How Equity plans to take on Safaricom in mobile payments

MAY 26,2014.

STANDARD DIGITAL.

Analysts say this could be a turning in Kenya’s telecoms market. “Equity Bank will on Monday, May 26, 2014 hold an investors’ and media briefing to unveil its MVNO strategy, report on progress of preparedness and rollout plan,” read an invite.

The bank, the largest lender in customer numbers has always hoped to go big on mobile phone banking to deliver financial services to its eight million account holders.

Nairobi Securities Exchange listed bank made a significant leap to venture into the telecoms mobile money space with M-Kesho. The venture was largely unsuccessful due to complications in revenue sharing and business models between it and Safaricom. The concept died. Safaricom went ahead to partner with Commercial Bank of Africa to launch a similar product—M-Shwari.

For Equity Bank, it had to look for alternatives. In the quest to dominate financial services in Kenya, Equity Bank has been slowly creeping into offering IT services. It recently built one of the few Tier 4 data centres in East Africa and will lease out 90 per cent of this capacity to enterprises.

The bank has also signed a number of agreements with Visa, PayPal and MasterCard to become dominant players in the growing electronics payment space. MasterCard and Equity’s offering allows users to carry out cashless transactions on their mobile handsets through mobile points of sale (MPOS). The bank had interest in yuMobile assets, the mobile phone company owned by Indian firm Essar Telecoms. But Safaricom and its main archrival Airtel outsmarted it.

Now, the licensing of Equity Bank’s subsidiary Finserve Africa Limited and two others Zioncell Kenya Limited, owned by Mobile Decisioning (MoDe) and Mobile Pay Limited, which runs the Tangaza Pesa brand as Mobile Virtual Network Operators (MVNO) could be a game changer.

Tangaza, in particular, offers money transfer services very similar to M-PESA.  “However, the problem one can foresee in Tangaza is the requirement to get a new SIM card in order to use Tangaza.”

This way, penetration is likely to be slow given the reluctance and / or inability of customers to purchase a new phone to use with Tangaza, as well as resistance to change in general.

However for Equity, it has an interesting technological innovation in the market: a stick-on sim card, which works with an existing sim card. It essentially is a thin layer of plastic with a circuit printed on it, and it allows a user to continue accessing their original network, but with the added functionality of enjoying Equity’s financial services.

Its own turf

“If Equity can leverage its massive customer base to adopt this, an easy way would be to offer it free to all customers with incentives for adoption, it would, in the medium term, pose a serious threat to Safaricom,” says Wanyonyi. But, he says all this depends on how Equity rolls out its services, and how acceptable to merchants it is, as well as how many money transfer agents it can roll out quickly.

“Equity, though, is on the right path,” he added.

Last month, Equity Bank announced that it would issue 300,000 smartphones to retailers to facilitate cashless transactions.

The bank will distribute the Near Field Communication (NFC) enabled phones free of charge to supermarkets, restaurants, kiosks, and barbershops as it seeks to boost income from payments processing.

The bank is turning to mobile phones as a cheaper and more convenient point of sale (PoS) compared with traditional swipe card readers.

Equity’s race for a piece of the lucrative retail payments market puts it head to head with Safaricom, which has been issuing M-Pesa pay-bill numbers to retailers under the Lipa Na M-Pesa service to facilitate cashless transactions.

“M-Shwari is a big threat to banks like Equity, whose target clientele is the same as that targeted by M-Shwari. It, therefore, follows that Equity would want to have its own network to rival Safaricom on its own turf — technology — just like Safaricom has brought the game to the banks on their turf — money transfer and banking,” Wanyonyi said.

By having their own network, Equity Bank could rattle Safaricom out of its middleman role, thus increasing earnings and passing the benefits on to consumers and shareholders.

However, Standard Investment Bank (SIB) believes MVNOs entry would not pose any serious challenge on Safaricom.

“With operators (MNVOs) — riding on existing infrastructure, we do not feel these changes will pose any significant value destroying competition. In fact, the main competitive focus is likely to lie in the payments space, which is being spurred by regulatory initiatives that focus on e-government,” SIB said in a recent note to its clients.

However, bring it on, seems to be the message Safaricom is getting out to its new competition. The firm appears bullish especially on the background of breaking its own record in posting the highest profits in the region and holds the view that its market share will remain largely unchanged even with increased competition.

The mobile operator reported Sh23 billion in net profits for the financial year ending March 2014.

