Safaricom roils the market with phone-based savings account

Kenya’s largest telecoms operator Safaricom on Tuesday deepened its foray into the financial services market with the launch of a mobile money product that will allow users of its M-Pesa service to operate interest earning bank accounts in their cell phones.

The new service, a partnership between Safaricom and Equity Bank, frees M-Pesa from the regulatory hurdles that have capped the size of transactions in its operations and ultimately limited its use in the national payments system.

“M-Kesho is the new national payments system, a cashless distribution system that will extend the reach of financial products by offering low cost and fast access to the masses,” said James Mwangi, Equity Bank CEO.

Analysts described launch of the mobile bank account dubbed M-Kesho (Kiswahili for money for the future) as a game-changing move that not only promises to deliver savings services to millions of poor people worldwide, but also significantly boost the movement of cash in the Kenyan economy.

“This is a clear message to the world that poor people want savings accounts and mobile banking is a powerful way to deliver the services to the million people worldwide who have a cell phone, but not a bank account,” said Alexia Latortue, acting chief executive of the Consultative Group to Assist the Poor (CGAP).

M-Kesho also gives the two partners a head-start in the race to capture Kenya’s huge population of the unbanked using simple and convenient solutions.

Launch of the mobile bank account offers Equity Bank an opportunity to turn M-Pesa’s 8.5 million subscribers into savings account holders while Safaricom taps into the potential large volume transactions for increased profitability of its M-Pesa service.

The graduation of M-Pesa from a mobile money transfer service to a fully fledged banking product serviced through a mobile phone is being hailed as a show of Kenya’s competitiveness in the field of financial services innovation.

“There are moments in history when one can identify the tipping point. Three years ago, M-Pesa was developed and today is the day Kenya showed its leadership in the financial inclusion arena,” said Ms Latortue.

In Kenya, M-Kesho is being seen as a true reflection of the future of money and the growing convergence of the financial and telecommunications services sectors, and its impact on the use of mobile phone in the national payments system.

By facilitating access to a bank account through a mobile phone, M-Kesho will enable individuals, small businesses, corporations and, ultimately, the government, to save money in interest earning accounts, pay for goods and services as well as service loans and insurance payments using their mobile phones.

The product also marks the arrival of a low cost, low entry level savings account that could shake up the market by challenging the large number of offerings by commercial banks.

Apart from creating of the largest pool of banked individuals in Kenya, M-Kesho represents the changing face of the country’s financial sector, which has increasingly turned to new technologies to extend its reach and lower its costs.

The partnership hands Equity a foothold in the competitive banking sector and marks the end of the bank’s three year struggle to perfect a mobile banking platform.

Equity Bank first launched a mobile banking solution in 2007 aiming to develop a means through which account holders could access their finances using their mobile phones.

Apart from the rivalry that came from banking sector players with similar offerings, Equity’s m-banking service has had to contend with the M-Pesa – Safaricom’s service that was launched in the same year.

“The challenges of rolling out the solution necessitated the inclusion of a telecommunications partner,” said Mr Mwangi.

Equity’s talks with operators in the mobile sector ended last year when it approached Safaricom for a match-up on M-Kesho, the offer that the partners have positioned as an entry point for many unbanked Kenyans to the formal banking services.

Initially, M-Kesho will focus on being a savings and insurance tool, before extending to offer other services such as credit.

Customers will open an interest earning bank account with Equity Bank that allows them to build a sound credit history and in the end offer them access to short-term loans.

Equity customers will have an option to apply for a personal accident insurance cover in the first year, which will seamlessly be migrated into a full life cover after the first year.

The account will attract no ledger fees, requires no minimum balance, has no penalties on withdrawal, and does not charge for deposits but earns 3 per cent in interest rates annually.

M-Pesa, originally developed as a money transfer tool, has grown over the last three years to become a formidable alternative payments channel, transferring a cumulative Sh405 billion since launch and quickly overlapping the gains made by over 100 years of operation by banks.

Compared to just 8.4 million accounts in the formal banking sector, M-Pesa now has 8.5 million subscribers actively using the service to transfer an average Sh1.8 billion a day on the system.

M-Pesa nows enables payments for over 75 partners (including utility companies and micro-finance providers), and is recognised as a payment channel for companies keen to avoid cash handling security pitfalls of handling cash and the risk of bouncing associated with cheques.

Should the new partnership prove successful, Equity hopes to convert the majority of M-pesa subscribers into account holders in its bank, offering it access to bottom of the pyramid users who can use its system to save money and service payments - a segment of the population that has thus far been left out of the reach of the banking sector.

Through the integration of the bank’s network of over 80 branches with 17,500 M-Pesa agents, the bank will also boost its presence in rural areas where accessibility to financial services has locked a large portion of the population out of the system.

On the other hand, the tie-up saves Safaricom - faced with a growing number of subscribers who already use its service to save - the hassle of obtaining a banking licence as it moves to extend the menu of services it offers subscribers through M-Pesa.

But over the last three years, the field has grown to include other mobile operators who are keen to invest in products that will help them maintain their subscriber base, forcing older players like Safaricom to seek new grounds for innovation.

A recent study by Financial Sector Deepening reveals that 21 per cent of M-Pesa users already use the service to either save money or store it for emergencies, and an additional 38 per cent would like to be able to earn interest on the money in their M-Pesa accounts.

The new partnership offers Safaricom the opportunity to maintain traffic on its service as it meets these expectations.

“This inter-linking of services sets the stage for a new range of products that previously we were not able to offer. It will target customers who can use M-Pesa as a tool to deposit and withdraw money into their accounts,” said Michael Joseph, Safaricom CEO.

A number of regulations governing the banking sector have been reviewed or altered to facilitate the launch of M-Kesho.

Central Bank governor Njuguna Ndung’u said that the two companies were given an exemption from certain regulations to create a unique agency network.

In addition, a new agency banking law had to be created.

Apart from representing a steep change in the mobile money industry and adding an additional feather in the country’s innovation cap, the development is anticipated to have wider implications for the economy.

The combination of cheap financial services and increased mobile accessibility is expected to boost the country’s chances of increasing its savings to 25 per cent of the country’s GDP - a target outlined in Vision 2030.

“The country must raise its level of savings to finance required investment. Currently, savings contribute to just 14-15 per cent of the country’s GDP. Increasing that amount would reflect targeted economic growth of 10 per cent,” said Uhuru Kenyatta, Finance Minister.

The number of bank account holders in the country has risen from just over one million in 2003 to 8.4 million currently.

Equity Bank boasts 4.5 million of those accounts or more than half.

But in spite of this increase, over 70 per cent of the population cannot access financial services, with the formal banking sector serving just 23 per cent of the population.

This is largely because of traditional barriers to access such as the cost, distance to financial services and limited financial education.

Tools such as the mobile phone - currently accessible by over 19 million people - have become increasingly important to financial institutions as they try to overcome those barriers.

“The fact that mobile providers already have effective delivery channels in place puts them in a unique position to offer a wider audience services,” said Mr Mwangi.

For mobile providers, the opportunities presented by products such as M-Pesa include the introduction of new revenue streams.

Last year, players recorded an average 35 per cent jump in revenues from money transfer products.

Globally, the sector is set to bring in $10 billion in total revenues by 2010, thanks to the entrance of new players offering m-payment schemes and subsequent consumer demand, according to Alan Goode, senior analyst and author with Juniper Research.