How over-regulation has stifled the pace of mobile money adoption in Africa

In a continent where less than 20 percent of Africa’s population has a bank account and where latent demand for money services is so high, why are there no other success stories on the scale of Safaricom’s MPESA service, in Kenya?

Diverse factors such as distribution networks or Kenya’s unique social structure have often been cited as the reasons why MPESA has only worked in Kenya and not elsewhere, the answer lies in the requirement for compliance and regulation obeisance has cemented the role of banks at the core of the mobile money universe. This factor has undoubtedly played a major role in limiting how mobile money solutions can be implemented and rolled out.

The overly-cautious, regulatory driven bank-led approach has all but killed off the possibility of producing an MPESA-like agile, cheap, customer-friendly mobile money application or solutions built around the requirements that sub-Saharan African customers so desperately need. This has had profound effects on the pace of mobile money adoption.

To understand how this situation has come about, it is important to view the Kenyan retail banks response to MPESA, and subsequently, how other banks and regulators around the continent responded to the spread of mobile money services.

MPESA launched in 2007 into a vacuum of clear guidelines and precedents that dictated how money could move around a mobile ecosystem. Thanks to a loophole in the banking regulations the service did not, at that time, require a banking license to operate.

The service grew rapidly from inception, and its runaway success caught the retail banking sector in Kenya off-guard. Less than a year after the launch, a cartel of Kenyan banks successfully lobbied the Kenyan Central Bank to investigate SafariCom and MPESA, labeling it “nothing more than a Ponzi Scheme“.

Clearly the established retail banks in Kenya viewed the upstart mobile operator-led service that acted like a bank, as a threat. Their aim was to teach the upstart a lesson, and shut it down or at least bring it to heel by forcing it to play by the rules, and act like a bank.

That strategy did not work out as planned. Under pressure from the central bank, an audit of M-Pesa was launched in 2009 by Consult Hyperion. The audit vindicated the upstart service by certifying that MPESA offered “bank-grade security and controls to its customers”.

At the end of the process MPESA was given a clean bill of health and allowed to continue to operate.

With the threat of alternative products like MPESA entering the market with their potential to disrupt and undermine the retail banking sector, central banks around the continent moved quickly to clarify and entrench the retail banks role as central players in the mobile money value chain.

Since then we have seen a slew of policy documents, directives and legislation, placing mobile money services firmly under the control of banks and banking legislation.

Since 2009, the South African Reserve Bank issued a several directives and papers that govern and regulate the functioning of mobile money within the existing banking framework. Similarly, after much stopping and starting Nigeria produced the “Regulatory Framework for Mobile Services in Nigeria” that sets out three classes of mobile money providers, “bank-led”, “bank-owned” and “non-bank owned” — in which, surprise, surprise, banks play a pivotal role. Central banks across the continent followed suit in a similar vein.

The net effect is that since 2008 we have seen the doors close around the legal and policy loopholes that may have allowed upstart mobile money services, like MPESA, across the continent to flourish and grow.

Today sub-Saharan (and other emerging market countries), banks have positioned themselves firmly at the center of the mobile money value chain, by virtue of their legally mandated status and role in the financial system, they hold a pivotal place in the way money moves in, out and around mobile services.

Arthur Goldstuck hit the nail on the head when he wrote that, the involvement of banks (referring specifically to Mpesa and Nedbank in SA), “immediately increased the complexity and cost of the service”.

“An increase in these two factors”, wrote Arthur Goldstuck, “directly prevents the service from achieving any meaningful market penetration”.

The experts have been telling us for years now that Africa is the new frontier and ripe for mobile money adoption. However it is abundantly clear that retail banks and financial institutions are not in a hurry to trade away the pivotal role they enjoy in the financial system, (and the vast long-term mobile banking opportunities that may result), and so free up the space for new entrants, innovations and entrepreneurs.

There appears to be some glimmer of hope that retail banks recognise the need to change their outdated and irrelevant business models. They have, however, been slow to do so.

While many sub-Saharan banks with an eye on mobile money, are not quite as bad as the vampire squids a la Rolling Stone magazine, wrapped around the face of mobile money solutions, they will have to look critically at the role they play in enabling mobile banking systems, if the vast un-banked populations of sub-saharan Africa are to get the kind of mobile money service products and services they deserve at the prices they can afford.