Time to cash out as Safaricom mulls launch of M-Pesa in Nigeria, Angola


Safaricom is set to expand M-Pesa, its 1o year-old mobile money service to new markets after its parent firm Vodafone PLC sold a 35 percent stake to its South African subsidiary for $2.6 billion in what will turn out to be a new test of loyalty to the firm’s retail investors but a welcome move to long-term institutional and international investors.

Spreading itself so thin

Just like Rocket Internet, a Berlin-based startup builder which has spread itself so thin across the world, the launch of M-Pesa into new markets would mean new partnerships and capital investments which will sent Safaricom’s revenues and share price tumbling down as the telco adapts to these new markets. For short-term retail IPO investors, this is likely the best time to cash out.

South Africa’s Vodacom Group which is set to acquire a 34.94% stake in Safaricom is itself a failure at operating mobile money in its own market even though it had at money, the M-Pesa platform and personnel it needed. Just buying into Safaricom and replicating its success across sub-Saharan Africa M-Pesa won’t miraculously save its soul. Vodacom said following a thorough review, it discontinued its M-Pesa product after showing a little prospect of growth in the country.

Speaking about the decision, Shameel Joosub, Vodacom Chief Executive Officer, said: “Vodacom’s decision is based on the fact that the business sustainability of M-Pesa is predicated on achieving a critical mass of users. Based on our revised projections and high levels of financial inclusion in South Africa there is little prospect of the M-Pesa product achieving this in its current format in the mid-term.”

Same Vodacom

Though M-Pesa continued to gain solid traction in Kenya, Tanzania, Lesotho, Mozambique and the DRC, Vodacom failed to save it South Africa arguing high levels of financial inclusion in South Africa and a less supportive macro environment unlike in Kenya and other growing markets.

Vodacom said it didn’t give up totally saying opportunities exist in the Financial Services environment and it promised to continue to explore them. With the failure of M-PESA in South Africa as a USSD platform. Vodacom sees the new Safaricom app as a saviour brewing fresh interest in trying mobile money services again. However, the markets are totally different and M-Pesa’s success, heavily pegged on peer-to-peer transfers in Kenya and poverty levels in rural areas might not be easily replicated in other markets.

According to Shameel Joosub, Chief Executive Officer of Vodacom Group, “Acquiring a strategic stake in Safaricom will provide our shareholders with access to a high growth, high margin, high cash generation business operating in a high growth market. In addition to producing mutually beneficial opportunities for growth, it will create further incremental value through the close cooperation between the two businesses, particularly in driving M-Pesa adoption across our operations.”

Safaricom M-Pesa Brand

Though the firm’s announcement that it may expand M-Pesa into countries such as Nigeria and Angola before the end of the year as well as sign platform-sharing deals with firms such as MTN in these markets may be a welcome move to long-tern international investors, the choice is the markets especially Nigeria maybe be wrong and could cost the firm and its investors a fortune.

Safaricom has invested billions to build its M-Pesa brand in Kenya and across the borders. Launching the same platform in other markets without the Safaricom M-Pesa brand won’t bare much fruit or user excitement.

According to the GSMA, Bureaucracy and regulatory complexity throughout Nigeria continue to act as barriers to realising the socio-economic opportunities that mobile services enable, underpinning the need for a transparent, consultative and pro-investment regulatory environment.Affordability and coverage are key barriers in driving increased mobile penetration and the socio-economic benefits that follow from improved access to mobile services. The cost of running a mobile is around 5% of personal income in Nigeria, well above the threshold of 2-3% below which penetration starts to rise steeply. On coverage, the country is well provisioned in urban areas but there remains a lack of infrastructure in many rural regions. This is understandable given the combination of challenging terrain and vast distances, a lack of electricity and road access, and persistent security threats.

The GSMA adds that coverage is largely a product of investment, which can only occur in a clear, constructive and proactive regulatory environment favouring innovative roll-out models (such as network sharing). Affordability requires this environment as well, but also has the strength of market forces to help.

