#10. Mobile money in Africa
Mobile money: where telecoms assist transactions instead of banks. The investment case, the failure of M-Pesa in South Africa and Quartz Arfrica.
Welcome! Issue #10 of Emerging Markets explorer ðŸ§Â covers mobile money: where transactions are facilitated by telecoms instead of banks. The investment case for mobile money, the failure of M-Pesa in South Africa and Quartz Africa to enrich your inbox.
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👀 Do you remember the tensions between Central Bank Nigeria and cryptocurrencies? CBN made a new move: now they pay Nigerians to use official channels for remittances instead of cryptocurrencies.
The big bet on mobile money
Mobile money consists of a closed loop network where digital transactions are assisted by a telecom network instead of a banking institution. It was the first fintech milestone in Africa.
In a mobile money service, the funds are stored in an electronic account linked to a mobile phone number. Mobile money works via USSD codes: people go to a mobile money agent, convert their cash to mobile money in their USSD code and then perform transactions with it. It works with any cell phone, including those with small screens and long battery life.
The earliest example of this is M-Pesa (Pesa is money in swahili), a mobile money service launched by Safaricom in 2007. It achieved success in many countries, being most successful in Kenya, where there are 30M customers and 98% of mobile payments happen via M-Pesa as of today.
But where there is a market, competitors appear, such as Airtel Money. M-Pesa is the market leader in Kenya, but there is more addressable market: there are 1.05BN mobile money accounts, and most of them are located in sub-saharan Africa; plus, the average of banked population in Africa remains low.
The opportunity is there. In the case of Airtel Africa, Mastercard just invested $100M in their mobile money arm. Furthermore, Safaricom and Vodacom acquired the M-Pesa brand from UK’s Vodafone in 2020.
The investment case
Bull case: the unbanked population remains outstanding in Africa, and many people don’t consider having their own bank account. However, the mobile phone adoption, even in frugal options of non-smartphones is wider, thus, it is easier to be adopted. Additionally, if a telco company has a dominant position in the market, it makes it easier to expand their mobile money wallet.
Bear case: The number of adults with a bank account in Africa keeps increasing. They can perform transactions with their banks, and a bank account opens the possibility of trading internationally in more open networks. Additionally, Internet expansion and a growing smartphone adoption allows people to use other fintech services, providing assets to other assets, such as foreign currencies, cryptocurrencies (which are becoming vehicles of remittances) etc.
Failure story: M-Pesa retreated from South Africa
M-Pesa entered South Africa in 2010, with the goal of achieving 10M active users by 2013. However, by 2016 they only had 76,000 active users, which made them retreat from the market.
M-Pesa was brought by Vodacom to South Africa in 2010. They partnered with Nedbank, a large bank in South Africa, with the reputation to serve the high and middle class. They estimated that there were 13M unbanked South Africans, and aimed at 10M users by 2013.
It didn’t happen.
The failure of M-Pesa in South Africa could be mostly attributed to distribution: M-Pesa operates in a closed-loop network, and needs many adopters to become part of the daily life of their customers, otherwise, they will look for alternatives.Â
In South Africa there were more alternatives than in Kenya, where it boomed. In South Africa 75% of the adult population had a bank account in 2015, and M-Pesa is a product acting as a substitute for banking transactions, advantageous for the unbanked population. The banking infrastructure was also remarkable in South Africa so that even low end customers were used to them.Â
The market gap for sending remittances was smaller: there were alternatives such as Shoprite Money Market to send money, and M-Pesa did not offer a differentiated value.
Additionally, Vodacom did not hold the same dominant position in the telecommunications area as in Kenya, and South African regulators were not as favorable for wallets. Thus, in 2016, with only 76,000 active users, Vodacom decided to shut down the M-Pesa operations in South Africa.
Source Recommendation: Quartz Africa
Quartz Africa is a section of Quartz, an economy news site founded in 2012 to serve a new kind of business leader and with a journalism built for users first.
Quartz operates in a freemium model: most of the articles require a subscription, but in the Africa realm, they send out a free Sunday newsletter: Quartz Africa Weekly Brief.
Quartz Africa Weekly Brief is a rich newsletter. It includes a relevant topic, 5 recent stories covered by Quartz Africa, an explained chart, funding rounds and M&As, a reader’s question explained (Why is Africa not affected by COVID-19 like Europe?), relevant news from other sites, and relevant quotes. The writing is very easy to read, and it offers valuable insights. You can subscribe here.
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