How Equity Bank lost yuMobile — and what it means for Nakumatt

By Emmanuel Were and Jevans Nyabiage

Kenya: Equity Bank has always hoped to go big on mobile phone banking as one of the cheapest routes through which to deliver financial services to its eight million account holders.

This urge got even greater after it divorced from Safaricom barely into their first year of marriage in M-Kesho, the mobile banking solution the two firms had partnered in. 

To make matters worse for Equity Bank, just a few years after the divorce, Safaricom walked down the aisle with CBA in 2012, rolling out M-Shwari, a mirror copy of M-Kesho.

And so, heartbroken, Equity Bank sought another telecom’s hand in marriage. 

An opportunity presented itself last year in the form of yuMobile, the mobile phone company owned by Indian firm Essar Telecoms.

In distress

YuMobile was in distress, looking for cash to stay afloat as its strategy of offering rock bottom prices for calls was not paying off. Instead, the Indian operator has been accumulating losses since its entry into the Kenyan market in 2008. The telecom operator is now in the red to the tune of Sh25 billion. 

The hole yuMobile dug itself into presented a perfect opportunity for Equity Bank to make a “bargain buy” into the telecoms industry, according to sources familiar with the discussions.

One quick-win strategy Equity Bank could have considered was to buy off most of yuMobile’s debts. After it owned these, it would have been in a position to negotiate with yuMobile to convert the debts into shareholding.

Currently, yuMobile’s pressing debts include a Sh860 million loan it owes Diamond Trust Bank (DTB).

“We currently have a one-year loan with DTB of $10 million (Sh860 million), which is not in default and it is due for payment in January 2015,” said Mr Madhur Taneja, yuMobile’s CEO.

Although the debt is not in default, with the company continuing to lose money — Sh3 billion a year, according to Mr Taneja — questions have been raised about the telco’s ability to pay off the debt.

The DTB loan is one of the items telecoms operators Safaricom and Airtel are pondering as they enter into negotiations to buy parts of yuMobile.

However, DTB Chief Finance Officer Alkarim Jiwa said he was unable to confirm the loan details when contacted by Business Beat.

Mr Jiwa was also not in a position to confirm whether the debt is in default or if it is being serviced.

YuMobile is also said to owe Safaricom and Airtel an unspecified amount in interconnection and termination rates.

The advantages

For Equity Bank, buying the debts and then converting them to shareholding would have a number of advantages.

First, it would side-step the long process of seeking a Mobile Virtual Network Operator (MVNO) licence.

The bank would also lock Safaricom out of acquiring additional frequencies, which would be, in a way, a masterstroke. Because of its rapid growth in terms of subscriber numbers, Safaricom has been hungry for frequencies to improve network quality. 

Each of the four mobile phone service providers have been allocated an equal number of frequencies regardless of the number of subscribers they have. This hurts Safaricom as it has to jam its 20 million customers in the same number of frequencies as Orange Kenya, with 2.2 million subscribers.

This is why, with yuMobile on sale, Safaricom made a beeline for frequencies.

Finally, if Equity Bank bought a stake in yuMobile, it would be acquiring 2.7 million subscribers. There is the argument that a majority of these subscribers are not single SIM card owners. That is, they have either Safaricom or Airtel SIM cards for  primary use, and then yuMobile SIM cards as secondary options, which means they spend very little cash on this latter line.

But the fact that these users spend little on their yuMobile lines would not worry Equity Bank. Instead, the main interest for the bank would be the information it could mine from the subscribers including: How often do these yuMobile subscribers top up their lines? What is their average spend? How many yuMobile subscribers have Equity Bank accounts?

And these questions would go on and on as Equity tries to understand the profile of these subscribers and, most importantly, what financial services the bank can offer them.

In the quest to dominate financial services in Kenya, Equity Bank is trying to acquire as much information as possible on how people use financial services. 

Data services

Take, for instance, the bank’s partnership with Google in Bebapay, a payment card that will be used in public transport once cashless payments take effect from July 1.

Through the partnership with Google, Equity will have a database on how “ordinary Kenyans” use public transport, including how much they spend and when.

The bank can then ask itself: Of the customers with Bebapay, how many bank with Equity? How can we win over those ordinary Kenyans with a Bebapay card but no account with Equity?

