Have phone, will send cash

Bohnstedt, Andrea

In Africa, moving money has always been problematic; for those without bank accounts, it is virtually impossible unless it is done physically by hand. But where there is a problem, there is a solution. The canny mobile phone operators seem to have come up with another winning innovation – combining money transfer with mobile technology. Andrea Bohnstedt reports from Nairobi.

Mobile phone operators may have initially sneered at sub-Saharan Africa’s market prospects, dismissing the idea that networks could be run profitably in what they thought was an environment of overwhelming poverty. They have quickly cottoned on. These days, banks are also slowly getting round to the idea that there is a clientele out there beyond the blue chips, large corporates and wealthy individuals – but in Kenya, the mobile phone companies are elbowing their way into that market for financial services, too.

Kenya has a vibrant mobile telecommunications sector – Celtel has launched its One Network that now allows Celtel customers to make phone calls across six countries, Kenya, Uganda, Tanzania, DRC, Republic of Congo, and Gabon without any roaming charges.

Safaricom, Celtel’s mass-market, low-cost competitor, quickly signed similar agreements with operators in East African Community (EAC) member countries Uganda and Tanzania.

Earlier this year, both companies started offering mobile phone remittances services, deliberately designed for citizens without a bank account: Only 27% of Kenyans are clients of formal, regulated financial institutions. Another 35% use informal finance mechanisms like rotating savings and credit associations, i.e. have very limited access to finance products. This leaves more than a third of Kenyans without any access to any financial institutions.

Kenya’s mobile money transfer products actually had a much simpler precursor: People who are cash strapped are usually also low on airtime. This bred the ‘flashing’ phenomenon – also known as ‘beeping’ and a host of other terms elsewhere. It is basically a phone call so short that the counterpart won’t be able to pick it up – and will then have to call back to find out what’s going on.

Celtel introduced a mechanism through which clients could send airtime credits from their own balance to friends or family members, and Safaricom followed suit. Safaricom’s name for this mechanism, ‘sambaza’ (Kiswahili for ‘to share’), has now entered colloquial language – ‘Can you sambaza me some airtime?’ But sambaza-ing has grown up.

Safaricom’s M-Pesa

Safaricom launched its M-Pesa (pesa is Kiswahili for money) in March 2007 after intense pilot testing. It’s easily accessible: To set up an M-Pesa account, clients need to take their ID and their phone number to a registered M-Pesa agent. Newer SIM cards already have the M-Pesa account functions, but anyone with an older SIM card can simply get a replacement free of charge. It is important that the client’s phone line is in credit as the M-Pesa system functions on the Safaricom sms system.

Clients can make deposits and withdrawals at a registered M-Pesa agent. Senders need to have an M-Pesa account, but recipients do not need to, Le. money can be sent to other network clients as well. However, it is cheaper to send money to someone with an M-Pesa account.

Amounts to be sent range from Ksh100 ($1.50) to an upper limit of Ksh35,000 ($525), with the fee a standard $0.45 to send to another M-Pesa account holder. If sending cash to a non-registered M-Pesa recipient, the fee ranges from $1.12 to $6 – but, in contrast to M-Pesa registered clients, they do not have to pay for withdrawals. Charges are pay-as-you-go: Clients are only charged per transaction. Each transaction needs to be confirmed with a secret PIN.

Agents are airtime dealers, but other outlets such as petrol stations, supermarkets and internet cafes can be agents – all businesses that are used to dealing with cash.

In July 2007, Safaricom signed an agreement with Postbank under which Postbank branches will act as M-Pesa agents – as bank branches, they are well placed to handle larger cash transactions, and adding the 80 Postbank branches to the network pushed the number of M-Pesa agents to more than 800.

Safaricom has partnered up with Commercial Bank of Africa which administers the overall M-Pesa account. Although declining to comment when the service will break even, M-Pesa’s head, Pauline Vaughan, notes with satisfaction that M-Pesa now has 600,000 active users and has moved Ksh2bn since its launch in March 2007.

The service was initially marketed with a strong emphasis on ‘sending money home’ from the urban areas to the rural villages – a universal image across Africa’s rural-urban divide that most people find reflected in their own experiences.

