Mo­bile Bank­ing and Po­lit­i­cal Bar­ri­ers

The once cosy re­la­tions be­tween mo­bile telecom­mu­ni­ca­tions op­er­a­tors and banks have soured over the lu­cra­tive money trans­fer mar­ket that was suc­cess­fully pi­o­neered by Sa­fari­com’s M-pesa.

Diplomat East Africa - - Table of Contents - ROBIN OBINO re­ports

The re­cent scrape be­tween re­gional telecom­mu­ni­ca­tions gi­ant Sa­fari­com and Eq­uity Bank over the use of a slim SIM card tech­nol­ogy has reignited de­bate on why Kenyan com­mer­cial banks are so determined to keep mo­bile phone com­pa­nies out of the lu­cra­tive money trans­fer busi­ness.

Ap­par­ently, it is only Eq­uity bank that has gone to battle with Sa­fari­com. Oth­ers are cap­i­tal­is­ing on the op­por­tu­nity for part­ner­ship. In 2012 the Com­mer­cial Bank of Africa (CBA) part­nered with Sa­fari­com to launch its M- Sh­wari plat­form, a com­ple­ment to M-Pesa that of­fers sav­ings and mi­cro-loans.

Kenya Com­mer­cial Bank’s MBenki, also rides on Sa­fari­com’s M-Pesa plat­form. It is an in­te­gra­tion of both M-Sh­wari and the de­funct M-Kesho from Eq­uity Bank.

Other mo­bile ser­vice providers have also tried their hand in the money-trans­fer busi­ness but with limited suc­cess in the case of Air­tel and out­right fail­ure on the part of the de­funct Essar’s Yu and Or­ange Telkom. Essar Com­mu­ni­ca­tion of In­dia ca­pit­u­lated af­ter seven years of wrong strat­egy and fail­ure to com­pre­hend Kenya’s telecom­mu­ni­ca­tions mar­ket. Last year, it sold its in­fra­struc­ture to Sa­fari­com and cus­tomer base to Air­tel be­fore flee­ing the mar­ket af­ter years of record­ing heavy losses.

Air­tel and Sa­fari­com paid $120 mil­lion (Sh10.5 bil­lion) for Essar Yu’s as­sets, Or­ange is strug­gling to stay afloat in the mar­ket.

Sa­fari­com has a 73 per cent share of the mo­bile mar­ket in Kenya, while there are over 17 mil­lion M-PESA ac­count-users.

When the banks lost the self­serv­ing ar­gu­ment that money

trans­fers were a pre­serve of fi­nan­cial in­sti­tu­tions, and that en­gag­ing in the busi­ness amounted to vi­o­la­tion of the Bank­ing Act, they changed tack. They have re­cently taken the war back to the mo­bile telecom­mu­ni­ca­tions com­pa­nies by tap­ping into mo­bile bank­ing so­lu­tions. As a re­sult, telecom­mu­ni­ca­tions firms are now pres­sur­ing politi­cians to stop the banks from en­ter­ing the mo­bile bank­ing sys­tems purely on their own. They want banks forced to part­ner with mo­bile phone ser­vice providers.

WAR ON MO­BILE BANK­ING

Be­tween 2007 and 2008, the then-act­ing Min­is­ter of Fi­nance, Mr John Michuki leant heav­ily to­wards reg­u­lat­ing the bank­ing regime that would have se­ri­ously ham­pered the ex­pan­sion of Sa­fari­com’s M-Pesa money trans­fer as we know it to­day. In fact, the late Michuki or­dered an in­ves­ti­ga­tion into the mo­bile money trans­fer ser­vice be­cause it could pose dan­gers to the fi­nan­cial sys­tem.

It was be­lieved that the de­ci­sion was most prob­a­bly in­flu­enced by an in­for­mal car­tel of lo­cal banks which were un­happy with the threat ser­vice posed to their busi­ness. It was re­ported that the big four banks has es­tab­lished an ad hoc com­mit­tee to ban the ser­vice. M-Pesa was un­flat­ter­ingly com­pared to the in­fa­mous sim­i­lar “pyra­mid scheme” that col­lapsed with mil­lions of shillings be­long­ing to un­wit­ting sub­scribers.

The gover­nor of the Cen­tral Bank of Kenya, Prof Nju­guna Ndung’u, has as­serted that he turned down a plea from com­mer­cial banks in 2007 to stop the spread of M-Pesa on the grounds that it would “cause a fi­nan­cial cri­sis in the coun­try.”

Had the tech­nocrats in gov­ern­ment sided with the com- mer­cial banks and po­lit­i­cal class, the lob­by­ing would have cost the coun­try a great op­por­tu­nity— one that has turned Kenya into a lead­ing ex­am­ple of an in­no­va­tive ap­proach to fi­nan­cial in­clu­sion in the world.

