Mobile money transfers edge out rival operators

Traditional money transfer service operators are losing their grip on the market as more Kenyans turn to mobile phone-based platforms that offer instant movement of cash, enhanced security and low transaction costs.

Official data on cash movement in the economy shows that nearly half (47 per cent) of all money transfers in Kenya are taking place through the mobile phone – a significant leap in use since the first such platform, M-pesa, was launched in the country two years ago.

Financial Sector Deepening (FSD), a research firm that conducted the survey for the Central Bank of Kenya, found that this rapid growth in mobile phone money transfers is piling pressure on formal and informal money transfer platforms that dominated the multi-billion shilling industry before the advent of the phone-based system pulling down their market share and revenues.

Popularity of the mobile money transfers is mainly hinged on the low cost of transaction, safety and speed – which delivers near instant transfers.

Nine out of every 10 users of mobile cash transfer services say they are mainly attracted by convenience, high (almost instantaneous) speeds, safety and relatively lower transaction costs, according to FSD.

M-pesa, which rides on telecommunications services provider Safaricom’s network has about seven million registered users who have moved an estimated Sh130 billion since the service was launched in March 2007.

Zain, the only other telecoms operator with a money transfer platform, has 350,000 customers and has transacted Sh1 billion since February’s launch of its Zap service.

Postal Corporation of Kenya’s (PCK) money order service appears to have taken the biggest knock with the latest shift. The service that held 21 per cent of the money transfer market before the advent of mobile phone-based money transfers in March 2007 now has near zero usage.

“Usage of money orders has virtually stopped,” said Caroline Pulver, a project manager at FSD.

Efforts to get comments from the PCK - which did not have a substantive chief executive until last week’s appointment of former police commissioner Hussein Ali to the post - were unsuccessful.

Other money transfer platforms, including MoneyGram, PostaPay and Western Union have lost market share and now control only three per cent of total transfers, from close to a tenth of the total transfers two years ago.

Only one person out of every 10 now sends money by courier or public transport bus companies – a platform that controlled a quarter of all transfers before the launch of mobile phone-based platforms.

Cash transfers by hand have, however, withstood the mobile technology tide, with data showing that about a third (28 per cent) of Kenyans still sends money through friends and relatives.

Dwindling fortunes of money transfer companies is reflected in the sharp decline of PostaPay’s revenues in the last three years.

Launched in 2006 by the Postal Corporation of Kenya, PostaPay grew steadily in the first nine months to record a pre-tax profit of Sh48.4 million from gross commissions of Sh143.9 million earned from local money transfer business.

Pre-tax profits soared to Sh186.3 million while total revenues climbed to Sh383.2 million in 2007/08 – its first full year of operation that also coincided with the launch of M-pesa.

A forensic audit of PostaPay early this year, however found that gross commissions had plummeted to Sh91.6 million leaving the business with an estimated pre-tax profit of Sh13.8 million in the first six months of 2008/09 fiscal year.

Safaricom’s financial report shows revenues attributable to M-pesa increased to Sh2.93 billion (4.1 per cent of the company’s total) in the financial year that ended in June.

“Competitors such as Zain and Safaricom offer substantially lower transaction fees compared to PostaPay,” says the forensic report done by consulting firm Deloitte.

Deloitte reckons that available information shows that profit margins for MoneyGram and Western Union’s money transfer services have been on a steady decline in the past three years.

Financial services sector analysts say operators of local money transfer businesses face an uphill task competing with the mobile phone-based operators and will have to be innovative to survive the cut-throat competition.

A big selling point for the mobile operators has been their relatively low transaction costs. While it costs at least Sh550, Sh300 and Sh200 to send Sh10,000 using MoneyGram, PostaPay and Western Union respectively, M-pesa charges about Sh105 for similar transactions.

The blistering price competition forced Western Union to cut its charges for local money transfers in June.

“The adjustment in pricing to address this specific target market ensures that we are priced well,” said Karen Jordaan, Western Union’s regional director for Southern and East Africa. But even a slash in transaction costs to match the mobile companies’ rates does not fully address the convenience advantage that mobile phone transfers offer.

“Many people, especially the young, do not want to be bogged down by tedious processes,” says George Okech, a marketing manager at Paynet Kenya, which also runs an electronic funds transfer business. “Players in this industry will have to be innovative to survive.”

Paynet has partnered with Safaricom to offer M-pesa users who wish to draw money from its ATMs card less transactions.

Currently, international money transfers offer MoneyGram, Western Union and PostaPay competitive edge over the mobile phone providers.

Safaricom’s application for authorisation for an international operating licence from UK authorities hit a snag last year, but the company has since entered into a transfer agreement with Western Union to get over the hurdle.

Business models used by the mobile phone operators that leave agents with the responsibility of settling all claims from own revenues has also limited growth of mobile money transfers – especially in rural areas.

This is mainly because most rural-based M-pesa and Zap transactions involve withdrawal of money sent from urban-based relatives and friends with very little deposits to settle the claims.

Scarcity of cash in these rural outlets has forced many users, especially those moving more than Sh3,000 to turn to the more liquid operators such as PostaPay and MoneyGram to avoid delays in delivery.

Regional integration
Zain says it is counting on “regional integration of its Zap platform around the African continent and a seamless connectivity with the individuals’ banking services,” to expand its reach.

The limitation of amounts transferable through mobile phones to a maximum of Sh35,000 per transaction owing to security and money laundering concerns is also seen as a curb on the mobile phone operators’ revenue horizon. The capping is being used by other operators to reap bigger commissions that have enabled them to stay in business.

Ms Pulver of FSD says Kenyans generally move small amounts of money making the mobile phone-based channels just good for them.

“Majority of those sending sums above Sh35,000 are likely to be already banked,” says Ms Pulver.After initially rattling commercial banks, who saw the mobile phone money transfer service as an encroachment on their turf, the traditional money transfer firms appear to be currently taking most heat from the new service.

“We envision Zap to be the future ‘currency’ where consumers will be talking about Zap money whenever they think of any transaction they would like to do,” says Rene Meza, the Zain Kenya managing director.