Financial sector gets edgy as telcos plan how to convert phones into savings accounts

A year ago, the finance and telecom markets were abuzz with the anticipated entry of several new players into the mobile money transfer service.

Keen to catch up with the gains made by Safaricom’s M-pesa — which currently boasts of about nine million subscribers and has transferred over Sh352 billion since its launch in 2007 — several players had planned to roll out similar products. That was not to be.

However, as the market leader M-pesa quietly celebrated its third anniversary a week ago, shifts were taking place in the industry that could shape the future of the mobile money transfer service.

Threatening to stir the status quo, the UK Department for International Development (DfID) — the same outfit that gave a grant to Safaricom’s parent company Vodafone to develop M-pesa — was mulling a Sh923 million mobile money transfer solution that could introduce the concept of a mobile phone savings account.

This comes at a time when existing solutions such as M-pesa and Zain’s Zap are gaining more ground in the transfer of small amounts of money even as they continue to capture the interest of commercial operations keen to cut down on transaction costs.

Analysts say the mobile money transfer business looks set for a fresh battle with the changing market trends adding that the DfID’s announcement renews debate on the mobile phone’s encroachment into the financial sector.

“This is definitely something we will have to watch out for since it might have a big impact on the financial industry should it be adopted,” said John Wanyela, chairman of the Kenya Bankers Association.

Financial inclusion

A true marker that the mobile phone is now considered a financial inclusion tool, the new service will allow users to deposit money into mobile accounts rather than just transfer small amounts between handsets.

Mr Wanyela said that although Kenya had emerged as a vibrant market for mobile based financial solutions due to its loose regulatory framework, the industry regulator, the Central Bank was continually monitoring the sector to assess the potential of the mobile phone.

“Currently the CBK is carrying out an industry review and the sector is contemplating the introduction of agency banking in a month’s time,” he said.

Conceptualized in partnership with CGAP, a micro-finance centre based at the World Bank, the DfID initiative seeks to expand the use of mobile phones to increase access to basic financial services for the poor.

“The idea that a mobile phone could replace a bank branch has gone from concept to reality at an amazing pace. It’s time to get beyond the early excitement of the past few years and shift into the build-out stage for mobile money so that millions of poor people everywhere get access to formal financial services,” said Stephen Rasmussen, manager of the CGAP Technology Programme.

The launch is informed by data gleaned from a CGAP survey in 2009 which showed that there are 2.7 billion people globally who do not have basic banking services.

The new technology aims to ride on the successes of mobile money transfer products such as M-pesa, and could signal a significant shift in the way money is handled in emerging economies.

But with the prospect of mobile phones transforming to become deposit taking and savings engines as envisaged under the CGAP initiative, regulatory issues are bound to crop up.

Months after M-pesa was launched, players in the local banking sector came out in force to try and quash the rapidly growing service which they saw as a direct competitor to the services they offered.

Although past CGAP data has suggested that many users of M-pesa already use the service to store money for short periods of time, no player in the growing mobile money market has given much thought to the concept of mobile phones acting as deposit taking devices due to the regulatory issues involved.

CGAP says it will trade on increased use of communication technologies in financial services such as point of sale devices and ATMs, but is banking on sustained interest in the mobile phone as a financial tool was increasingly connecting poor people to the financial grid. In addition to a 2006 grant from the Bill & Melinda Gates Foundation and CGAP funding, DfID plans to invest Sh923 million to the CGAP Technology Programme that aims to create the world’s first mobile phone-enabled savings accounts.

“Savings is a highly neglected financial service available to the poor, and despite what most people may think, the poor do need a safe place to save money,” said Amolo Ng’weno, deputy director at the Bill & Melinda Gates Foundation.

CGAP is already working with select groups within Kenya to extend full-service banking for poor people in rural Kenya by deploying mobile banking solutions.

It is currently working on implementing a new project led by Equity Bank, which currently has more than three million deposit accounts (approximately half of all deposit accounts in the country).

According to CGAP, the bank has expressed interest in teaming up to design solutions that will free its branches from the burden of handling small-value transactions and is targeting over 800,000 customers by mid 2010.

Analysts say the entry of the new products such as those being considered by DfID/CGAP could prove significant for local telecom firms.

From a field of over five potential contestants at the start of last year, only Zain has successfully launched a money transfer solution to rival Safaricom’s M-pesa.

Since its launch in January 2009, Zain’s Zap has recorded slower growth, with 400,000 users and Sh700 million transferred on the service since launch.

The firm is now eyeing the gap left by the exit of Postapay - an international payment service that was shut down after claims of fraud in 2009 - to tap into the international remittances market.

“We definitely see this as a growth area. Mobile transfer solutions have made international remittances easier. It’s a revolutionary new way of handling money,” said Rene Meza, Zain Kenya CEO.

In September, it became the first company to allow its subscribers to receive money from any bank in the world for just Sh10 using their mobile phone.

Users can also send funds directly to their bank accounts.

“We deliberately developed this product with the financial sector in order to incorporate best practices,” said George Held, Products and Innovation Director at Zain Group.

Priority product

For Telkom Kenya, expected to launch Orange Money in November last year, the delayed onset of services has been attributed to fine tuning efforts aimed at streamlining its Orange Money product to suit the needs of the local market.

“We will be launching the service this year, I can not commit to when. All I can say is that this is a priority product for the group,” said Mickael Ghossein, Telkom Kenya CEO, in a past interview.

In December last year, Essar announced that it had inked a deal with international payment solution provider Obopay, and planned to launch joint operations with Equity Bank.

Three months down the line, there are no physical signs that the service is operational and active.

Data obtained from the firm indicates that it will be pursuing a similar tariff structure to that on M-pesa, with charges falling within the range of Sh0–350 for transactions, compared to Sh0-400 on M-pesa.

It costs Sh25 to send money to registered YuCash subscriber, compared to Sh30 on M-pesa.