The ability to send and receive money over the phone, without the need for an internet connection, revolutionised the way banking is conducted in Africa, especially in Eastern countries such as Kenya. These mobile financial services (MFS) now span the full spectrum of financial services, offering customers the ability to transfer money securely, using current accounts as well as allowing users to access savings, loans, investments, and insurance.
According to GSMA, half of the 282 mobile money services operating worldwide are located in Sub-Saharan Africa. McKinsey reports that there are 100 million active mobile money accounts in Africa, far exceeding customer adoption in South Asia, with 40 million active mobile money accounts. In the past four years alone, mobile money users have grown by more than 30% annually.
The Impact of Accessible Banking
Firstly, mobile banking allows those individuals who do not have access to real banks, either due to poverty traps or due to a lack of local banks, to bank cheaply and effectively. This increased fluidity in currency transfer has facilitated business growth, which started out as P2P payments but increasingly sees use in paying vendors, merchants, utility companies and in the future, government authorities. Not only does this facilitate financial inclusion for individuals that would otherwise experience hardships in accessing a stable banking system, but this also ensures users have more control over their financial situation, understanding exactly where their money is and where it is going.
Secondly, with access to quick transfers of money through P2P systems, this also establishes a system for loans between individuals and companies. These mobile loans, with low limits such as $10, can provide early businesses and families alike with the chance to escape poverty traps. To add, with almost 80% of people in sub-Saharan Africa being excluded from formal finance, and the African Development Bank estimating a credit gap of between $70bn and $90bn for the continent’s medium and small enterprises, there is large potential for the loan market to take shape in mobile banking.
Carriers Beating Banks
Despite FinTechs, banks and other financial ventures entering the mobile banking market, mobile networks operators (MNO) continue to dominate in customer numbers, transaction volume and coverage, with M-Pesa and MTN Money having five to ten times as many clients as bank-centric approaches (for example Equitel). McKinsey opines that such success rests upon three pillars: near ubiquitous distribution networks, vast numbers of customers/strong market concentration, and a superior client experience.
Above all, the sheer scale that MNOs can operate at dwarfs the initiatives from banks, particularly in remote regions, presenting distribution as MNOs’ main advantage. It is reported that 37 African markets have ten times more registered agents than bank branches. To take Kenya as an example, leading banks in Kenya, where agency banking has been highly successful, have approximately 15,000 agents, yet Safaricom, a large MNO, has more than 130,000 agents where customers can cash in or cash out. The scale of the operations allows MNOs to outperform traditional brick and mortar banks, securing further clients and users simply as a result of the ecosystem that new users would become a part of, should they accept MNOs as their banking platform.
Building on from this, customer numbers are vast. For example, MTN, the largest telco in Africa, conducts business with 171 million customers, compared to Ecobank, Standard Bank and Barclays Africa, who are leading Pan-African banks, service 11 million and 15 million customers.
Why is this happening?
The client numbers can be attributed to the superior client service that such companies offer. M-Pesa’s client-facing expertise and offered experience presents a user-friendly and simple process, that does not require financial literacy. Combined with easy registration, the fact that merchant acceptance is widespread and that M-PESA does not levy transaction fees on bill payments, users can begin financial inclusion relatively easily. Furthermore, MNOs also have the advantage of mobile phone penetration, which is an average of 80%, double the penetration of banking for the same regions.
As Paul Makin argues in Regulatory Issues Around Mobile Banking, the role of a regulator is to stand between citizens and financial chaos; ensure financial institutions offer services in a responsible manner and, for emerging economies particularly, promote social objectives, extending the reach and depth of financial services.
As with any jurisdiction, regulating emerging technologies is difficult, as shown by the divide on cryptocurrencies. Not only is emerging technology a challenge, but companies and individuals are using such technology to both combat new issues as well as solve old issues in new ways. With this comes more sophistication in processes and fintech companies are making banking easier by removing limitations and outpacing banks, and laws in the process.
Cyber security risks are also an ever-growing problem. As more carriers collect data on customers to strengthen services offered, they need to take appropriate measures to ensure that the data is stored securely. Such data is not only delicate, as it connects individuals to finance, but users are not able to take control of their own data protection. As a result, regulation is needed to set standards of security, and leveraging the opportunity of mobile banking against security threats is a prime objective for legislators in order to protect what has become a critical infrastructure in Africa.
Further, crafting monetary policy to suit this niche market is required. As mobile banking continues to mature and develop more financial inclusion, policies need to be adopted that make individuals more sensitive to investment opportunities, and increase the taxation base. With this, laws regulating deposit schemes, trust arrangements and the control of carriers in this regard must be well researched and produced, this includes deposit insurance, particularly as such companies are effectively the larger party in the relationship.
Laws recognising such a duty of care and pushing mobile banking companies to take precautions in the name of customer security is the right step forward. For example, no company is too big to fail, and thus insurance and protection must be offered to customers against the default of the company, protecting customers’ money accounts in the event that such companies become insolvent.
The Other Side
Interestingly, regulators such also seek to ensure competition is healthy. For the market to work efficiently, an adequate amount of competitors must be present, to afford some protection to users against monopolies and to prevent abuse of market positions. What’s more, when conducting consultations to research regulations and aid with the law making process, regulators would do well to, as argued by Njuguna Ndung’u (May 2016), “ensure they are listening to all the voices in the market, not just the dominant provider.”
This also includes analysing the readiness of carriers and banks to facilitate greater adoption and promotion of these services, including microfinance loans, as passing regulations that limit such services from being offered by carriers, despite possessing a stronger ecosystem and better infrastructure, would cause more harm than good. Thus, when regulators feel the need to decidedly attribute certain actions to banks only, considering the power and ability of banks to carry out such services, should be a critical factor.
With that said, should regulators conclude that these carriers are performing an essential public service, such operations should be required to follow the stringent requirements that other private institutions performing public sector work are required to follow – including transparency on certain issues and keen consideration of stakeholders. This would also extend to protecting users from abuse in order to increase profits, declaring some schemes unpalatable as traps and moving to secure better representation for the consumer base.
Moreover, the risk of a high profile failure, from a major carrier, either through financial difficulty, default and insolvency, caused by bad corporate decision-making, legal action or otherwise, or security failures including cyber attacks, weakened infrastructure, the use of outdated technology or other technical issues, could be enough to set mobile banking back.
The reputational damage to not only the company but additionally the branchless banking system could cause distrust by individuals, provide excuses for regulators to toughen up on such schemes as well as shrink the market through a lack of investment. Regulators need to provide options to protect against such eventualities, from insurance to other trust options. Cooperation with existing providers is key to gathering expertise and using existing experience to customise banking regulation that protects and creates an environment that is conducive to further growth.
Lastly, users need laws to ensure that this niche form of banking is not abused – carriers are in a strong position of power, effectively being in control of mobile banking. As carriers and mobile banking providers continue to expand their services into more sectors, regulators must resist the temptation to “classify all services as banking services and hold up the entire industry but instead regulate each service in proportion to its level of risk,” as is argued in Consolidating Africa’s Mobile Banking Revolution (May 2016).
Whilst these mobile services are going some way to facilitate banking, they do not perfectly meet the definition of a banking institution. The revolution is welcomed, but as the reach of these private operators grows, regulation must be levied against them to protect consumers, particularly in delicate economies.
The companies are performing a quasi-banking role in a narrow sense but are not held to the standard that banks are. Regulators must close the gap to ensure that continued financial inclusion remains unhindered.