Price wars

“We are kind of used to people trying to snatch our customers… we saw the attempts with MNP where there were expectations that over a million customers would jump to rival networks,” said Bob Collymore, chief executive officer Safaricom.

Kenyan subscribers have a low propensity to switch mobile service providers even when offered lower tariffs. The telco market is already fiercely competitive, with customers more often than not preferring value over price when making purchasing decisions.

“Respectfully, we stopped worrying about competition and reacting to their strategies and focus on giving our customers better service and this has resulted in low churn among our subscribers. Customers with an average revenue per user of Sh500 and above have a churn rate of below 2 per cent.”

“Safaricom’s network has a population coverage of over 91 per cent, which means you get connection pretty much across the country and people want connection when they travel and not too many people are prepared to give this up.”

While it may brush past attempts to snatch Safaricom’s customers, these attempts have not been without an impact.

The price wars of 2011 saw Safaricom’s profitability for the year to March 2012 decline, and more pronounced in the half year between April and November of 2011 when its profits declined almost 50 per cent.

A similar onslaught seems to be in the offing, with the recently licensed MVNOs promising to offer services at just a fraction of what is offered by Safaricom. They are expected to offer products to what the mobile operators are offering today.

The three MVNOs will ride on Airtel Kenya’s network.

Safaricom’s dominance

Collymore said Safaricom is unlikely to lower its costs but would instead focus on other customer retention strategies, especially upping quality of services.

“It is their business plan, I do not know what they are planning to do but respectfully, we stopped worrying about competition and reacting to their strategies… we will let them knock themselves out,” he said. “Call costs have gone to Sh3 per minute, then to a shilling and now there are tariffs where you pay Sh10 and talk free all day… it cannot go lower than free calls. With all that, we have been able to increase our market share by four percentage points from 64 to 68 per cent by focusing on our customers.”

“Zioncell as an MVNO will have a clear focus on impacting communities by ensuring that users have the benefit of adding value. This is achieved strategically and driven heavily by users in ways which Zioncell will release to the public during its official launch,” CEO, Julian Kyula said in an email response when asked to comment.

“We will work with large or small groups or societies while customising user cases to deliver value at the same time ensuring the social impact is validated through the benefits of being a customer.”

If Equity Bank’s strategy succeeds; it could even eat into the market share of smaller operators. This way, Wanyonyi says, “The smaller operators will have to piggy-back on the Equity service, since their own proprietary money-transfer services have failed to pose any serious threat to Safaricom. If Equity succeeds with its offering ­— which is cross-platform — we would slowly begin to see it eating into Safaricom’s dominance, and hence into Safaricom’s massive profits.”

“In line with these developments, it is no surprise that the bank sought an MVNO licence so as to gain a share of the lucrative telecoms market,” telecoms research firm International Data Corporation (IDC) said in a note.

However, IDC says the MVNO licence does not translate to easy sailing. In Africa, a number of MVNOs have failed to gain significant market traction. The South Africa telecoms industry has been a key victim as MVNOs, Virgin Mobile and Red Bull Mobile dismally failed. This failure is attributed to high interconnection fees, low Average Revenue Per User (ARPUs), an unfavourable regulatory environment and lack of adequate infrastructure-sharing mechanisms enforced by the regulatory body.

But still, Equity’s entry into the telecoms space will be keenly watched by other financial services providers in Africa.  “The bank’s entry into the telecommunications sector will be a challenge at first, but it is expected that once initial hurdles, such as regulatory approvals, mode of delivery of services either through use of SIM cards or native mobile applications, identifying the correct partners for their agent and network infrastructure to name a few, are overcome, the bank might start pushing for market share in the targeted niche market of mobile money services,” IDC said.

While the analysts see the mobile transfer and payments market as a promising market segment for the bank and the other MVNO operators, the real fight for market share will be on mobile payments of goods and services (in particular utility bills and daily basic commodities), and integration with bank accounts to facilitate deposits and lending.

This, therefore, provides a sound market opportunity for MVNOs offering value-added services such as mobile money and mobile-based retail transactions.

“Pegged on the eight million customer base they already possess and the well-established distribution channels in place, Equity Bank will be initially better placed to target this ‘internal’ customer segment before reaching out to the broader market,” IDC said.

The analysts say the key value propositions to be offered as they roll out their MVNO strategy should be mobile money and e-payments, with competitive pricing points, widespread access and availability of agents.

Equity also possesses the financial muscle to wage potential price wars with other competitors and also resonates as a strong brand with millions of Kenyans.