Why Mobile Money transformed Kenya, but failed to take off in Nigeria

This article compares the impact of Mobile Money on Kenya, the largest economy in East Africa, with its impact on Nigeria, the largest economy in West Africa (and Africa as a whole). We see very different patterns of financial development in respect of Mobile Money.

What is Mobile Money?

Mobile Money started as a payment service performed from a mobile phone, although now it is evolving into a platform to also include a limited range of other financial services. It enables users to access their money anywhere and at any time without the need for a traditional bank account, and can provide financial inclusion for the low-income masses. It will not replace retail banks, which provide a more diverse range of financial services, but in a number of countries it has become a popular platform for typically small transactions.

In the developed world we have retail bank accounts so Mobile Money is unlikely to have a significant impact, however, for the large part of the global population who do not have retail bank accounts – ‘the unbanked’ – this provides access to financial services they would not otherwise have.

How does it work?

There are broadly two approaches to Mobile Money: the service is either ‘bank-led’ or ‘telecom-led’. In practice, the service requires a telecommunication operator to provide the infrastructure, as well as a bank to provide the financial framework.

A subscriber with a compatible SIM card creates an account in which to deposit funds on their phone, typically by purchasing a Mobile Money scratch card. A user can then pay for a good or service with their mobile phone to another subscriber. Both the recipient and the sender receive a text message confirming the payment has been successful. The recipient can then cash this money with a Mobile Money agent or keep their money in their account. Telecommunication companies already have a network of agents selling air-time and so these agents’ functions can expand to include Mobile Money. Mobile Money transactions are protected with a PIN number in a similar manner to using a bank card to provide protection to customers.

The operator receives a transaction fee for every transaction. Transaction fees are typically small, at either a percentage or a flat fee depending on the transaction.

Why has Mobile Money been so successful in Kenya?

Kenya has been successful due to Mobile Money being ‘telecom-led’. The telecommunication company Safaricom entered the Mobile Money market in Kenya back in 2007 with a platform called M-PESA. Safaricom invested in the infrastructure, trained their agents all over the country to become Mobile Money agents and simultaneously promoted awareness. Safaricom have been successful due to the high penetration of mobile phones throughout Kenya as well as a large unbanked population. There was also little regulation at the time, which helped facilitate market innovation. Subsequently, other telecommunication companies have entered the market, but they still have a small market share in comparison to Safaricom.

Today, a large portion of Kenyan GDP is channelled through M-PESA. Safaricom have been unquestionably very successful, and can even facilitate a limited range of loans, savings, insurance products as well as financial transactions. This platform is not just used by the rural poor. People with traditional bank accounts also use it for ease of making a payment. M-PESA may never replace the role of traditional banks, but it allows access to individuals who otherwise would not be able to make electronic payments.

During the first half of 2015 in Kenya there were 131,761 Mobile Money agents and 26.5m customers according to the EFInA Quarterly Review. This is in a population of around 45m people. This shows that Mobile Money has become widely accepted.

The Nigerian experience:

Nigeria also has a large unbanked population and high levels of telecommunications penetration. However the Mobile Money experience here has not yet been so successful.

According to the EFInA Access to Financial Services in Nigeria 2014 Survey, there were 0.8m adults in Nigeria using Mobile Money. This compares to a population of around 178m people, demonstrating far less penetration compared to the Kenyan market.

The main blame for the slow take up of Mobile Money falls on the Nigerian Central Bank (NCB). The NCB has followed a ‘bank-led’ model where they have licenced banks to operate Mobile Money rather than the telecommunication companies. The reason for the bank-led model in Nigeria has been partly for protectionist reasons, to avoid money laundering and also due to concerns about a loss of control. The NCB has also more heavily legislated the Mobile Money industry making the Nigerian regulatory environment less attractive.

Telecommunication companies have been restricted to providing the infrastructure for Mobile Money, through which bank services can be offered. This has proved less attractive to the telecommunication companies, and has given them less incentive to develop the technology and infrastructure here in Nigeria. Banks also have less incentive to develop Mobile Money, which may compete with existing products and target typically poor individuals instead of their normal target of wealthy individuals. This is as well as banks not having the distribution model which telecommunication companies have.

MTN, a South African telecommunication company with successful Mobile Money platforms in a number of other countries has fallen into difficulties with the Nigerian Government. The Nigerian Communication Commission (NCC) has imposed a significant fine on MTN Nigeria for not deactivating customers who had not proved their identity and registered correctly. The incentive for MTN Nigeria to continue investment in Nigeria with a potential court case on the horizon and uncertainty over fine payments is also questionable although MTN appear to be negotiating the fine down.

This is slowing the pace of financial empowerment in Nigeria. There are areas within the country with security issues due to Boko Haram and vast areas where there are no retail banks. However telecommunication operators are everywhere. The opportunities are there, but until the regulatory framework is more open, Mobile Money is unlikely to have much of an impact.

Conclusion

As Kenya is in its tenth year of Mobile Money, Nigeria is lagging behind. Mobile Money can empower the unbanked population by providing basic financial services and financial inclusion. This can help businesses grow and make trade easier.

Nigeria now needs to catch up, otherwise the unbanked population will be suffering the consequences of not having basic financial services for years to come.