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.
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.
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