M-Pesa revolutionizing financial industry

May 11, 2015

Africa’s existing models of financial inclusion, especially the delivery of financial services at affordable costs to disadvantaged and low-income segments of Kenyan society includes access to savings accounts, access to transaction and payment networks, and access to micro-financing products.After announcing record profits, Safaricom has greatly expanded financial access to include the intermediary role of banking in Kenya with transactions and payments to incentivize vulnerable customers to shift from informal financing to formal avenues.But Safaricom’s intermediary role is constrained by cost-to-serve, which is a result of the existing product distribution model that exists in Kenya and other African countries. By rethinking the product distribution model, East Africa’s largest telecom company can change the cost to serve. Many Kenyans according to a study conducted last year still operate outside the banking system and Safaricom financial inclusion is to bring them into the banking system.Kenyans not in the banking system have such excess liquidity to keep money somewhere they cannot access immediately and most are said to willing to save money in such frequency that their amount saved would be meaningful.It was also noted in a study customers in Kenya choose informal financing instead because formal, intermediated ones are expensive and unable to meet the customer needs.

M-Pesa financial inclusion should seek to address all these needs by having micro financing as a key component of any program they are initiating.For example, how should Commercial Bank of Africa and Safaricom M-Shwari loans be operationalized?The revolutionary mobile banking service makes it possible for millions of Kenyans to save, earn interest and borrow money using their mobile phones.All one need is to be a registered Safaricom subscriber, registered M-Pesa user and have an active Safaricom M-Pesa account.Although the programs have been successful, there remains residual demand that still deserves regulators’ attention and indicates that there are financing demands Safaricom cannot meet.So how can Kenya’s mainstream banks’ intermediary role in financial inclusion be executed, such that customers are incentivized to move from informal financing to a formal one like M-Pesa?In Commercial Bank of Africa partnership with Safaricom, loan origination hasn’t been a complex task like the mainstream banks applications that involves finding potential clients, understanding and defining their needs and appropriate products for them, reviewing customers’ situations, identifying additional information, documentation, or other verification banks need to evaluate extending credit.Such processes require knowledge and skill, which is why banks build branch networks, to provide a base from which account officers can perform the necessary field and desk work.Since the advent of M-Pesa, Tigo Pesa, MTN Money, Airtel Money, Voda-Pesa among others, commercial banks in East African region have shut down their micro branches especially in upcountry areas due to cost issues and stiff competition from Safaricom.

In Uganda, micro banking distribution models exist in a high interest rate regime and one wonders how can existing models serve even more vulnerable segments, with a cost model that would provide meaningful improvement on interest rates over the informal sector lenders.The question that is many industry watchers in the region with over 140 million people, shifting the work that has been done by professionals to individual agents lead to a loan origination model that is viable in terms of credit risk, approval rate and operational risk as Safaricom in Kenya and Vodacom in Tanzania are doing? Is there another an alternative to that? I don’t think so but Contador Harrison could be wrong.I think it will require a fresh take on how banking products are distributed in countries like Kenya and Uganda.In Tanzania, a banks’ branch model has been seen as a necessity to establish trust and contain operational risk.The strength of CRDB branch network is a function of the number of nodes in Tanzania’s largest network bank, since customers who visit CRDB branches are not, presumably, visiting another bank’s branches and thus, their own the audience in what experts define as “captive distribution model.”The “captive distribution model” model involves branches accepting deposits, disburse withdrawals and facilitate other transactions.The process involves banks securing premises to ensure transactions remain secure. However, M-Pesa innovations have inspired new alternatives to the traditional banking and has reached out to the unbanked population. Benefits of M-Pesa are different from Banks which choose which customers they accept, particularly so for loan products, for which bank must consider credit assessments, capital constraints, concentration risk, exposure and other various considerations.

In East Africa, studies have shown that Banks differ in that they serve a variety of customers, ranging from individual consumers to companies large and small. The latter class, in particular, entail deep commitments that require extensive information and assessment something which M-Pesa processes don’t require.Consumer loans are relatively similar in terms of purpose and requirements and the Safaricom’s partnership with Commercial Bank of Africa has proved that.However, for the Banks they must own their underwriting capabilities and processes. In the case of Safaricom and Kenya Commercial Bank’s partnership launched less than two months ago, the distribution channels of consumer financial products can be shared.KCB Group and Safaricom mobile banking product enables customers get loans using their mobile phones at a rate of 2% monthly.KCB-M-PESA Account loans repayment period range from one month to six months.Customers do have option of two fixed savings options, a fixed deposit account and a target savings account.Kenya Commercial Bank and Commercial Bank of Africa still have to decide whether to accept or reject a client. M-Pesa technology has enabled in Kenya and across the East African region consumers greater access to financial services and information about them. In the case of Kenya Commercial Bank a customer may only have time to visit one branch, but they can easily SMS an account officer from another bank to compare quotes.To serve the “less-bankable,” M-Pesa is serving them via a distribution model that is effective in recruiting customers, profitable to operate as Safaricom reported in its annual financial results and as KCB and CBA charging of a rate that has meaningful difference to the informal financing alternatives has shown, the market will get bigger and better thanks to M-Pesa revolution.

Contador Harrison