Frontier markets fertile ground for mobile payment platforms
• It is an industry born from consumer need and that produces fast-growing, profitable businesses
BUT, LONG TERM, THE TRUE VALUE OF THESE BUSINESSES LIES IN THEIR PAYMENT AND TRANSACTION ECOSYSTEMS
Frontier markets are typically economies where large-scale multinationals such as Heineken and British American Tobacco may have taken root, but familiar consumer brands such as Starbucks have yet to establish footprints.
While frontier markets are frequently viewed as high risk, it is becoming apparent that certain business models work far better in these than in developed economies, creating some interesting opportunities, one being mobile money.
It is an industry born from consumer need, high-cost banking infrastructure and technical innovation, and that produces fast-growing, profitable businesses. Globally, the mobile money industry processed $1.3bn a day in 2018, making mobile money the leading payments platform for the digital economy in several emerging and frontier markets.
Having investigated several payments businesses globally, there are a few that stand out for us: M-Pesa in Kenya and Tanzania, EcoCash in Zimbabwe, Orange Money in West Africa, MTN MoMo in Ghana and bKash in Bangladesh.
These markets have a few things in common that have supported the growth of mobile money. The first is that inadequate legacy banking systems render a large percentage of their populations unbanked, while mobile telephony has enjoyed huge penetration. Mobile phones play a central role in peoples’ lives, creating higher levels of trust in mobile services than elsewhere.
Second, regulators in these economies tend to be pragmatic, with an approach that enables financial access. This combination creates a fertile environment for the formation of formidable mobile financial services
businesses that can quickly grow from concept to profitability. We believe there is significant potential for earnings growth, driven predominantly by margin expansion.
But, long term, the true value of these businesses lies in their payment and transaction ecosystems, in which once established, there is almost no limit to the auxiliary services that can be added, including loans, insurance products, merchant, utility and salary payments, and even investment services — all of which usually come with very high margins.
Current levels of earnings are therefore well below what we believe to be normal.
M-Pesa is a great example of this dynamic. In 2012, traditional person-to-person transfers accounted for 95% of revenue. By 2018, this had dropped to 74% as M-Pesa had added other high-margin payment services.
Alipay, valued at $150bn, shows the remarkable product proliferation potential with a payments platform and indicates that mobile money businesses in frontier markets still have significant runway for growth. What excites us is that these businesses tend to trade on much lower multiples than developed and even emerging market peers.
One of the reasons mobile money businesses trade at discounts in frontier markets is that they are not listed separately. The only way an investor can access such a business is by owning a parent company, usually a telecoms company or bank, which typically trade on lower multiples. These fledgling businesses are just a small part of current earnings, so often very little attention is paid to understanding the quality of these earnings.
A case in point is bKash, the largest mobile money business in Bangladesh, which is 51% owned by Brac Bank. In 2018, Alipay acquired a 20% stake in bKash in a deal that valued bKash at $700m. The implied price/sales ratio of this valuation is 3.3 times, well below that of its peers. bKash has about 30-million subscribers compared with 48-million formal accounts held by banks in Bangladesh. This scale creates a network effect that attracts more users and service providers. The growth opportunity is extraordinary: revenue per user is still only half of what we see in Kenya, while profit margins have significant expansion opportunity.
As a comparative, we estimate that the market currently assigns a value to M-Pesa of more than $4bn and we see no reason why bKash should not be worth as least as much, considering the population is three times that of Kenya.
Regulation is the most obvious risk associated with payments businesses and, indeed, financial institutions more generally. But a risk that is perhaps less widely appreciated is disruption from messenger apps such as WhatsApp and Facebook. These apps have the same ability to leverage their existing, well populated and trusted platforms when introducing mobile payment services. This is what WhatsApp is doing in India.
However, one of the key constraints messenger apps face in frontier markets is transferring money into the user’s mobile wallet. Mobile money players use large agent networks that physically receive deposits and process cashouts, while messenger apps typically partner with banks which require users to link their bank card. The lack of bank accounts in frontier markets is problematic for messenger apps.
In frontier markets, we have seen several case studies of collaboration rather than competition, such as the partnership between WhatsApp and MTN that allows MTN customers to recharge airtime and check their bank balances using the platform. Over the past 25 years of investing, we have learnt that the combination of low earnings and low multiples can result in very rewarding investments.
Mobile money businesses are already showing these same signs and will be multiyear compounders, making them among the most compelling investment chances out there.