In­deed, the Cen­tral Bank of Kenya (es­pe­cially its reg­u­la­tory and pay­ments sys­tems de­part­ments) is cred­ited with re­sist­ing the push to lock mo­bile telecom­mu­ni­ca­tions com­pa­nies out of the money trans­fer mar­ket. So too is the de­funct Com­mu­ni­ca­tions Com­mis­sion of Kenya (now the Com­mu­ni­ca­tions Author­ity of Kenya) and, no­tably, the then Per­ma­nent Sec­re­tary in the Min­istry of In­for­ma­tion and Com­mu­ni­ca­tions, Dr Bi­tange Ndemo, who made a strong case for li­cens­ing mo­bile money bank­ing.

Th­ese of­fi­cials clearly un­der­stood the po­lit­i­cal econ­omy of pri­vate in­ter­ests seek­ing to erect bar­ri­ers to in­no­va­tions in the fi­nan­cial ser­vices. Bar­ring the telecom­mu­ni­ca­tions firms from the ser­vice would have locked out mil­lions of Kenyans from fi­nan­cial ser­vices to the benefits of the banks.

THE TA­BLES TURN

Now the ta­bles have turned. Af­ter the phe­nom­e­nal suc­cess of mo­bile bank­ing, which clearly threaten the prof­itabil­ity of tra­di­tional bank­ing mod­els, com­mer­cial banks have changed tack and have be­gun in­vest in mo­bile phone-based bank­ing. They started by in­tro­duc­ing prod­ucts that linked them to the ser­vices of­fered by the mo­bile phone com­pa­nies. To­day, com­mer­cial banks have fully em­braced mo­bile bank­ing by in­tro­duc­ing their own SIM cards in­stead of re­ly­ing on those is­sued by the mo­bile phone providers. Mo­bile phone com­pa­nies are the ones cry­ing foul and seek­ing po­lit­i­cal pro­tec- tion to bar such tech­nol­ogy. They are the ones us­ing the is­sue of se­cu­rity and the threat to the in­tegrity of mo­bile money ser­vices by the new Eq­uity Bank’s thin SIM tech­nol­ogy, which Sa­fari­com Limited claims will ex­pose its clients to fi­nan­cial fraud.

Sa­fari­com is the big­gest mo­bile telecom­mu­ni­ca­tions com­pany in the East and Cen­tral Africa re­gion and most suc­cess­ful. It is widely be­lieved that Sa­fari­com’s ob­jec­tion to the slim SIM tech­nol­ogy is based on fears that it might lose a huge pro­por­tion of sub­scribers on its M-pesa plat­form to Eq­uity Bank.

With over 16 mil­lion cus­tomers, Eq­uity is the largest bank by ac­counts held. In ef­fect, its com­pli­ant, which seems to find favour with MPs has been dis­missed as at­tempt to keep com­pe­ti­tion out of the lu­cra­tive money trans­fer ser­vice.

Iron­i­cally, Eq­uity Bank and Sa­fari­com which are both lead­ers in their core busi­nesses have pre­vi­ously co-ex­isted in har­mony. In­deed, the bank has even sought to piggy ride on Sa­fari­com’s suc­cess by in­tro­duc­ing prod­ucts that tap into M-Pesa. This has ben­e­fit­ted both the mo­bile phone com­pany (in ex­pand­ing its busi­ness) and also in­creas­ing Eq­uity’s prof­itabil­ity and cus­tomer base. But the good re­la­tions are fac­ing their tough­est test.

NEW TECH­NOL­OGY

At the heart of the fall­ing out of Eq­uity and Sa­fari­com is the in­tro­duc­tion of a new tech­nol­ogy that has in­tro­duces the use of an in­de­pen­dent SIM card (one not is­sued by a mo­bile phone com­pany). This pa­per-thin SIM card is lay­ered on top of a cus­tomer’s ex­ist­ing card with­out af­fect­ing the cus­tomer’s orig­i­nal ser­vice provider’s net­work ca­pac­ity. With this tech­nol­ogy, cus­tomers have

In­deed, the Cen­tral Bank of Kenya (es­pe­cially its reg­u­la­tory and pay­ments sys­tems de

is part­ments) cred­ited with re­sist­ing the push to lock mo­bile telecom­mu­ni­ca­tions com­pa­nies out of the money trans­fer mar­ket

no need to use dual SIM-card hand­sets; they can make calls, send mes­sages and trans­fer funds us­ing the same set.

The tech­nol­ogy re­ceived the all-im­por­tant go-ahead from the sec­tor’s reg­u­la­tor, the Com­mu­ni­ca­tions Author­ity in Septem­ber last year, when it was li­censed. The CBK has also given its ap­proval.

Sa­fari­com has come out strongly to op­pose the new tech­nol­ogy, which Eq­uity plans to make avail­able to its huge cus­tomer base at a no fee on two grounds. Firstly be­cause it ex­poses its sub­scribers to the risk of fraud and se­condly, the tech­nol­ogy was ap­proved be­fore the rel­e­vant leg­is­la­tion was en­acted. Just as com­mer­cial banks had done when their core busi­ness was threat­ened by mo­bile phone ser­vice providers, Sa­fari­com has sought pro­tec­tion from politi­cians— in par­tic­u­lar the Par­lia­men­tary Com­mit­tee on ........, which have now rec­om­mended that Eq­uity’s ap­proval be suspended un­til they are sat­is­fied with the se­cu­rity of the tech­nol­ogy.

