Mobile Money: Africa’s Best Contribution to Innovation So Far?

The evolution of mobile money in Africa is a clear example of a business in which the continent is leading, not lagging. Besides the classic money transfer services already present for several years, many providers are now expanding their services by entering the banking industry and opening up interesting scenarios so far unexplored by the so called “developed economies.” There are aspects to be addressed in order to further enhance the potential of this business, but the current mobile penetration together with several other factors seem to foresee plenty of opportunities ahead.

When it was first launched several years ago, mobile money was just a transfer tool for microfinance institutions to help borrowers receive and repay loans in a more convenient manner. Nowadays, it is a business that can represent an incredible opportunity to connect and merge people participating in the formal and informal economy. The chart below shows that mobile money penetration is growing exponentially in the Sub-Saharan region and that its population is forecast to reach China’s level in 20 years, making Africa one of the biggest and youngest markets to target. Moreover, according to GSMA’s Mobile Economy 2013 report, globally “more than 2.5 billion adults do not have access to a formal bank account and are not able to access basic financial services in order to save, borrow or transact.”

Mobile money started in Kenya in 2007 with the launch of the first platform: M-Pesa. Since then, the service, controlled by Kenyan mobile network operator Safaricom, has been rapidly expanding, and is currently an important pillar for people’s daily expenses.

Mobile services expand

Its operations are now consolidated in other African countries such as Tanzania and South Africa, while several other mobile operators have now joined the business by tapping other major markets such as Ghana and Nigeria. But expansion is old news. What is interesting now is expansion of services.

Cost cutting and liquidity increase are the first aspects that can be highlighted: besides being able to pay electricity bills and school fees, now customers in Ghana can also buy life insurance through South African mobile network MTN.

M-Pesa customers can pay for retail goods for a commission of 1.5% per transaction charged exclusively to the seller: a competitive rate compared to other less accessible and more expensive instruments such as credit cards, currently charging between 3% to 5% commission (BDlive, August 2013).

Another development: Safaricom is entering the Kenyan savings and loans business through a service called M-Shwari in collaboration with Central Bank of Africa, achieving very promising results so far.

Looking at the following image, it is possible to see how Safaricom and MTN P/E ratios are perfoming compared to the benchmark represented by MSCI Frontier Markets Africa Telecommunication. Investors seem ready to put a higher price on these companies compared to the region’s peers.

Potential pitfalls

The GSMA’s report also warns about potential pitfalls that should be considered in assessing mobile money services: operational challenges, lack of regulations and a need for further learning. Nevertheless, lower cost transactions, higher liquidity and financial inclusiveness together with the increasing levels of mobile penetration, represent an interesting opportunity. Some cases have also shown how this system can be considered safer than banks: in the 2008 post-election violence, Kenyans regarded M-Pesa as a safer place to store their savings than financial institutions, heavily compromised in ethnic disputes at the time.

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