Analyst Angle: African mobile payment market: Opportunities, drivers, issues and future trends

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
Over the past few years, mobile payment solutions have experienced strong adoption in emerging markets like Africa as they perfectly fit the needs of many Africans who have limited resources or don’t have a bank account. With 116 mobile payment services already available or set to go live in the coming quarters, the mobile payment market has become an overcrowded space in the African region. The level of competition in certain African markets like Ghana, Nigeria, South Africa, Uganda or Tanzania has increased fairly dramatically over the past few years. For instance, in Ghana, eight mobile payment services are now available (Vs. seven in Tanzania and Uganda). Nokia, in association with Obopay, which is set to introduce its Nokia Money service early next year, is well positioned to become a serious player in this space as well as a peacemaker. However, several issues need to be overcome before the market reaches its full potential.
1. Mobile payment solutions growing in popularity as it perfectly fits the needs of many Africans: Over the past few years, mobile payment solutions have experienced strong adoption in Africa as they perfectly fit the needs of many Africans who have limited resources, do not have access to formal financing services (e.g. banks) and don’t have a bank account. For instance, in Kenya where only 40.5% of Kenyans have a bank account, Safaricom M-PESA has experienced strong growth, reaching 7 million customers today. Generally speaking, mobile payment solutions are perfectly tailored to the needs of Africans as they are affordable and can leverage the growing popularity of cell phones and mobile data services like SMS in this region. In many African wireless markets (e.g. South Africa, Nigeria, Tanzania, Morocco, Algeria, etc.), low-income customers, which have limited resources and focus on low-end feature handsets, represent the large majority (98%-99%) of the wireless market. As a result, carriers have to implement plans (e.g. prepaid) and services like mobile payment solutions in this kind of environment that fit the needs of this population.
2. Two major types of mobile payment solutions dominate the African mobile payment market: AT (Air Time Transfer) & MMT (Mobile Money Transfer): Generally speaking, AT services enable mobile users to trade airtime with one another in order to make calls, while MMT services allow mobile users to withdraw that same airtime in liquid cash. MMT services work like ATM or debit cards: users can visit a cash-in/cash-out agent (typically the same person who sells pre-paid airtime cards) in order to deposit or withdraw liquid cash. Typically, the money is stored in the SIM card. While several MMT services are available via WAP and USSD, the large majority of mobile payment systems are SMS-based.
3. Mobile payment adoption is as high as 20% in African countries like Kenya and is set to experience strong growth in the coming years due to growing demand and growing popularity of SMS-based solutions: Over the years, the adoption of mobile payment solution has experienced strong growth in many African countries like Nigeria or Kenya. In fact, in Kenya, roughly 20% of the population (7 million out of 37 million) use the Safaricom’s M-PESA mobile payment system. If you want to learn more about the state of the Kenyan mobile payment market, feel free to check out my report on the Kenyan mobile entertainment market. I also wrote a similar report on Tanzania. To learn more about this report, click here. Moving forward, the adoption of mobile payment solutions is set to grow fairly significantly driven by the growing demand for such solutions. The market is likely to see the emergence of more capable and affordable solutions, which should help fuel the adoption of such solutions. Of note, in the North African region, the mobile payment market is not as competitive and remains fairly underpenetrated despite the enormous needs. Additionally, the large majority of mobile payment systems remain fairly unsophisticated as most carriers offer AT services. Thus, there is a need for more advanced mobile payment systems like MMT with international money transfer capabilities.
4. International mobile payment service set to become a must have in the coming years: Safaricom’s popular M-PESA service now allows Safaricom customers to receive money from friends and family in the U.K. directly to their M-PESA account. Of note, Safaricom is the first African carrier to offer an international mobile payment service. I expect other carriers in Kenya and other African countries to follow suit by adding an international component to their existing mobile payment solutions. This makes sense given the growing number of Africans living abroad. I also expect Safaricom to add new international destinations (e.g. U.S., Canada, Germany, etc.). It will be critical for Safaricom to continue to work with leading international banks such as Western Union.
5. Nokia set to become a leading player in African mobile payment market based on its dominance in handset market, proven distribution channel and Obopay’s solid experience in the mobile payment space: Nokia, in association with Obopay, which is set to introduce its Nokia Money service in select markets (India, Africa, etc.) early next year, is well positioned to become a serious player in this space as it could leverage its dominance in the African handset market (40% market share in South Africa), or emerging markets in general, especially in the low-end handset market. The company could also leverage its proven distribution channel and Obopay’s solid experience in the mobile payment space. Of note, Nokia invested $70 million in Obopay earlier this year. Nokia Money will enable users to exchange or transfer money, pay merchants for goods and services, pay their utility bills, or recharge their prepaid SIM cards (SIM top-up). Nokia is currently building a network of Nokia Money agents, where consumers can deposit money in or withdraw cash from their accounts. Ultimately, Nokia should also help drive price erosion in the African mobile payment market. Also, Nokia is unlikely to become a threat to leading mobile payment services like Safaricom M-PESA, MTN Mobile Money and Zain Zap as I expect those companies to remain on top in the near term based on their current momentum. Bust most importantly, Nokia could become a key facilitator in the space as it could help solve interoperability issues between mobile payment systems across carriers and countries; in fact, Nokia’s mobile payment is set to be open and interoperable with other payment services. We also believe that third part companies like Credit SMS and Splash Cash are likely to become key technology enablers here.
6. But several issues remain before the market reaches its full potential: Generally speaking, the mobile payment market remains highly unregulated at the moment. But most importantly, there is a boiling debate as to whether banks or carriers should regulate the market. So far, the mobile payment market is essentially controlled by carriers. In the coming months, frictions between carriers and banks are set to intensify, especially in a country like Kenya. Other key issues include liquidity shortages in rural areas, inter-carrier interoperability issues, etc.
Bottom line: Mobile payment solutions are set to experience strong growth in the coming years in emerging markets like Africa. However, competition is set to intensify dramatically in the years to come, which should help drive the price erosion and ultimately further fuel the adoption of such solutions. Moving forward, I
expect more mobile payment solutions
to be available across carriers and countries. Solutions are also likely to become more capable and affordable as a result of increased competition in the market, especially from a company like Nokia. I also expect Nokia and several third-party companies to become key facilitators in the space as they could help solve interoperability issues between mobile payment systems across carriers and countries. I strongly believe that Africa presents tremendous opportunities for mobile payment companies like mFoundry, and other similar companies. Lastly, with already 116 players on the space, for too few carriers, I expect to see a phenomenon of consolidation in the market. Many of the small players will end up being shut down or acquired by the largest players.