Hence, for the bank, yuMobile’s 2.7 million customers offered the perfect opportunity to mine subscriber data to offer financial solutions.

The bank is slowly creeping into offering IT services and also digging deep into mining of customer data to find solutions it can offer its customers.

Equity Bank recently built one of the few Tier 4 data centres in East Africa and will lease out 90 per cent of this capacity to enterprises.

But the deal to buy into yuMobile was not going to be an easy sell to Equity Bank shareholders.

Although Equity Bank’s powerful CEO James Mwangi and his second in command John Staley, the chief officer in charge of finance, innovation and technology, would be willing to go ahead with the deal for its future value, many of the other shareholders would have shot the proposal down.

This is because the situation would be unlike when Equity Bank bought a 24.9 per cent stake in Housing Finance in 2011. Then, the synergy between the two financial institutions was evident, and it was clear Equity Bank would benefit from Housing Finance’s knowledge and expertise in the fast-growing real estate market.

Not an easy sell

“Even though James Mwangi has a tight grip on the institution, how would he convince other shareholders that Equity Bank understood what it would be getting into by buying yuMobile, which has been loss-making telecom?” asked a source familiar with the discussions who asked not to be named because of his business relations with the two firms.

Also, Helios Investments, a private equity firm based in London that bought a 25 per cent stake in Equity Bank, would have opposed such a deal.

Helios, which is run by Nigerians, wants in on the growing Africa telecoms story. The firm has been buying base stations and leasing them out to telecoms companies.

Helios would have strongly opposed a move by Equity Bank to buy a loss-making telecom, however much of a bargain buy the opportunity appeared, according to sources.

Business Beat was unable to reach Mr Mwangi for comment.

With no strong backing from key shareholders, Equity decided it would be better off seeking an MVOP licence.

This licence would allow Equity Bank to lease frequencies from Safaricom, Airtel or Orange. The bank would have its own SIM cards, with subscribers able to make calls.

“Equity Bank’s application, which is in the initial stages, might prove to be a turning point in Kenya’s telecoms industry if successful,” said Leonard Kore and Spiwe Chireka, analysts at telecoms research firm International Data Corporation (IDC).

Penetrate the market

Three other companies have also applied for a licence to offer mobile phone services.

They are Kenya’s largest retail chain Nakumatt, and two mobile money service firms — Mobile Pay and Zioncell — owned by Mobile Decisioning (MoDe).

Mr Danson Njue, a research analyst at Informa Telecoms & Media, said Equity and Nakumatt are counting on their existing customer bases to compete in the country’s telecom market.

“MVNOs can be used to offer differentiated services to a segment of the market. In my opinion, these new firms have spotted a gap in the market and hope to use that to create a business case for the MVNO service to offer special telecom services to their existing customers and grow their revenues,” he said.

The common denominator in all these organisations is the primary desire to pursue the mobile money services segment.

Over the past few years, Equity Bank has tried to penetrate this market through the rollout of ICT value-added services.

It made a significant leap to venture into the telecoms mobile money space with M-Kesho. The venture was largely unsuccessful due to complications in revenue sharing and business models between it and Safaricom.

The bank has also signed a number of agreements with Visa, PayPal and MasterCard to become dominant players in the growing electronics payment space.

MasterCard and Equity’s offering allows users to carry out cashless transactions on their mobile handsets through mobile points of sale (MPOS).

“In line with these developments, it is no surprise that the bank has sought an MVNO licence so as to gain a share of the lucrative telecoms market,” said IDC.

Equity Bank was expected to use Essar Telkom’s network infrastructure, a mutually beneficial agreement as Essar was also seeking additional funds to roll out a 3G network.

Complications

However, this deal is likely to be complicated by the pending acquisition of yuMobile’s network infrastructure by Safaricom. It is also unlikely that Safaricom would want to partner with one of the largest banks in Eastern Africa that could challenge its M-Pesa innovation.

However, the MVNO licence does not translate to easy sailing. IDC analysts note that in Africa, a number of MVNOs have failed to gain significant market traction.

The South Africa telecoms industry has been a key victim as MVNOs Virgin Mobile and Red Bull Mobile have dismally failed. This failure is attributed to high interconnection fees, low Average Revenue Per User (ARPUs), an unfavorable regulatory environment and lack of adequate infrastructure-sharing mechanisms enforced by the regulatory body.

