How the next banking revolution is taking place in your cell phone

M-Pesa handles more money than all banks put together, while Equitel has overtaken its holding company in the value and number of transactions it processes.

“I am not sure M-Pesa is going to end well.”

These ominous words came from the mouth of one of Kenya’s most respected public servants – the late John Michuki.

The no-nonsense Kibaki-era minister was at the time, December 2008, the acting minister for Finance. He was concerned about the 21-month-old mobile money transfer service that had taken Kenyans by storm.

Banks were incensed by how the new kid on the block effortlessly made forays into their turf of sending and receiving money.

To stop the further ascendancy of M-Pesa, four large local banks are said to have approached Michuki, alleging that the mobile money service provider was similar to a “pyramid scheme”.

They are even reported to have created an ad-hoc committee designed to stop M-Pesa, arguing that people could actually lose money if it collapsed.

Michuki ordered the Central Bank of Kenya (CBK) to audit M-Pesa, saying the service’s popularity had made the government “jittery”.

However, a visit to Michuki by then Safaricom Chief Executive Michael Joseph may have softened his stance.

During the meeting, Joseph is said to have demonstrated to the minister how he could pay his foreman’s wages. Michuki was dazzled by how convenient, fast and easy it was.

It might be purely due to its ingenuity, strict regulations or both, but M-Pesa has grown beyond anyone’s expectations.

Today, Safaricom plans to transform into a global financial giant, with M-Pesa at the heart of the telco’s next chapter.

“Our vision is to be a purpose-led technology company by 2025,” new CEO Peter Ndegwa told investors recently.

“My mission, as I recently shared with the board and staff, is to establish a customer-obsessed digital-first organisation, delivering strong growth by the end of the financial year 2022.”

Safaricom’s new strategy, according to Ndegwa, will see the telco spread its tentacles into multiple areas besides telecommunications and finance. The company has already tapped into health, education, e-commerce and agriculture.

As for banks that had placed barriers on its ascendancy, Safaricom has the option of either going for the jugular or building bridges with them.

On its journey to becoming a financial services provider, M-Pesa has moved beyond being simply a platform to send and receive money that left banks shaking in their boots over a decade ago.

As a payments solutions provider, Safaricom has added Lipa Na Pesa, which enables merchants to get paid via M-Pesa and is turning into a major driver of the country’s cashless economy.

Already, Safaricom has leveraged its 21 million customers on M-Pesa to offer lending and savings services through M-Shwari and KCB M-Pesa. It has also unveiled an overdraft facility, Fuliza, that allows M-Pesa users to spend more than the amount in their M-Pesa wallets.

Now, the telco has set its sights on wealth management and insurance, financial services with low penetration.

The firm is testing a new collective investment scheme that will see M-Pesa subscribers invest in stocks, fixed bank deposits and government securities.

It already has M-Akiba, a partnership between the telco, the National Treasury and the Nairobi Securities Exchange that allows Kenyans to buy government debt from as little as Sh3,000.

Although its low-cost health insurance plan with Britam collapsed, the telco has since come up with a new one called Home Insurance Plan.

For as little as Sh250 a month, or the cost of a beer, M-Pesa subscribers can insure household goods like furniture, clothing, cutlery and electronics valued at up to Sh250,000.

As part of becoming a financial services provider, Safaricom earlier this year also unveiled a ‘super app’, which provides small and mid-sized enterprises (SMEs) with the capability to create their business apps within the M-Pesa mobile money ecosystem.

This gives SMEs access to Safaricom’s 25 million mobile money customers.

The big numbers.

Waiver on fees

The telco is also positioning itself to become a universal payment network, enabling merchant interoperability as well as e-commerce and cross-border payments.

Already, through its M-Pesa Global service, more than half of the about Sh300 billion diaspora remittances that come into Kenya annually get into the country via the platform.

Further, in September, a record Sh483 billion worth of mobile transactions were completed, largely due waivers of fees on transfer of Sh1,000 and below as part of the emergency measures aimed at discouraging cash transactions to curb the spread of Covid-19.

A huge chunk of this money (over 80 per cent) went through M-Pesa.

Early this year when the Kenya National Bureau of Statistics (KNBS) reviewed the basket of goods and services used to compile the Consumer Price Index (CPI) – also known as the cost of living index – among the new additions was mobile money transfer.

Cash is still king in Kenya, but as the country increasingly embraces a cashless economy, mobile money is being seen as a critical cog in turning the wheels in this new business environment.

Banks are not being left behind. While most have merged with Safaricom’s M-Pesa in one form or another, others like Equity Bank are looking to go it alone.

Equity has a customer base of more than 10 million and has decided to hunt for more clients through mobile finance services (MFS) and unveiled Equitel.

Equitel is a SIM card that can be used to make calls, payments, and transfer and receive money through the mobile service EazzyPay.

Most banks, however, have decided to get into MFS by working with M-Pesa.

KCB, the country’s largest bank by asset size, has a savings and lending platform with Safaricom, and another loans service through its mobile app.

CBA (now NCBA), the third-largest bank by assets, was the first to team up with Safaricom through M-Shwari. The partnership helped shore up NCBA’s customer numbers as a lot of M-Pesa customers opened loan and deposit accounts with the lender.

Today, there is no bank without a mobile banking wing. If anything, most of them have ferociously been migrating their services from brick-and-mortar branches into digital platforms.

For the first time, said Equity Bank’s CEO James Mwangi when releasing the lender’s quarter-three financial results, the digital bank had overtaken the legacy bank in both the number of transactions and value of transactions handled daily.

“This will be a great investment ... to converge banking and telecommunications and change the landscape of the customer experience in Africa,” Mwangi said of Equitel in a past event.