Com­mer­cial banks ven­tur­ing di­rectly to pro­vide ser­vices that are the domain of the mo­bile phone providers in­tro­duce a new mar­gin of com­pe­ti­tion that is a real threat to the prof­itabil­ity of the telecom­mu­ni­ca­tions com­pa­nies. Thus Sa­fari­com is now seek­ing to block Eq­uity’s en­try by dis­guis­ing it as a se­cu­rity con­cern. As one an­a­lyst writ­ing in The Econ­o­mist poignantly pointed out: “This is a clas­sic in­cum­bent move, claim­ing safety con­cerns to try and pre­vent Eq­uity Bank of­fer­ing value-added ser­vices that Sa­fari­com of­fers through MPesa.”

As demon­strated by the wran­gles, one of the dan­gers of in­no­va­tion in fi­nan­cial ser­vice is that the ap­pro­pri­ate leg­is­la­tion is miss­ing. In a 2009 study on the suc­cess of mo­bile bank­ing in Kenya, Prof Ndung’u notes that there are two ma­jor pol­icy op­tions when ap­proach­ing this is­sue. The first is to bar the prod­ucts un­til leg­is­la­tion has been passed. He also notes, how­ever, that “given that most of­ten the process of en­act­ing leg­is­la­tion takes a long time, such an ap­proach risks the pos­si­bil­ity of sti­fling in­no­va­tion and thus un­der­min­ing ac­cess.” On the other hand, an al­ter­na­tive could be to en­act leg­is­la­tion af­ter the prod­ucts have en­tered the mar­ket, but, “this ap­proach would achieve the goal of ac­cess but could as­so­ciate with fi­nan­cial in­sta­bil­ity.”

Kenya has some­what fol­lowed the sec­ond ap­proach, as he ex­plains, “In Kenya, the strate­gic pol­icy choice has been to al­low tech­no­log­i­cal in­no­va­tions in mo­bile bank­ing, but un­der pru­dent mon­i­tor­ing and re­view to en­sure that the in­tegrity of the fi­nan­cial sys­tem is main­tained. … At the in­sti­tu­tional level, the Cen­tral Bank of Kenya has un­der­taken var­i­ous strate­gies to en­hance the over­sight ca­pac­ity ef­fec­tively keep­ing abreast of in­no­va­tion and tech­no­log­i­cally driven fi­nan­cial ser­vices. This has made it pos­si­ble to in­crease ac­cess to fi­nan­cial ser­vices but at the same time main­tain sta­bil­ity.”

Clearly, mo­bile bank­ing in­no­va­tion should be en­cour­aged to thrive, but watched closely by the rel­e­vant au­thor­i­ties, who should pri­ori­tise bal­anc­ing ac­cess and sta­bil­ity. He em­pha­sises that “it would be ex­tremely un­wise to ex­pand ac­cess at the ex­pense of fi­nan­cial sta­bil­ity and in­tegrity of the pay­ment sys­tem. Coun­tries that do not have ad­e­quate su­per­vi­sory ca­pac­ity of their pay­ment sys­tem would be ill ad­vised to al­low new tech­no­log­i­cally-driven fi­nan­cial prod­ucts and should care­fully weigh the po­ten­tial costs of in­sta­bil­ity. Some vul­ner­a­bil­i­ties of mo­bile phone bank­ing that can desta­bi­lize the fi­nan­cial sys­tem and lower the ef­fi­ciency of the pay­ment sys­tem in­clude fraud­u­lent move­ment of funds, net­work hitches, mis­match of cash bal­ances at the pay points, and prob­lems that as­so­ciate with high ve­loc­ity of funds mak­ing it dif­fi­cult to stop sus­pect trans­ac­tions.”

Thus, the key to Kenya’s suc­cess­ful mo­bile bank­ing in­dus­try is per­mit­ting in­no­va­tions and, at the same time, en­sur­ing that the reg­u­la­tory agen­cies work con­tin­u­ously to eval­u­ate and man­age po­ten­tial risks. This is what the au­thor­i­ties are do­ing by al­low­ing the com­mer­cial banks to en­ter the mar­ket. It is also a ma­jor rea­son mo­bile bank­ing has been so suc­cess­ful in Kenya and not in many other African coun­tries.

The tech­nocrats have al­ready eval­u­ated the Eq­uity Bank’s tech­nol­ogy and are con­vinced that it is se­cure. Such in­no­va­tions are cru­cial to ad­vanc­ing wel­fare and erect­ing bar­ri­ers to en­try in the name of se­cu­rity will only serve to un­der­mine in­no­va­tions and re­duce con­sumer wel­fare. Politi­cians should be care­ful not to un­der­mine com­pe­ti­tion as is ev­i­dent in the cur­rent case of Eq­uity ver­sus Sa­fari­com. In­cum­bent and dom­i­nant firms like Sa­fari­com must brace for in­creased com­pe­ti­tion aris­ing from tech­no­log­i­cal in­no­va­tions, and the best strat­egy for them to keep ahead of en­trants is in­vest­ing in in­no­va­tion so as to be able to pro­vide more, bet­ter and cheaper ser­vices

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