Still, Equity’s entry into the telecoms space will be keenly watched by other financial services providers in Africa, particularly FNB Connect in South Africa.

“The bank’s entry into the telecommunications sector will be a challenge at first, but it is expected that once initial hurdles, such as regulatory approvals, mode of delivery of services either through use of SIM cards or native mobile applications, identifying the correct partners for their agent and network infrastructure to name a few, are overcome, the bank might start pushing for market share in the targeted niche market of mobile money services,” IDC said.

While the analysts see the mobile transfer and payments market as a promising market segment for the bank and other potential MVNO operators, the real fight for market share will be on mobile payments of goods and services (in particular utility bills and daily basic commodities), and integration with bank accounts to facilitate deposits and lending.

Kenyan subscribers have a low propensity to switch mobile service providers even when offered lower tariffs. The telco market is already fiercely competitive, with customers more often than not preferring value over price when making purchasing decisions.

This, therefore, provides a sound market opportunity for MVNOs offering value-added services such as mobile money and mobile-based retail transactions.

The value

“Pegged on the eight million customer base they already possess and the well-established distribution channels in place, Equity Bank will be initially better placed to target this ‘internal’ customer segment before reaching out to the broader market,” IDC said.

The analysts say the key value propositions to be offered as they roll out their MVNO strategy should be mobile money and e-payments, with competitive pricing points, widespread access and availability of agents.

Equity also possesses the financial muscle to wage potential price wars with other competitors and also resonates as a strong brand with millions of Kenyans.

The significant increase in online payment transactions in the Kenyan market has created a new attractive battlefront for potential e-payment solutions providers.

Safaricom recently ventured into this market when it launched online payment service Lipa Na M-Pesa Online, moving the mobile-only payment platform to the web.

Equity recently partnered with PayPal to enter this space.

“Equity Bank and future MVNOs will have to start offering their own web-based payment gateways and/or solutions so as to capitalise on the growing electronic payment opportunities presented by the e-commerce sector in Kenya,” IDC said.

However, the deal by Safaricom and Airtel to acquire yuMobile complicates the potential entry of MVNO players. With yuMobile going to another suitor, the alternative option for the likes of Equity and Nakumatt would be to use Telkom Kenya’s network in a long-term partnership.

Mr Peter Wanyonyi, a telecoms analyst, says the firms applying for MVNO licences are reacting to perceived low quality of service.

“There have been unsubstantiated allegations that some telcos slow down competing money transactions carried out on their networks by banks and other possible competitors,” he said.

Hence, to strategically position themselves in the market, the MVNOs will need to own networks, or at least lease and operate networks virtually, to maximise the appeal of their offerings.

“The M-Shwari service is a big threat to banks like Equity, whose target clientele is the same as that targeted by M-Shwari. It, therefore, follows that such banks will want to have their own networks to rival Safaricom on its own turf — technology — just like Safaricom has brought the game to the banks on their own turf — money transfer and banking,” Mr Wanyonyi added.

Such companies, by owning networks, can also kick Safaricom out of its middleman role, thus increasing their earnings and passing the benefits on to consumers and shareholders.

Main attractions

For Nakumatt, with its one million customers, the mobile phone service licence provides two attractions.

Competition in the retail supermarket chain space is heating up with the expansion of players like Tuskys, Naivas and Uchumi. Of course Nakumatt, Tuskys and Naivas have an unwritten pact not to get into each other’s space as Nakumatt’s patriarch helped Tuskys’ patriarch start off in business, while Naivas’ founder was a brother to Tuskys’ founder.

But there are other international supermarket chains eyeing the Kenyan market, and they will not pay heed to any unwritten pact.

Nakumatt might want the mobile phone licence to pull off offering everything — from shopping to mobile phone-based financial services — under one roof.

If it is able to pull off operating a mobile phone service, it will increase its value as a business. This means that the Shah family and politician Harun Mwau would get more money once they cash out.

For a long time, Nakumatt has been looking for a strategic investor with limited success as discussions have often broken down on negotiations on the price and stake the Shahs would cede. 

But sooner or later, with the rapid expansion Nakumatt has been involved in, the firm’s shareholders will have to sell a stake to raise more money.

The chain would be more valuable to investors if it was more than just a traditional supermarket.

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