How banks are becoming telcos and telcos are becoming banks in Africa
Two very important days in your life as an African are the day you get your first phone and the day you open your first bank account. Are these days about to become a thing of the past?
I come from Malawi. A country where only 12% of the population have access to electricity, 36% have access to mobile and 19% have a bank account.
In the rest of Sub-Saharan Africa, the story isn’t very different
With about 62.1% of the employed workforce earning less than $3.10 a day, most people would only need the services of a bank or a telco after they have been earning for a significant amount of time.
There isn’t a lot of exhaustive research on the matter, but the data available would seem to suggest that these two days are significant milestones in the life of an ordinary African citizen.
I know first hand that access to communication and formal finance systems can do a lot to make one’s life better — it’s no surprise that banks and telcos are among the most profitable ventures on the continent.
However, due to the operational nature of both industries, most Africans will obtain their first phone and SIM card before they ever step into a bank.
The end result? Mobile is on the rise and telcos are starting to step into the territory of banks leading to some very interesting questions about where and how to draw the line between the two.
“[In the period 2014 to 2017] the share of adults with a financial institution account remained flat, the share with a mobile money account almost doubled, to 21 percent.” — World Bank Global Findex on Sub Saharan Africa
To understand what’s happening today, we must understand the history of both industries. For a very long time, banks and telcos in Africa got along well as each provided scalable services in their respective verticals while minting a ton of cash in the process.
Despite serving fundamentally different purposes, banks and telcos have a few operational similarities that made a collision somewhat likely.
The trouble started pretty recently
In 2007, Vodafone and Safaricom Kenya launched the famous M-PESA product, the first mobile money solution in the world that really took off.
Dismissed by the banks in its infancy, the solution quickly scaled up and in 2011 there were more mobile money account holders than bank account holders in Kenya.
One of the keys to the success of the product is the inherent way in which telcos acquire customers. Due to the relative simplicity of communication services and the native digital nature of telephony, it’s just a lot easier for telcos to reach a lot more people than banks do.
The significance of this rises from the fact that most bank services are not digitally native, so it’s a lot harder to scale. A practical example of this is how it’s a lot easier to “produce” SMS messages than it is to produce chequebooks.
The odd thing about mobile money in Kenya is that it would have never gotten off the ground without the banking industry to facilitate it.
Wait what?
Kenyan banking regulations require that all value held in mobile money be backed by a trust account with funds held in a commercial bank.
This also holds true for most African countries.
After the success of M-PESA in Kenya, banks in other countries quickly became aware of the existential threat that mobile money posed to them.
For instance, in Nigeria, where the banks lead mobile money and not the telcos — adoption has suffered. This because telcos have much more robust distribution mechanisms than banks do and play in the digital space natively.
Where telcos are not incentivised significantly, mobile money will typically see slower uptake than in countries where they are.
Banks are playing catch-up in a war that they are doomed to lose as long as the African consumer meets the telco first.
At the same time, telcos still have a lot to learn from banks about managing people’s money. Considering these realities, coupled with retrogressive regulation around both telecoms and finance in African countries, isn’t it only reasonable for African banks and telcos to stop being separate things?
At first glance, the notion may seem absurd but I believe it’s the most efficient way that players in both industries can grow exponentially.
A strange new world
Think about it this way: the mobile phone stopped being just a communication device years ago.
Prepaid airtime was the first digital pseudo-currency to take the continent by storm. Despite multiple instances of people using airtime to facilitate money transfers, telcos never viewed airtime as a financial service mechanism.
Instead, they focused on growing their core communications business and strengthening mobile internet infrastructure.
The end result is that African telcos now have the experience and means to reach millions of people through their devices whose utility is increased everyday by the telco adding additional services.
The value of a phone and SIM card to the African consumer increases every time utility is added, and the distribution effort on the part of the telco for increased utility is usually negligible because services are consumed on a digital device.
On the other hand, banks don’t enjoy such a luxury — their customers do not possess a mechanism or device for the consumption of their services on a purely digital plane.
A bank debit or credit card is the thing that comes closest to what telcos have but still does not offer the same utility (and therefore value) as a SIM card does. It’s only good for moving money.
Banks could, hypothetically, come up with a new thing that they own and sell to people to enable them to consume their services digitally, but that thing would be dependent on connectivity infrastructure and in most African countries, that infrastructure is owned by telcos.
It’s hard to win.
The banks’ chance to fight back?
On the flipside, telcos just aren’t very good at moving money around.
Mobile money works for most use cases, but the moment you need to do a large number of transactions or move around a larger sum of money, its limitations quickly start to show.
Most mobile money accounts have a daily transaction limit and maximum account balance — much unlike bank accounts. I imagine this is because the mobile network operators still need to back funds held electronically with an equivalent in a bank and do not wish to risk exceeding storing more value than they can back.
International remittances are an even bigger problem as banks own the best and most reliable mechanisms for moving money around the globe, like SWIFT wire transfers for example.
The global financial system relies heavily on banks and the agreements between them, and no matter how hard telcos try, they’ll never be able to get a seat at that table.
Now then, given how many people in Africa are still excluded from the formal financial system and still don’t own a mobile phone, an ideal logical solution would be to combine the strengths of these two industries and create a new thing that is neither exclusively bank nor telco but solves communication and money management through one mechanism.
Of course, this would mean collapsing the idea of each of these industries existing on their own and that would lead to a lot of money lost for a lot of important people — resistance is natural and expected.
The first clear example I’ve seen of this new type of industry in Africa came in 2015 with the launch of Equitel in Kenya — a bank-led virtual telco that introduced thin-SIM cards that you could overlay over your existing SIM card to gain banking functionality on mobile.
In this way, the bank is able to leverage the telco’s infrastructure to reach customers.
Equitel was met with heavy resistance from Safaricom — the leading mobile money operator at the time with M-PESA. It appears they were right to do so as Equitel has eaten significantly into their market share.
While we are yet to see many such upheavals, the symbiotic relationship between telephony and finance becomes ever more clear as time progresses.
Newer entrants in the space such as BibiMoney, want to push the boundaries even further by offering thin-SIM technology that is telco and country agnostic — selling their solution to banks who would want to ride mobile infrastructure to drive financial inclusion.
It’s still unclear to me what exactly this future will look like but it’s now apparent that mobile technology is a powerful distribution mechanism for both banks and telcos alike.
The problem with the current mobile banking/mobile money models in place now is that they all seek to undercut the other player. Telcos go over-the-top of banks by providing mobile money and banks go over-the-top of telcos with thin SIMs.
As a result of this, a lot of time and energy is expended by either party trying to defend against over-the-top threats from the other.
If the technology continues to evolve at the rate it has, this problem will only be exacerbated. Throughout the history of time, incumbents have resisted inevitable technological change only to be annihilated by disruption.
The fact that both the telecoms and financial industries are regulated by different regulatory bodies who are fast becoming unclear about where there jurisdiction starts and ends doesn’t do much to help the situation.
Ultimately, it’d be a lot easier, and a lot more useful for the African population if these competing industry interests were consolidated and efforts aligned towards solving the real problem:
