It was a memorable experience in Malawi — on discovering that the hotel bill had to be paid in cash. No cheques, no transactions by credit cards accepted: just the Malawian Kwacha. And you got wads galore of Kwacha in exchange for American dollars — so many banknotes, in fact, that they were difficult to conceal. The exchange bureau looked dubious enough: the men lingering outside, decidedly ominous.
But all of this may be about to change — because sub-Saharan Africa offers a tantalising prospect for mobile financial investors.
In most of the region, only a small population percentage — upper-income households — enjoy the convenience of card-based, online and mobile banking. Most consumers still pay with cash.
One study (see below) shows that more than 90% of retail transactions in parts of the region remain cash-based, and a Gallup* survey of 11 countries in sub-Saharan Africa found that more than 80% of adults make bill payments or remittances with cash.
Given the lack of digital-payment penetration, consumers, banks and governments in the region are still bearing the high cost of cash payments — costs associated with manual acceptance, record-keeping, counting, storage, security and transportation. So the economic incentives for change are compelling.
Moreover, two-thirds of adults in sub-Saharan Africa (a hugely significant proportion in developing countries) currently use mobile phones. In Kenya — the one, developed digital payments market in the region where M-Pesa** has become a success story — mobile-payment penetration stands at 86% of households. 86%! Think of most places in the developed world, and that level of mobile-payment penetration is unheard of.
Already, regulators in sub-Saharan markets are paving the way for e-money and the entry of non-bank operators — making use of business models and systems for electronic remittances, both domestic and international, which have already been well tested in other markets around the globe.
Together, all these factors should make it easier for digital payments to leapfrog the costly development of formal banking. Mobile money promises a lower-cost, more scalable alternative to traditional banking. Why then have payment players hesitated to venture into these seemingly high-potential markets? Why have there been so few success stories to date?
“These transaction flows represent a large untapped market for mobile providers, say the researchers. They are especially relevant because it is easier and less costly to make those payments electronically than with cash.”
Hurdles to mobile money investment
Partly, the lack of investment to date has resulted from uncertainty about whether Kenya is unique, or whether the potential for mobile payments in other markets is similarly robust.
As with most new business ventures across the continent, data on the nature and size of markets, the investment required, the risks involved, and, most importantly, the nature of customer needs and preferences is hard to nail down.
New research & analysis
However, new research (by McKinsey & Company and the Bill & Melinda Gates Foundation) has explored 44 sub-Saharan African countries and incorporated Gallup survey data. The analysis examines remote domestic consumer payments in individual markets to identify significant cash-payment volumes made through informal channels. “These transaction flows represent a large untapped market for mobile providers,” say the researchers. “They are especially relevant because it is easier and less costly to make those payments electronically than with cash.”
The researchers examined several major payment categories, including person-to-person (P2P) payments, government-to-public payments, bill and formal-obligation payments, wages, and payments for goods and services. “These represent early-use cases in which the benefits of digital payments considerably outweigh those of cash, thus making it likely that digital payments will rapidly win consumer acceptance,” say the researchers. P2P payments are the largest category, given the many migrant workers and informal networks of families and friends, who are often the primary source of family financing.
A key feature of the incorporated Gallup data is that it does not just focus on formal payment options (such as through banks, money transfers, or mobile devices) but also asks about payments made in cash through informal channels. This data allows researchers to estimate latent market demand for digital services.
To estimate each country’s market potential, the researchers first examined trends underlying Kenya’s rapid transition to mobile payments. These trends were applied to each country’s raw data to create baseline reference points which were used to develop individual market projections in the following scenarios:
• P2P payments are digitised across other sub-Saharan African countries, matching Kenya’s current penetration rate for long-distance digital payments (70%)
• Other types of long-distance payments (e.g. wages, government-to-public) are digitised to Kenya’s current level (70%)
• P2P payments maintain the 70% rate of digitisation and the total transaction volume grows at the same rate as seen in Kenya between 2006 and 2009, during the early expansion of M-Pesa.
Gallup data shows that currently, on average, 54% of adults in sub-Saharan Africa make one or more long-distance payments in a given month, totalling approximately five billion transactions annually. The total volume of these flows is approximately USD 760 billion, and 50 to 60% of the transactions are in cash. Based on conservative estimates, this would result in annual revenues of about USD 6.6 billion annually from electronic payments. Other scenarios estimate USD 7.7 billion, USD 11 billion and USD 16 billion annually.
Nigeria alone, for example, could be worth USD 1.8 billion. More than 80 million Nigerians do not own bank accounts. Of the total adult population, 74% are ‘unbanked’ but the mobile penetration rate is 54%. This is especially significant because of the fact that 39% of Nigerians live in rural areas where financial institutions find it commercially unviable to operate.
The Central Bank of Nigeria has granted mobile money operating licenses to 18 financial institutions and independent operators and also to six banks, including one microfinance bank Fortis MFB.
With a population of 170 million, 110 million active mobile phone subscribers, according to the Nigerian Communications Commission, and 25.4 million bank accounts, there is a huge potential for mobile money in Nigeria. However, it is clear that operators are struggling to make an impact in the country in terms of investment in agency network, technology and marketing, says Lawrence Etukakpan, UHY Maaji, UHY’s member firm in Nigeria. Challenges operators face are:
• Start-up technology problems
• Insufficient take-off capital for the country’s size
• Inadequate agency network.
“Governments also gain when adopting digital payments. They not only reduce their payment costs but increase transparency.”
Digitisation spurs growth
Digital-payment platforms are also expected to benefit stakeholders beyond the payment industry. In Kenya, for example, many start-ups are attempting to incorporate M-Pesa as part of their entrepreneurial business models. One small business uses it to help parents make more timely school-fee payments, while another uses it to establish informal savings groups. Even non-payment organisations are finding ways to use the new payment infrastructure. For instance, Bridge International Academies, a low-cost, for-profit educational franchiser, found that M-Pesa could help it obtain real-time financial data, which enabled it to become more trusting of franchisees and reduce record-keeping.
Governments also gain when adopting digital payments. They not only reduce their payment costs but increase transparency.
When digital payments take hold, as they did in Kenya, consumers also eventually profit from related savings. The cost of making remittances via M-Pesa is about half that of other formal domestic-remittance services. Moreover, customers can instantly send payments from their mobile phones instead of travelling an hour or more to distant bank branches. Many customers in sub-Saharan Africa need bank services but simply live and work too far from a branch office.
Equally important is that electronic payments bring financial services to vast numbers of non-banking and under-banking families. They dramatically reduce transaction costs, greatly increase customer convenience, and minimise the need for expensive physical infrastructure, including branch networks.
Implications for payment providers
Sub-Saharan Africa presents a number of opportunities for bank and non-bank financial service providers, mobile operators, and others seeking new markets.
An important first step in considering these markets is understanding the common financial flows in a typical household in sub-Saharan Africa — flows that differ significantly from those seen in more developed markets.
In sub-Saharan Africa fund sources are diverse — wages, crop income, remittance payments from family members, government payments, and donations. Typical expenses include food, utilities, school fees, health needs, basic retail purchases, and purchases associated with various life-stage ceremonies, such as weddings, funerals and holidays. Understanding where these flows are concentrated should enable the development of more effective market-entry strategies.
For example, say the researchers, a bank’s relationships with employers, government agencies, and agricultural entities might best position it to digitise private and government wages, or farm payments. And mobile operators with far-reaching airtime networks might do best in the P2P-payment arena.
The region’s small and medium-sized businesses — with high payment volumes — also send and receive a wide variety of payments. They receive payments from customers, middlemen and government agencies; they make payments to wholesalers, employees, landlords and service providers. Most of these payments are still made with cash. As such enterprises are at the heart of customer and supplier networks, their uptake of mobile money would stimulate adoption both up and down the value chain.
Challenges to investment
In developing economies, one of the greatest challenges is providing convenient options for cash deposits
and withdrawals. ATMs (automated
teller machines) and other point-of-service devices need to be conveniently located throughout a community.
Apply that to remote communities, even to the less remote communities in cities, across sub-Saharan Africa and another reason why mobile money has not as yet taken off comes into view. Upfront investment required for such services is substantial if people are to be weaned off cash transactions.
Significant latent demand for digital payments in many markets of sub-Saharan Africa looks compelling, engendered by impressive and widespread consumer acceptance of mobile-communications technology.
But who will make the first big move?
* News and market research company
** Mobile Pesa (pesa is Swahili for money) is a mobile-based money transfer process.
More details of UHY member firms in sub-Saharan Africa are available on the UHY website under Locations