How Kenyan Banks Lost to Mpesa

Mpesa, a wildly successful payment platform contractually licensed to Safaricom, has prospered at the expense of what would have been banking services. Kenya’s banks have taken a back seat as Mpesa leads the payments market. It wasn’t always like this. Over the past decade, mobile financial services evolved, greatly benefiting from an easy to scale agent network; favorable e-money guidelines, and accessible GSM SIM networks. With each advance, Mpesa grew in leaps and bounds.

A confluence of 3 factors made all this possible:

Agent networks scale better than bank branches

Banks had always encountered last mile challenges, having to put up costly branches with little to no incentive to capture rural and informal markets. To fill this void, Non Banking Financial Institutions (NBFIs) emerged and thrived – MFIs (micro finance institutions), SACCOs (credit unions), Chama’s; even Equity Bank, Kenya’s second-largest bank by market value, started out as a building society, a semi-formal financial institution.

A mobile service provider, with no prior banking experience, Safaricom took a radical approach in rolling out an expansive money transfer agent network. Dressed up as an NBFI, with over 60% mobile subscriber share, the service was an instant hit, capturing – local remittances and low value money transfer – a niche market.

Banks cried foul after its success became apparent, pointing at the unfair advantage enjoyed by non-banks. To remedy this, clauses in the Finance Act of 2009, amended the Banking Act allowing them to contract third party agents just like Telecommunications companies. Under this regime, non-bank agents would not face a lower regulatory hurdle than bank-based systems, neither raise regulatory compliance for existing agent models.

This proved insufficient to dislodge mpesa. A subsequent ruling by Competition authorities (CAK) last year, ordered non-exclusive agent contracts to be scrapped, opening up mpesa agents’ network to rival mobile cash firms.

Strict Banking Regulations vs non existent e-money regulation

Strict banking regulations had always been a constraint on signing up customers eg rigid identity requirements. Formal banking therefore, was limited to a select minority. The majority, under-served segments – low income, rural, farmers, women – turned to informal and semi-formal financial services structures.

Unlike rigid bank regulations, Mpesa was easy to use, one only needed an ID and identity SIM module. In theory, any Kenyan with a national ID card and SIM checked off all requirements for registration. Because no e-money regulation existed and no regulatory precedence to look up to, the Central Bank of Kenya gave a nod to proceed with a pilot while monitoring.

Banks lobbied against this ‘uneven playing field’, calling for an equally strict regulatory regime. A Case study by AFI (Alliance for Financial Inclusion) – “Enabling mobile money transfer The Central Bank of Kenya’s treatment of M-Pesa” documents the events over this time.

“Banks had been publicly grumbling for some time that the playing field was not level for them and that Safaricom was taking on banking business without the appropriate license”

To quell opposition from banks, CBK settled for a neutral solution – limit Mpesa’s transfer amounts to low value payments, to curb threats of money laundering and terrorist funding.

One SIM to rule them all

Cellular communication in Kenya, like most of the world, is greatly dependent on GSM networks while internet penetration is nowhere close to achieving GSM rates. A key feature of GSM is the Subscriber Identity Module (SIM), a proprietary hardware.

In Kenya’s context, the implications are tremendous given Safaricom dominant 66% subscriber market share. Owning full rights to run SIM applications, effectively makes it a gatekeeper; access comes at a price.

Banks for instance, are confined to USSD and SMS channels by Mpesa, having to pay per session. SIM toolkit apps are reserved as a competitive advantage for native telcos mobile wallet apps like Mpesa/airtel money. It’s a huge contrast in terms of User experience – SIM apps run smooth at no cost to access while the true cost of a USSD session is debatable and the user experience is clunky at best.

Table 1: Survey of costs of USSD access paid by MFS providers to MNOs in Kenya (July-August 2014)

I would be surprised if banks don’t see this blatant unequal partnership, but, they have little choice but to dance to the tune of the gatekeeper. In this competitive market, mobile as an access channel is a must and almost every local bank has adopted this model – like KCB-MPESA and CBA Mshwari mobile banking products.

Equity bank was quick to the mark, it realized the folly of this model back in 2012 after encountering difficulties managing M-kesho, a joint Mpesa – Equity Bank product. Instead, they plotted how to democratize the SIM, Equity had to become a Telcos via an MVNO (Mobile Virtual Network Operator) license. John Staley, CIO and Ignacio Mas, a consultant, addressed this in “Why Equity Bank Felt it had to Become a Telco – Reluctantly”

“As an MVNO, Equity will run all the services that mobile operators typically offer, but without managing the network infrastructure or owning the radio spectrum over which they run.”

Equity Bank now rolls out SIM cards like a regular Telcos with customized SIM toolkit applications – no more gatekeeper.

“Banks take on Mpesa” – Daily Nation, August 17, 2015

Today, Mpesa is a darling of financial inclusion narrators, overshadowing banks while reinforcing the brand. There is no going back now, Kenyan banks have to catch up.

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