Genna Robb

Anyone who has recently spent time in Kenya, Zimbabwe or Tanzania will have noticed the pervasive influence of mobile money on everyday life. People use it for a wide range of purposes from buying airtime to paying taxi drivers to making loan repayments. Mobile money has revolutionised financial services in several countries, lowering transaction costs, driving financial inclusion and providing consumers and small businesses with easy, cheap and safe ways to transact. More than that, experience in Kenya has shown that mobile money can be instrumental in bringing people into the formal economy, generating information on individuals’ transacting behaviour and thus creating better risk profiles – and a credit record – which can be used to offer them financial services that would otherwise be inaccessible.

The impact on financial inclusion is well documented, but it is not just the poor and unbanked in Kenya who use mobile payments. According to the GSMA, in 2014, 67% of transactions in Kenya’s National Payment System by volume were conducted using mobile money. Small businesses also use mobile payments as a way to pay their workers.

In Tanzania, mobile money was slower to take off, but is now growing fast. Competition is already providing benefits to consumers in terms of low prices and convenience. In 2014, the major mobile money providers in Tanzania reached an agreement to allow their platforms to interoperate so that customers can send money to recipients with mobile wallets on other networks. This development, unprecedented internationally, allows consumers to benefit from a much bigger payment network. As shown in Figure 1, the benefits of Tanzania’s more competitive market structure seems to have also delivered benefits in terms of pricing.

Figure 1: Concentration vs. pricing in Tanzania, Kenya and Zimbabwe

Source: company websites

So with such game-changing developments happening on our doorstep, the question for South Africa is why are we so far behind? A number of attempts to launch mobile payments solutions have failed (including Vodacom’s M-Pesa), although recently both Vodacom and MTN have re-launched their services.

It is often pointed out that South Africa has a much more sophisticated financial system than these comparator countries and more people already have access to financial services. In addition, cheap means of transferring money already exist, such as Shoprite’s R9.99 service which allows customers to send money to any Shoprite branch in the country. However, in 2014, according to the FinScope survey, 25% of adults in South Africa remained unbanked and of the 23% of adults who sent or received remittance transfers from friends or family within South Africa, the largest proportion, 32%, stated that they sent the cash with a relative or friend. This is compared to only 9% of people using friends and family to send remittances in Zimbabwe (Finscope Zimbabwe, 2014). As shown in Figure 2, the next most popular means of sending money were to use a bank or ATM (30%), supermarket money service (27%) and only then cellphone money (18%).

Figure 2: Percentage of people using remittances on a monthly basis

Source: Finscope South Africa, 2014

Thus it does seem on the face of it as if there is a need for mobile money in South Africa, although the demand may not be quite as obvious or easy to satisfy as in these comparator countries. However, some substantial barriers to entry exist for would-be mobile money providers.

One of the major challenges facing a potential mobile money provider is that of building a distribution network, as experience has shown that unless mobile money outlets or agents are ubiquitous, the solution will struggle to gain traction. Here, South Africa may be slightly different to the other countries where mobile money has been successful, as the high crime rate and consequent high cost of cash makes it impractical to roll out lots of small agents all over the country. An alternative which has been used effectively by TYME (MTN’s partner in its mobile money service) is to partner with a major retailer and piggy-back on their existing branch network. This does increase the complexity of the exercise, however, as it brings on board another major partner with its own incentives and goals and requires an already thin margin to be split in another direction. Meanwhile, there are only a small number of suitable retailers in the country, some of whom already offer their own money-sending products, and therefore it is not clear how easy a route this would be for another new entrant.

Another area that is often cited as holding back developments in South Africa is its rigid regulatory framework. Mobile money proponents cite the flexible approach of the Central Bank of Kenya as a key success-factor for M-Pesa. There is no denying that the South African regime is harder to navigate for new entrants.

First of all, in the absence of a special dispensation for non-banks or e-money providers (which is the approach taken by the Tanzanian authorities, for example), payments providers in South Africa are treated as banks and subject to the full regulatory compliance requirements (and costs) associated with this. This forces providers to partner with banks, necessitating complicated joint ventures where banks naturally would like to see the mobile money product do well, but not too well. This approach is unnecessarily stringent and stifles innovation and disruption which would benefit consumers, especially the poor. In fact, mobile payments introduce very little risk into the payment system, as the funds sent by customers are typically held in a trust account and not invested or on-lent by the MNO as would be done by a bank. This is why in most jurisdictions, mobile money providers have not been regulated as fully-fledged banks, but regulators with an eye on financial inclusion have come up with a more proportionate regulatory response.

FICA regulations are another hurdle in South Africa, although here at least a more proportionate response to risk has prevailed. Exemption 17 allows clients to be registered for mobile money without proof of address or face-to-face ID verification as long as there is a low daily transaction limit.

The benefits that mobile money can bring through driving competition in the payments space are clear. In Tanzania, to send the equivalent of R500 from M-Pesa account to M-Pesa account costs only R3.23. Also, mobile money delivers more than just cheap money transfers: the money can remain in the wallet and be used for other transactions such as purchasing electricity. On the back of mobile money platforms, providers can build other solutions and services such as credit and savings products.

If we truly want to create a more inclusive economy then creating the regulatory space, as other countries have done, for mobile money providers to innovate and compete is an important step.

This blog is based on research done with Thando Vilakazi for the Centre for Competition, Regulation and Economic Development at the University of Johannesburg, www.competition.org.za.