While regulations on coverage expansion (as a condition for spectrum ownership) and expectations for Quality of Service (QoS) are important in ensuring high quality services for consumers, a balance is important to avoid delays in the implementation of an operator’s expansion and upgrade plans. This is also important for Mobile for Development (M4D) services, where the regulatory environment can play a role in an operator’s decision to roll out such value-added services. Major growth of mobile money services has thus far been largely outside West Africa in general, although there are many positive success stories to draw on from other countries in this sector (e.g. Kenya, Tanzania, Democratic Republic of Congo) where operators have used extensive distribution networks and brand to grow scale and catalyse development of other M4D sectors through payments, transfers and insurance. From this, we think there is a strong case for permitting operators to operate mobile money services in Nigeria. More widely, a facilitating regulatory environment can help unlock successful services in other M4D sectors closely aligned with economic growth and social improvement (Sri Lanka is a good example), for which Nigeria is a prime candidate.

Another factor could be the Central Bank of Nigeria (CBN) Act which was passed ten years go to give CBN power to promote the implementation of best practices including the use of electronic payment systems in all banks across Nigeria. CBN governs use of mobile money and agent banking in Nigeria and released a licensing framework argued to have stifled mobile money services instead of nurturing them.

Though they have been revised to allow telcos run agency networks, there is still huge distrust between banks and telcos which are supposed towork together to make mobile money a success. The regulatory environment did not encourage masses to utilize the services and Vodacom will be required to use billions of shillings to encourage M-Pesa uptake in Nigeria.

Spending in Nigeria without earning will affect Safaricom’s share price back home.

Market dominance

M-Pesa is successful in Kenya because of its dominance. With over 30m customers of Kenya’s 45 million population, Safaricom owns serves over 70 percent of the adult population and is a dominant player and politics has helped it define dominance in abstract terms. These makes P2P mobile money transfers an easy success. In Nigeria, MTN which is the biggest telco has less than 30 percent market share and it won’t have the network effect Safaricom’s M-Pesa has in Kenya. To lure investors not to cash out, Vodacom could have rolled-out M-Pesa in Uganda, Rwanda and steadily across Eastern Africa where the majority of Kenyans are spread and the region also shares a common culture of sending money back home or to their peers. Remember, M-Pesa grew out of inbound transfers from the working class to their parents in rural areas with no state welfare or investments in old age. P2P payments won’t be definitely huge for M-Pesa in Nigeria and Angola, an oil-rich and mining community.

Culture & P2P transfers

Another report by the Institute of Economic Affairs argues that mobile money has been successful in Kenya because it ‘telecom-led’. The report argues that Safaricom invested in the infrastructure and launched a countrywide agent network while mobile money in Nigeria is a ‘bank-led’ model where banks are licenced to operate mobile money rather than telcos. IEA argues that Nigeria has a bank-led model due to protectionism, fraud and loss of control.

However, this might not be entirely true as Safaricom is also partly owned by the Kenyan government. An agent network without customers does not make any mobile money operation successful. The agent networks were set up by Safaricom because of customer demand. The major advantages Safaricom might have had was the loose legislation M-Pesa got at the time but demand was high.

Banks Vs Telcos

Looking at Nigeria, Vodcaom sees a huge market of over 180m people, a huge unbanked population and a dozen telecommunications firms reaching the country’s urban and rural folks who might find mobile money simpler to use, opening access to financial services such as savings,  loans and insurance. However, banks market their accounts rather than mobile money services. CBN has to open up regulation to allow Vodacom’s M-Pesa in Nigeria to more than providing infrastructure for Mobile Money but to be allowed to offer mobile financial services such as savings, insurance among others.

With the coming interoperability and infrastructure sharing, Safaricom will open up M-Pesa to more players. Though Safaricom sees this as additional revenue, a set price will make the service either too expensive to use or bring little revenue to its coffers leading to losses to its retail investors who wouldn’t see the bigger picture. Thereby making M-Pesa a loss making liability to the firm than an asset. The reduced margins will greatly affect the telco’s worth back home and abroad and unattractive to investors.