At the end of July this year, the Communications Authority of Kenya (CAK) allowed Equity Bank, Kenya’s second largest bank by assets, to launch a new mobile banking product in partnership with Indian telecoms firm Bharti Airtel, which operates in Kenya. Equity Bank will be able to offer customers a sim card tied to Bharti Airtel and from which they will be able to access a range of banking services, including making requests for loans.
“Plans are at an advanced stage,” says Adil El Youseffi, Airtel Kenya’s chief executive. “The bank is currently testing the services with its staff, with an expected launch to its customers this year.
“For Airtel Kenya, the launch is in line with our innovation and differentiation agenda. It is a disruptive strategy for us. We see [mobile virtual network operators, or MVNOs] as complementary [to our business], and critical to opening up... the mobile space and thus facilitating and accelerating the financial inclusion of all Kenyans.”
M-Pesa opposition
Bharti Airtel and Equity Bank originally wanted to launch a product called Thin Sim, an ultra-thin sim card that users place on top of their primary sim card, which then allows them to access Equity Bank’s mobile banking services without having to switch providers. Equity Bank is still awaiting a decision from the CAK about whether that is possible – Safaricom, one of Airtel Kenya’s rivals and which runs M-Pesa, the biggest and original mobile money transfer service in Kenya, is fighting it on the grounds that Thin Sim might be able to intercept information between mobile handsets and primary sim cards and thus infringe on the intellectual property rights of primary sim cards.
The delay is not necessarily a significant setback for Equity Bank, according to Paul Makin, one of the founders of M-Pesa, and who now heads Consult Hyperion's Mobile Money Practice, a UK-based mobile money consultancy.
"It’s not as big a deal as it would be in Europe as in Kenya most mobile users have prepaid accounts and they often have multiple sims – a Safaricom number for work, an Airtel number for leisure – as it is cheaper to talk with friends that also have an Airtel number, and so on. So to buy an Equity sim card for mobile banking is not as massive a deal as it would be elsewhere,” he says.
Monopoly over
Despite M-Pesa's challenges, experts argue that the new product is likely to be introduced eventually. “This is long overdue,” says independent mobile money expert Merlin Stone. “The behaviour of the regulator follows a classic pattern: let the leading innovator do a great job of developing the market, then allow in competition. It may be that the regulator waited until it was felt that Safaricom had made enough profit, but now that Safaricom is making good profits, and given that it will take time for competitors to get established and dent these profits, it is time to allow the competitors in.
“The monopoly is ending. The regulator is following what regulators do all over the world when they decide to end the [effective] monopoly of the incumbent.”
Other recent events lend some credibility to this assumption. In June, the CAK ordered Safaricom to stop restricting its agents from co-operating with rival mobile operators. Safaricom has also been instructed to stop levying charges against competitors. The regulator hopes the moves will make mobile money cheaper for consumers and also encourage platform interoperability.
Equity Bank, which is looking to set itself in direct competition with Safaricom, has a strong record of tapping the unbanked market in Kenya. However, according to Mr Stone, it and other new entrants to the mobile money market will mostly aim to win over customers from Safaricom. "They will be more interested in winning business from Safaricom and then selling additional services. Those who do not use the service either have more complex needs [as they are richer] or too little money and are at the other end of the spectrum,” he says.
Observers think Thin Sim could have a big impact on the market. Mobile users with Airtel, Safaricom, Orange and YuMobile will all be able to use the service. Equity Bank also says it will charge no more than KSh25 ($0.28) per transaction, irrespective of the amount of money involved. This contrasts with Safaricom, which currently charges up to KSh110 to send money to other Safaricom users and KSh275 to do so to unregistered users.
“Safaricom's relatively high prices seem to have been connected with the high costs of setting up its agent network, but it may be that Airtel feels that it does not need to allocate its past mobile set-up costs to this mobile money operation," says Mr Stone.
Competitive landscape
Insiders expect that Equity Bank’s new offering is just the beginning of a more competitive mobile money landscape in Kenya. "As competition gets more and more vibrant, we expect to see more and more innovative enterprises joining the MVNO space with the intention to attract subscribers by targeting niche market segments to address user-specific needs," says Airtel’s Mr El Youseffi. It is for this reason that Airtel Kenya is also collaborating with Zioncell Kenya and Mobile Pay Kenya, which were awarded licences as MVNOs in April.
However, Mr El Youseffi says that for the new products to challenge Safaricom, they need to have strong appeal. "This service and innovation is consumer driven; if it delivers value to the consumer and improves their lives, uptake will follow," he says.
Other observers agree. "The problem is how you get people to use your service," says Mr Makin of Consult Hyperion. "Equity Bank has a strong brand, which will help, but it will still find it difficult. A lot of people don’t want to change. They are quite happy with Safaricom.”
Mr Makin says, however, that Equity Bank’s pricing will make it competitive and enable it to get users to switch services from existing providers. “The low price Equity is offering should make this relatively easy,” he says. “Equity's large customer base will help too.”
For now, Safaricom remains dominant. In March, it had more than 17 million active users out of the 23 million mobile money users overall in Kenya, representing about 70% of the adult population. According to Safaricom, M-Pesa transactions amount to about KSh2bn per day.
"Functionality and capability will be key if Equity Bank is to succeed," says Mr Makin. "Customers will be asking: ‘Can I make payments in daily life? Can I use it in a retail environment? Can I get paid into the account? Will the government be able to pay my pension into the account?’ They will have to make these mobile accounts as much like conventional accounts as possible.”
Savings and loans
Savings, loans and insurance services will thus be important. Safaricom has already acquired valuable experience in this area. It launched the mobile savings and loans product M-Shwari with Commercial Bank of Africa in November 2012. M-Shwari has more than 3 million customers and its developers are continuing to introduce new features, including a fixed-deposit function, which was launched in June.
In January, Safaricom created Linda Jamii, an M-Pesa health insurance product, targeting 1 million customers.
Rivals’ interest in these areas is clear. In October 2013, Airtel Kenya partnered with Pan Africa Life Assurance to introduce a mobile insurance product called BimaMkononi. In January this year, Airtel Kenya announced the launch of a new mobile loan service, probably in response to the success of M-Shwari.
"We should see people being able to apply for credit cards and loans on their phone, something which will be helped along in Kenya by government legislation," says Bhartesh Shah, head of retail clients for east Africa at Standard Chartered. "We should eventually see even advisory services, such as those regarding mortgages, become possible on the mobile phone.”
Rivalry between Equity Bank and Safaricom ties into a wider question about the relationship between banks and telecommunications firms. Some analysts have argued that banks are over-reliant on technology software and infrastructure developed by telecommunications firms and claim that banks will have to come up with their own versions if they are to truly make a mark on the industry. Financial institutions in Kenya respond that this is not necessarily the case.
“To be honest we see the mobile money architecture as ancillary to our business rather than as competition,” says Mr Shah. “There are plenty of other examples where banks have leveraged technology from elsewhere to offer a better service to customers and profit from that – including Visa and Mastercard.”
Nonetheless, the consensus seems to be that a competition between banks and the biggest telecommunications firm in Kenya is brewing. Competitors will have to chip away slowly at Safaricom’s dominance rather than expect its dramatic erosion overnight, according to experts. "Can Safaricom continue as it is for the next two years? Absolutely," says Mr Makin. “Four to five years in? That is when it will get interesting.”