Data from the Communications Authority of Kenya (CA) shows Equitel, which operates as a mobile virtual network operator (MVNO), recorded growth of 16 per cent in the number of mobile money commerce transactions to 101 million as at June 2019.

The value of the commercial deals went up 15 per cent to Sh378.9 billion, a 15 per cent increase from Sh328 billion processed over a similar period in 2018.

This followed the operator’s aggressive signing up of leading retailers and online merchants, and an increase in the number of Equity Agents.

“Our effort to digitise retail commerce operations through enrolling retail shops to transact through EazzyPay has paid off. The number of EazzyPay transactions has grown, suggesting the size of transactions is increasing and the country is accepting the risk of digital money,” said Mwangi.

However, there have been concerns raised around the waiver of fees for transactions of Sh1,000 and below, which has been extended to the end of the year, on M-Pesa’s earnings.

Revenue from M-Pesa transfers and withdrawals in the six months to September fell by Sh4.5 billion and Sh500 million, respectively, while that from payments and betting fell by Sh1.6 billion and Sh700 million, respectively.

However, during this period, one-month active M-Pesa customer increased by 1.2 million from 25.6 million in the first quarter to 26.8 million in the second quarter. It is a significant rise compared to an increase of 700,000 in the preceding period.

With more active customers, M-Pesa is well poised for the next assignment where digital finance is expected to play a large part in the financial sector.

Besides becoming a fully-fledged financial services provider, the company also intends to grow into a full “digital ecosystem while staying prudent in our cost management to fund a sustainable growth into the future,” according to Ndegwa.

The launch and runaway success of Fuliza, has presented to players in both the telecommunications and financial sectors a window into the disruption that lies ahead.

A staggering Sh149 billion was disbursed through Fuliza in the six months to September 2020, with a 99.4 per cent repayment rate.

While such a high repayment is expected given this is an overdraft facility that gets deducted whenever a subscriber puts money in their M-Pesa wallets, it speaks of financial ingenuity.

Banks, on their parts, have relied heavily on loans. Commercial lenders in the country have been left smarting from an unprecedented wave of loan defaults.

With the advent of Covid-19, banks have released results showing a spike in non-performing loans (NPLs), which are loans that have not been paid for more than three months.

This deteriorating lending environment has seen banks scale back loans to corporates and SMEs due to muddled risk profiles in the wake of the pandemic.

Meanwhile, mobile remains the dominant channel for new credit requests across financial service providers. At KCB Group and Equity Group, 77 per cent and 83 per cent of transactions, respectively, in the past year were conducted through mobile phones.

The success of Fuliza has prompted Safaricom to ramp up its financial service provisions, and the coming months are going to see the company encroach deeper into the territory of commercial lenders.

“We are broadening our financial services portfolio, evolving M-Pesa into a broader financial platform that becomes a lifestyle choice, especially for our SMEs and MSMEs with products around wealth management, savings, insurance and credit products among other propositions,” said Ndegwa.

Potential results

The potential results of this can be gleaned from the net effect Fuliza has had on KCB M-Pesa and M-Shwari.

While Fuliza disbursements grew by more than a third in the half-year to September, the value of loans through KCB M-Pesa contracted by 60 per cent and on M-Shwari by 14 per cent.

However, following the high risk of defaults, KCB and NCBA scaled down on the disbursement of loans through their mobile lending platforms.

NCBA has also moved all loans of less than Sh2,000 to Fuliza in what is aimed at discouraging people from taking loans for consumption.

Safaricom is also waiting on regulatory approval from the Central Bank of Kenya (CBK) to launch its investment platform, Mali.

It will allow subscribers to invest in unit trusts from as little as Sh100 with interests of up to 10 per cent annually.

The combination of Mali, Fuliza and the revamped M-Pesa business app means both individual users and those running SME accounts on Safaricom will have little incentive to leave the telco’s digital finance ecosystem for commercial banks.

The deep foray into financial services, where the firm already controls substantial aspects, could rekindle the debate on whether the firm is too big to the disadvantage of other industry players, consumers and even new entrants into the sector. In the past, the proponents of the debate argued that Safaricom needed to be split, by for instance, hiving off M-Pesa to form a new entity.

As of June this year, Safaricom had a market share of 64.2 per cent of the 57 million mobile subscribers registered, according to CA data.

While this has substantially come down from upwards of 70 per cent a few years ago, the firm is still miles ahead of its closest competitor, Airtel, which commands market share of 26.8 per cent.

When it comes to mobile money, Safaricom’s lead is even bigger, with the telco having 30.19 million mobile money subscribers out of a registered 30.52 million. Airtel has 310,359 subscribers, while Telkom Kenya’s T-Kash had about 14,000 users.

The dominance debate was anchored on a report from UK consulting firm Analysys Mason, which recommended increased regulation on ICT sector players that, because of their size, could be stifling competition and barring the entry of new players.

The report has in the past drawn emotional arguments from different players. Some industry players say it will level the playing field while others, including Safaricom, oppose it arguing that it is akin to punishing success.

According to both the Kenya Information and Communications Act (KICA) and the Competition Act, a player with over 50 per cent market share should be declared dominant and fall under the scrutiny of regulatory bodies – CA and the Competition Authority of Kenya (CAK).

The Competition Act has lower thresholds for dominance and a firm with a 40 per cent share of the market can be declared dominant.

The concerns of dominance are among the factors that led to Safaricom being denied a licence to operate a TV station in 2018, but by then, Safaricom had rethought the idea it had first floated in 2015.

Five years ago, the firm had applied for a licence to own and operate a free-to-air television station. CA turned down the application, saying it would have to determine its scale would not be a threat to existing service providers.  

By Frankline Sunday, Dominic Omondi and Macharia Kamau

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