A student at the University of Dar es Salaam in Tanzania was asked by a former lead engineer at paypal during a mentoring session almost a year ago “Why are you not using Amazon web services for cloud computing?”, he replied “I don’t have a credit card to set up the service”…. The student could afford the popular pay as you go service that startups use to host web services, he just did not have the plastic card with the logo and account to access it…. Ironically, “pay as you go” business model was arguably pioneered at scale in Africa where 96% of the nearly 700M mobile subscribers use to pay for their mobile service and ultimately kicked off mobile banking.
Africa is a mobile money leader globally, there are currently over 40M mobile money users in Africa and forecasted to hit 350M by 2015. Earlier this week, VISA, the credit card processor giant announced the launch of their new mobile money offering for developing countries that came directly out of the $110M acquisition of Fundamo from South Africa earlier this year.
The unstated benefit about the acquisition and relaunch of the service is the rapid pace of innovation it now sets in the mobile money space in Africa and in turn broader emerging markets- the target market for the launch of the new service are in Uganda and Nigeria via MTN mobile operator’s key markets right in the heart of fast growing economies with millions of unbanked population in both east and west Africa. But given Fundamo was already established in some 40 countries, we can expect the roll out to happen fast across broader emerging markets.
This should wake up the established mobile operator backed mobile money services, such as Vodafone, who have historically paved the way for mobile money adoption under Safaricom’s M-PESA in Kenya. But have not yet been able to replicate the success quite yet in other countries. Success has been local, but the game is about to shift across the continent and go global.
In this post, I evaluate the offerings and my take on what the future should or might look like- its fair to say that the mobile money space in Africa is about to get red hot.
Things are starting to heat up with the big players
As mentioned, the entry of VISA in conjunction with MTN should wake up the sleeping incubents in the space. M-PESA as a technology platform has remained pretty much unchanged since launch in Kenya, the technology is built on USSD which gives a broad reach across all types of phones.The agent network is one of the biggest strengths, given the huge physical footprint across the country, also Safaricom’s high marketshare (currently around 70%) also helps cement the network effects that many technologies have enjoyed in past such as Microsoft Windows OS, Google in Search, Apple’s iPod. In each of these areas, competition and innovation has often propelled even these incumbents to act whilst they print money. Erik Hersman has has argued that many mobile operators have been asleep especially in countries with over-regulation such as South Africa and Nigeria and hence not innovating, it’s also easy to forget that ultimately, a mobile operator’s core competency is not necessarily in this- they have to maintain and expand network coverage by investing heavily in latest wireless technologies such as 3G, 4G/LTE etc… not to mention compete ruthlessly in marketing and getting hold of the best handsets with other competitors- sometimes price wars can break out in the race to sign up and retain as many subscribers as possible. Mobile money is currently less than 10% of mobile operator revenues.
As we race towards mobile saturation in Africa, mobile operators will begin to turn to value added services such as mobile money to focus more on retaining customers than trying to sign up new ones- this often requires a different corporate strategy, but ultimately it means innovating. The best way to wake up these giants is innovation from an unlikely source… I believe that source is now the payment processors such as VISA, e-commerce & remittance players and the growing number of m-commerce startups springing up to serve real consumer problems.
Before we get into evaluating them- lets begin with understanding what makes a mobile money offering successful.
As mentioned, technology ubiquity and reach is critical. USSD and SMS have been the primary consumer facing technologies that enable this, which in turn have excellent ease of use qualities that allow anyone in Africa to easily operate it. Although that has not always been the case- in Tanzania, the services sometimes vary widely with different implementations. Transaction based SMS on the whole is not the best user experience for mobile money compared to session based USSD- despite its current advantages, however I believe that in future, USSD is simply inflexible technology to take us to the next level and the web is ultimately the platform best positioned to take us further.
Marketshare does play a role… Safaricom’s dominance in Kenya absolutely helped propel and spread the mobile money service, and the lack of interoperability hinders others from being able to catch up easily. Its also a virtuous cycle, most people don’t realize that the business model of mobile money is highly dependent on huge investments in the agent network, also a key factor in establishing enough float especially in rural areas and the fact that it helps retain users and enable upsell of prepaid airtime services, instead of relying on costly prepaid vouchers- this can attribute to more than half the economic value of the service, not the transactions themselves as it is easy to believe. In other words, as a startup trying to create your own mobile money service- the going is going to be HARD if you don’t have the infrastructure advantages an incumbent mobile operator has. As a result, a mobile operator like safaricom has no incentive to open up their platform via some API initially- the gains don’t outweigh the cost and focus unless you are a strategically big enough partner for value added integration- this includes mainly dealing with large merchants or banks such as with M-Kesho or what Craft Silicon is succeeding in doing.
Door is open for more innovation:
But this leaves a gapping hole for innovators to fill. How does one integrate with online and mobileweb? How does one allow a regular merchant to accept and process multiple mobile money services? And finally how do you move money across borders?
The problem with many of these features is they require some deep platform engineering investments and they often expose security flaws if not done correctly- it is certainly a huge risk if not done correctly that may scare a mobile operator into opening up their platform- the initial service probably was not designed to do this- that’s why partnerships such as VISA/MTN between an experienced credit card processor and a mobile money operator originated service are so powerful and compelling .
I was the CTO/head of product of one of Tanzania’s first online ecommerce travel site for flights, hotels, tours. I spent many months last year picking the right solution to accept both credit cards and mobile money in Africa- In the end I settled with 3G Direct pay for 3 reasons:
- They were serious on fraud and security
- They offered all credit cards and would add incrementally mobile money services (they have M-PESA and Airtel money in Kenya)
- They were well adopted and trusted in the travel space (take a look at their clients).