Consequently, after the launch, Safaricom has now focused its campaign mostly on radio advertising, a lot of which is placed in regional radio stations and in different local languages. The marketing may be mostly focused on remittances, but what really distinguishes Safaricom is the fact that the M-Pesa effectively creates a virtual wallet, or a virtual bank account. Users can keep up to $1,050 in their M-Pesa account and use it to pay retailers, or pay for services.

Celtel’s Sokotele

Launched shortly after Safaricom’s M-Pesa, Celtel’s Sokotele has pursued a different model. Sokotele only offers remittances with maximum amounts of $75 – if clients want to send larger amounts, they will need to do several transactions. Again, there is a transaction-based fee. In contrast to Safaricom, however, the system is not based on Celtel’s SMS system – in fact, clients do not even have to have a mobile phone, making it, potentially, even more accessible.

Money is sent through, and picked up from, a Sokotele agent who handles both airtime sales and money transfers with a payphone unit. Since the introduction of the service, cash volumes have increased markedly, from $45,000 in July to $105,000 in August, and then to $750,000 in September.

This jump, according to Robert Ochola, the sales and marketing manager for the Sokotele payphones at Celtel, is due to two factors: Celtel’s advertising campaign kicked in, and pupils were going back to school.

To develop and operate the service, Celtel has partnered up with local technology firm Packetstream and K-Rep Bank, a bank targeting low-income customers with microfinance services, i.e. financial services that specifically target the poorer end of the market. K-Rep Bank handles the cash and also works directly with Sokotele agents, including providing them with loans to purchase the Sokotele unit.

But Ochola also points out additional benefits of the co-operation: K-Rep Bank clients have exactly the profile that Celtel is targeting with its service, and the bank has also been instrumental in vetting the agents, which helped the overall security of the system. Sokotele ran a separate marketing campaign to recruit the agents. Aiming at a footprint across the entire country, Sokotele currently works with 400 agents.

Ochola considers the strength of the partnership with Packetstream and K-Rep as one of the reasons why the product has quickly become financially viable for Celtel. In addition to careful cost management, investment costs were kept low as each of the three partners brought in their in-kind contribution.

Ironically, in the different approach both companies have taken to this product their typical roles appear have been reversed: Whereas Safaricom was always perceived as the mass market operator, and Celtel as serving the middle and upper classes, in the money transfer business, Celtel clearly aims further down the market, offering a service for which clients do not even need a phone. As far as remittances go, however, both companies found that the average transaction volume was $45.

And the future?

Both Safaricom and Celtel have partnered with a commercial bank that deals with all the bank-specific issues and actual cash handling. While the money transfer business is currently not regulated in Kenya, this may change shortly:

The Central Bank of Kenya (CBK), the regulator for the financial sector, is working on legislation to combat money laundering and to regulate electronic payments and the payment system, both of which will affect mobile money transfers.

Both companies are planning to add utility bill payments to their services shortly, and are working on adding international remittances to their system: Safaricom currently runs a pilot for this product and Celtel is in negotiations with potential partners. According to CBK data, $58,000 was sent to Kenya in remittances in June 2007 alone. Based on data from remittance agencies and banks, the CBK estimates that remittances will reach more man $1bn a year.

As a consequence, this is potentially a huge market and the established players like Western Union and MoneyGram have long attracted criticism for their high charges. The CBK figure for remittances is most likely an underestimate – and as with domestic remittances, Celtel’s and Safaricom’s services will help to bring the small amounts into a formalised system.

As Safaricom’s M-Pesa was developed together with its parent company, Vodafone, a roll out of the product to other markets where Vodafone operates is likely.

Russell Southwood, from Balancing Act Africa, a telecoms and internet thinktank which is publishing M-Money – Finances, Banking and Payments through mobile phones in October 2007 – concludes that there is finally a critical momentum with this particular product and technology.

“Transferring money using mobile phones has been like the ‘holy grail’ – much talked about but never seeming to be found. In the past six months, a number of services have started, indicating that the market players have gone from just being interested to starting to implement.

“Some of the indications from those first in seem to indicate enough potential for it to take off properly. In the mid-term, the consequences for banking in Africa, where customers currently get a far from satisfactory service, are quite profound.”

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