regulator signalled it is mulling the legal roadmap to implement the split.

Back efforts

The Central Bank of Kenya (CBK) reiterated on Friday it will back legal efforts to compel Safaricom, Airtel Kenya and Telkom Kenya to split their telecommunications businesses from mobile money transfer and lending units.

CBK Governor Patrick Njoroge repeated at a post-Monetary Policy Committee briefing that a road map for the split of the telcos' business units could be in place by January next year.

"To secure the operations on the money side...we are now much further ahead in this thing, hopefully before the end of the year but definitely by January," he had said earlier this month.

His statement mirrored calls by the now ruling Kenya Kwanza Coalition that it would split Safaricom into several stand-alone business units if it won the elections.

"Effective immediately after forming the government, the administration will seek the break-up of Safaricom Ltd into two distinct and separate business entities with a mobile telecommunications institution under the direct jurisdiction of the Communications Authority and the financial institution firmly under the jurisdiction of the Central Bank of Kenya" read the coalition's manifesto.

Safaricom has consistently rejected the accusations of dominance amid repeated petitions to parliament by its rivals for a probe into alleged market abuse.

The Financial Standard could not immediately get a comment from Safaricom for this article.

But signs are that Safaricom is already bracing for a post-split environment and how it would play out.

Digital bank

According to analysts, Safaricom - which has already partnered with commercial lenders on a raft of products that allow banks to reach customers via phones - would in a split environment be able to form a mega digibank (digital bank) that would take the war for banking services from traditional brick-and-mortar banking halls to customers' phones.

The prospect of a digital bank is not new to Kenyans at a time most lenders have embraced digital channels in a battle for survival.

Recent studies have been urging Kenyan banks to embrace technology to better counter disruptions from financial innovations.

Research by SAP Africa, for instance, notes that failure to do so may expose lenders to a tough future marked by thin profits.

According to CBK's Dr Njoroge, 96 per cent of transactions happen outside bank branches. This is up from 91 per cent before the Covid-19 pandemic struck.

Many lenders have rolled out digital banking platforms, which have in turn cut the need for customers to visit brick-and-mortar outlets for services such as opening of accounts, balance inquiry and settling bills.

Safaricom had initially resisted calls to split its telecommunications business from mobile money when the debate about dominance came up.

But with growing Fuliza service that is now averaging Sh1.3 billion overdrafts a day, and plans to roll out Fuliza for Business, a CBK licence could clear hurdles such as caps on the maximum money it can lend, analysts say.

Safaricom would, for instance, tap into over 400,000 businesses currently using its Lipa na M-Pesa service to offer an overdraft facility for working capital needs such as boosting stock.

Currently, the amount M-Pesa customers can send in a day or hold in their digital wallets is capped at Sh300,000 with the maximum per transaction at Sh150,000.

The same limit of Sh300,00 also applies to Pochi la Biashara, a product that allows customers who own informal businesses such as food vendors, kiosk owners, boda-boda operators and second-hand clothes dealers to receive and separate business funds from personal cash on their M-Pesa number.

CBK, under anti-money laundering regulations, does not allow a registered M-Pesa user to send more than Sh35,000 to an unregistered user.

Such caps have seen Safaricom also set the Fuliza limit at Sh70,000, meaning that even customers with high-value transactions and good repayment history cannot borrow more.

Getting a CBK licence can help the telco beat these caps and take competition to the doorsteps of digital lenders, microfinance banks and commercial banks, analysts say.

"Safaricom would bite the banks hard on product delivery, but the core cost of a bank is its cost of funds," said Deepak Dave, an analyst with Riverside Advisory.

It would not be smooth sailing, however, for Safaricom.

Other services

Commercial banks provide a raft of other services, which represents non-funded income or income that is not generated from lending.

This includes foreign payments, advisory and consulting services, foreign currency exchange, bank guarantees, remittance of funds, credit cards and ATM services.

The telco would as such find the going tough in this business.

"Safaricom would struggle from a standing start," said Mr Dave.

"On the other hand if they bought a bank with at least Sh500 billion in deposits, everyone else may as well pack and go home."

This possibility where Safaricom would apply for CBK nod to offer more services was captured by former Safaricom Chairman Michael Joseph this year.

"What may happen is maybe if we took M-Pesa out of Safaricom and it was regulated by the CBK, we could then apply to the CBK to offer more services that are not necessarily telecommunication services," Mr Joseph told The Standard in an earlier interview.

The plan could enable Safaricom, which rolled out M-Pesa in March 2007, to take financial services competition much closer to the doorsteps of banks, which had initially resisted the launch of the Safaricom platform.

"It could be financial services. We could lend you money to buy a car, we can't do it today," Mr Joseph said.

"So there is opportunity to give more range of services to choose from."

Equity Group CEO James Mwangi said earlier that Kenya's largest bank has witnessed a surge in high-value transactions on digital channels, which has for long been a preserve of branches.

"The silver lining for us was to use Covid-19 as the tailwind to push more customers to digital banking. Many may never go back to brick-and-mortar banking," he said.

"Big transactions are now moving out of banking halls to digital transactions."

Mr Joseph was credited with the launch of the pioneering mobile money platform M-Pesa and taking the telco to listing in June 2008 via an initial public offering that raised Sh50 billion for the government.

He left Safaricom in July this year and was replaced by former Industrial and Commercial Development Corporation Chairman John Ngumi.

Safaricom has for long been experimenting with financial initiatives, including partnering with major local banks.

In 2019, the firm revealed it was testing a new savings service on its M-Pesa platform in its latest onslaught on the banking sector.

The new product known as Mali (Kiswahili for wealth) would allow M-Pesa users to invest and earn a 10 per cent annual interest, which would accrue daily.

It would cap savings at Sh70,000, and aims to allow subscribers to invest easily without exit restrictions.

The company also continues to expand and grow its existing financial offerings.

The telco has also widened the number of services it offers on the M-Pesa platform beyond personal cash transfers.

Merchant and utility payments have gone up, as has the usage of mobile platforms for taking loans from banks and also Safaricom's own overdraft service, Fuliza.

M-Pesa accounts for about 99.9 per cent of the value of mobile money transactions, underlining the entrenchment of the platform in Kenya's economy.

Crucial role

The National Treasury in earlier reports warned that the collapse of the M-Pesa service would cause widespread disruption in the economy.

This means M-Pesa is classified as a systemic risk to the country's economy, underlining its crucial role.

Safaricom remains the National Treasury's biggest corporate cash cow at a time the country is struggling to grow revenues.

In the financial year ended March 2022, Safaricom paid Sh144 billion to the Exchequer including Sh124.7 billion in taxes and licence fees and a Sh19.5 billion dividend payout courtesy of the government's 35 per cent stake in the firm.

In the year to March 2022, payments of Sh1.4 trillion were made through the Lipa na M-Pesa platform and a total of Sh9.78 trillion paid through M-Pesa, entrenching the popularity of the platform as a means of commerce as opposed to paying via cash.

Safaricom's mobile money business made a profit of Sh50 billion before tax in the year ended March, contributing nearly half of the company's total gross earnings and solidifying M-Pesa's position as its most profitable service.