Mobile money: The next generation

Africa has forged a reputation as a global leader in mobile financial services. There are relatively few bank branches across the continent, and only a minority of people have bank accounts. Published in This Is Africa, 20 October 2014

Telecoms companies have stepped into the gap to provide financial services to large swathes of the continent’s population. Yet even as more customers sign up to the services, attention is turning to the next generation of mobile financial services: in particular developing savings and lending services using mobile technology. If this is done successfully, it has the potential to transform the financial landscape for individuals and small businesses who could gain access to affordable credit - many for the first time.

First generation mobile financial services like MTN Mobile Money offer a ‘virtual wallet’ on customers’ mobile phones, allowing them to conduct simple transactions like sending and receiving money, paying bills or topping up their phone credit. These services have brought tens of millions of Africans into the formal financial sector for the first time. According to the GSMA, a mobile telecoms industry body at least nine African countries now have more mobile money accounts than bank accounts.

And despite the spread of these services to other parts of the world, sub-Saharan Africa still dominates the global market. Of the 203 million registered mobile money accounts around the world as of June 2013, 98 million of them were in the region.

Now, banks are developing savings services that will leverage the reach of mobile. Pan-African lender Ecobank has plans to roll out mobile-based lending and savings services. The Togo-based bank plans to set up mobile savings accounts with MTN Mobile Money in a dozen countries around Africa.

“The potential for mobile saving is enormous,” says George Bodo, head of banking research at Ecobank.

“It is estimated that there is $1.2bn in cash stuffed under mattresses or in biscuit tins across Africa. If these funds could be leveraged through mobile banking, they could transform lending to local businesses, which currently pay exorbitant interest rates.”

Some services have already been launched. As was the case with the first generation of mobile services, Kenya is a leader. Safaricom offers the M-Shwari service in conjunction with Commercial Bank of Africa (CBA), and the M-Kesho service with Equity Bank. Also in Kenya, Airtel has partnered with microfinance bank Faulu Kenya to offer small, short-term loans under a service called KopaChapaa. Kenya Commercial Bank has its own M-Benki offering.

Across the rest of the continent, however, such services are still relatively rare. The GSMA says there are 21 services in Africa which link mobile money to some other banking products. Of those, only nine offer loans. Among them is M-Pawa in Tanzania from CBA and Vodacom, and Mjara loans in Ghana from MFS Africa and MTN Mobile Money.

A role for regulators

If the potential for mobile savings and loans is to be realised elsewhere in the region, then it may require encouragement from regulators. Some, at least, seem keen.

“The ultimate goal is to use these mobile financial services to start creating savings. This supports the ultimate aim of financial inclusion…but also poverty reduction,” says Rwangombwa John, governor of the National Bank of Rwanda.

“Going forward, we are going to have savings on the mobile services that are linked to micro-loans, so it is going to have an even bigger impact on the lives of the population.”

But some countries are still dragging their heels. In Sudan, for example, even basic mobile financial services are only just starting to gain traction. Elsewhere, there are concerns about how to regulate these services.

“Central banks are becoming extremely cautious of these developments in mobile banking,” says Mr Bodo of Ecobank.

In Nigeria, for instance, there is an ongoing battle between the between the central bank and the telecoms regulator over who should regulate the mobile platforms, according to Mr Bodo.

Assuming that such regulatory issues can be ironed out, the key to a successful rollout of mobile banking services is to first of all encourage more savings via mobile devices. One factor which augurs well for the uptake of these practices is the fact that many customers already save small amounts just by maintaining a credit balance on their mobile money accounts.

Of course, non-bank providers cannot lend these funds out, so the trick will be to both encourage customers to save more and to link their mobile wallets with the formal banking sector. At that point, banks can recycle the accumulated capital and lend it to local businesses.

“It is not enough simply to save. You need to get that money to those that use it for investment,” says Benno Ndulu, Tanzania’s central banker.

However he believes that in order to allow savers and investors to meet, banks and other deposit-based services still need to be the point of intermediation. “For us, as we go forward, it is extremely important that we make that connection between the mobile money services and the banking system,” he says.

The incentive for banks to tap into mobile services is very strong, allowing them to connect directly with the millions of previously ‘unbanked’ citizens across the continent.

“As we go further into connecting banks to this infrastructure of mobile money services, the opportunity to increase the community that saves with banks and to increase savings is phenomenal,” Mr Ndulu claims.

Shifting attitudes

The role that the various industry participants have to play seems clear enough. However, it will require a cultural change for some financial institutions.

“A few banks have started to integrate with mobile wallets, but this is a relatively new trend,” says John Owens, senior policy adviser on digital financial services at the Alliance for Financial Inclusion (AFI), a non-profit organisation. “Most banks are still trying to compete rather than integrate with mobile wallets, so there is still a ways to go.”

The problem is that many banks have seen the launch of financial services by telecoms companies as unfair competition because, typically, these new service providers are not as tightly regulated as the banks themselves. Attitudes are changing, but it is a gradual shift.

Consensus is emerging amongst players across the two sectors, as well as regulators, on the need to create “an open ecosystem of financial inclusion which allows a variety of players along the value chain” to participate, says Alfred Hannig, executive director at the AFI. “We are looking for very smart partnerships among mobile money issuers, payment platforms, banks, telcos, agent networks and so forth.”

Assuming the industry and the regulators can build on that nascent sense of cooperation, there are some advantages to using the mobile networks to promote savings and loans. As technology becomes more sophisticated and cheaper, it is easier for companies to roll out a wider range of services. In addition, a customer’s mobile payment record can serve as a relatively simple credit history, providing an easy way for banks to evaluate the risk they are taking on when they lend.

Security risks?

However, with the benefits of mobile services also come some real risks to the security and privacy of users – something that has been recognised by regulators around the world. In a report issued last year, the UK’s Financial Conduct Authority pointed to several areas of weakness, including mobile banking apps that can get infected with ‘malware’ or other viruses. Others, such as California-based IT security firm Guardian Analytics point to the danger of users being tricked into downloading fake security apps on their phones and criminals hacking into wi-fi networks to redirect transactions or capture usernames and passwords.

The risk of fraud is something the industry is well aware of, and some measures are being taken. The AFI, for example, says it has started to put more effort into the issue of consumer protection. The AFI has been running a Consumer Empowerment & Market Conduct working group since April 2011, in which policymakers from around Africa and beyond can discuss regulatory issues related to consumer protection.

The AFI has some protection principles in mind already. “The ‘e-money’ funds of the public must be protected and available for redemption at all times. They must be unencumbered and maintained in the banking system or in liquid government securities that are equal to the amount of outstanding e-money issued,” Mr Owens explains

The way in which Africa forged ahead with the first generation of mobile banking services offers reason to suppose that such hurdles can indeed be overcome. If that is the case, then the continent could emerge as a global innovator in the next stage of the industry’s growth as well.