I had one big feature hole though- dealing with cross border mobile money, after all I was in the travel business. I would have to set up a merchant account in every single country and after evaluating numerous mobile money online integration services only Intrepid Data Systems offered a compelling enough solution via iPay to solve this – but lacked the 3 points above that are crucial to get going.
This is where VISA comes in and why they are so important. As a company founded from a consortium of banks and later spun out as a separate company, they not only get openness, APIs and integration, they also get security and fraud prevention (important globally and even more so in Africa) and finally they also get ecommerce with more recent moves in the west with acquisition of cybersource. As a result with their new offering they can offer secure cross border African mobile payment services and even some interoperability among the mobile operator payment services should they wish. The other aspect, is their huge network of global merchants. Try booking an international or regional flight with a closed mobile money service? Its not easy. A few months ago, Airtel along with Standard Chartered have been innovating and created “PayOnline”, a very compelling solution that gives you a temporary MasterCard credit card for the transaction (with currency conversions factored in).
What I conclude from this is that VISA/MTN and MasterCard/Airtel are now well positioned to serve the emerging middle class who increasingly will want to buy e-books from amazon, Facebook credits, apps from Android market and other things that middle class users around the world currently enjoy- its actually huge and opens up a bigger onramp for millions in Africa ready to consume services and trade. In short, VISA solves a problem I had last year and many others trying to set up ecommerce companies that can scale across the continent and the world.
New exciting startups are popping up all the time, such as KopoKopo. They intend to be the software as a service solution that lets any merchant accept mobile money. Almost like a web point of sales system for mobile money. I feel that startups like Kopokopo will succeed if they can build out a network of merchants faster than their other startup competitors but also faster than giants such as VISA/MTN and Mastercard/Airtel which bring along its other advantages.
From Local to Global, Payments/Cash withdrawal to Ecommerce
One thing to note, its ok to only deal with mobile money if you are serving customers who just need mainly local payment services- this is the immediate needs of the majority of Africans coming from the unbanked. A lot of organizations and impact investors are focused on this segment= mobile money is a key pillar for scalable microfinance. However for the fast growing middle class, as I mentioned, if they need to buy an ebook online they would need VISA/MTN and MasterCard/Airtel advantages to transact with regional and global merchants. And once the integration of the mobile and web world becomes even greater- VISAs offerings become even more compelling for both mcommerce AND the ecommerce world.
I believe there are two big players largely missing from the current equation. That is Paypal and Google. Paypal is largely adopted globally and arguably worth more than the core ecommerce giant eBay itself. They have yet to make serious waves in Africa and they can be a potential challenger to VISA and open even more payment options. They recently announced that they process millions of mobile payments per day. And they bought mobile payments company Zong this year as well for $240M, which you have to believe is part of their entry solution into mobile payments in emerging markets and particularly strong in the virtual goods space as Facebook growth in Africa explodes. I see a strong possibility they will collaborate with Vodafone group and integrate paypal with the M-PESA solution. Whilst Paypal launched last year in South Africa and supposedly you can open an account in Kenya but you can’t easily withdraw into a local account as you’d expect as is evident in this customer service post. Combining M-PESA and Paypal would make the last partnership between a carrier and a online payments company that has all the ingredients to win the future web and mobile digital space in Africa.
Google has yet to make serious waves in mobile payments within Africa- but given the growth of Android, Google wallet with potentially Near-field Communication (NFC) enabled smartphones and strength in online services we should not rule them out quite just yet especially if they decide to partner with one of the big mobile operators such as Vodafone if Paypal doesn’t already.
So in the near future, this leaves 3 big consortium mobile money/mcommerce players in Africa in terms of potential subscribers based on the current mobile subscriber numbers: VISA/MTN, Mastercard/Airtel and potentially Paypal or Google/M-PESA(Vodafone). Orange potentially left out in the cold if they don’t do something bigger. MTN seems to have a big lead in subsaharan Africa when you factor out Egypt- otherwise Vodafone is not far behind.
- MTN – 100M
- Airtel- 48M
- Vodafone- 52M (87M inc. Egypt)
- Orange 18M (50M inc. Egypt)
But who will win? Will a Paypal-like startup emerge totally independently of mobile operators within Africa? One has to wonder where this leaves startups like Pagatech in Nigeria that went the direct route of building a mobile operator agnostic mobile money service. Can a mobile money service truly survive without being backed by an operator?
There will clearly be multiple solutions to pay around the world, led by the different credit card processors VISA, Mastercard, AMEX etc… to paypal and even cash, wire, Western Union etc.. Mobile payments have been the only significant technology acquisition activity that directly relates to Africa tech startups and I believe we are just getting started.
But whoever enables the most innovation and integrates to solve real payment/financial services related problems of Africans are best positioned to win- and this can be categorized into 3 areas. Willstream is one player I like for instance operating in Senegal currently because they focus so squarely at a problem- combining remittance health gift voucher services to unbanked populations.
- Who has the biggest merchant network for the service that drives a virtuous cycle and creates a network effect similar to that done by companies like Microsoft, Google have exploited. This also includes who wins the hearts and minds of developers to build out service and enable more merchants to transact.
- Who has the most secure and hence trusted solution
- Which service has the best user experience and seemingly works across local, regional, global- online and on the phone via USSD or otherwise.
The one thing that these 3 have all have in common- “ownership of the customer”. And customer can be defined as both the tech developer building solutions and the end user themselves… Where would ebay be without paypal? When will that Tanzanian computer science student be able to pay for Amazon web services and tap into key infrastructure for cloud computing?