Will The Real Payment Disruptor Please Stand Up

Farhad Manjoo makes a compelling argument for why the real winners of the payments revolution are the same players we already know, the credit card companies and the banks, in his, “Don’t mess with credit: Why the future of payments is already in your pocket.

“Nearly every start-up working in payments is simply creating a new front end for your credit card. That’s not a small thing; we need new ways to use our credit cards. But we shouldn’t forget the true winners in this new marketplace—whatever innovations we see in payments over the next few years, there’s a very good chance that most of the rewards will flow to Visa and MasterCard.”

This is true… if you live in the US or Europe.

It’s also why Mpesa is so important, as it represents a new form as well as a new source.

Mpesa destroys the paradigm of payments as we knew it

It’s a good thing that Mpesa happened in Africa. It offered a new way of thinking about money and payments, without the legacy baggage of banks and regulations meant for another century. The powerful banking interest were held at bay, not by great power, but by indifference – this is Africa afterall, who cares about this market?

With Mpesa, and without a bank account:

  • People can send and receive money.
  • People can store up to $1000 in the system, creating a pseudo-savings account.
  • There are no credit card companies involved.
  • There are no banks involved.

Mpesa is big now too, big enough to garner a lot of attention from the the credit card companies and banks. M-PESA has over 14 million users in Kenya, 9 million in Tanzania, and hundreds of thousands in Afghanistan and South Africa now too. It now processes more transactions domestically in Kenya than Western Union does globally, somewhere in the range of 25% of Kenya’s GDP is transacted on it.

The banks actively lobby against mobile-based payment and money systems now, globally, as it constitutes a massive competitive threat that they are unable to compete with due to a multitude of reasons, one of which is simple transaction costs. The credit card companies are watching closely too, and moving. Mastercard and Visa both are working on mobile offerings, seeking to link with mobile operators in order to bypass a would be competitor.

Mpesa isn’t perfect – we need a payment system that works across mobile operators and can be synced (easily) with any bank, if needed. While it could improve, it’s still worth pointing out the really big missed opportunity here is by Vodafone. Like I’ve said before, if Mpesa was rolled out at as an independent company led by Michael Joseph, it could battle the credit card companies of the world and unseat them in many markets.

What’s interesting to me is that in the arguments in the US and Europe on “the future of payments” the real innovation, with real numbers, isn’t being mentioned.

Update. some new blog posts on this topic:
Could we live without cash?
Payments, the more things change…

Africa’s small merchants and payments

I’ve been pondering small business, payments and incentives quite a bit recently. Partly because of the web startups I’ve been seeing crop up locally, partly due to the inefficiencies in the system, and also because I’m a bit of a merchant at heart.

Specifically, I think that small business in Africa will bring a major wave of activity in the online space. That some smart startups will take advantage of mobiles and the internet, and will be beneficiaries of this growth. We’re all quite impressed with the peer-to-peer mobile money growth on the continent, but those numbers pales in comparison to what can be done with high penetration of active merchant payment options.

The African Payments Picture

A recent post about Square (the merchant payment system for iOS devices) and their use by small businesses started me thinking beyond the mobile peer-to-peer payments we’re so focused on here in Kenya and more in the direction of the merchant side. Right now Square moves $4 million per day, a healthy business, but not a massive amount compared to the big guys in the field. Most merchants in the US and Europe default to having some type of credit card or bank card payment setup for customers, it’s almost a given.

Meanwhile, in Africa it’s a different story. Mobile payments have taken the stage due to the lack of credit/debit card penetration. In short, African’s lack payment options, so innovative ways to use what they do have (phones) has pushed payment innovation forward.

While the mobile operators have been busy diversifying their revenue streams and figuring out new ways to hook in their subscribers with mobile money, the banks haven’t been nearly as active. Many of them would rather just create a mobile way to check your balance, rather than provide a tool with truly meaningful interaction, something you could pass money through to merchants or your contacts. Instead of offering something of equal, or better, value they’ve instead chosen to try and block the operators movements.

As I’ve suggested many times, we need an agnostic system, where the user isn’t penalized for their choice of mobile operator or bank.

New Ideas

While the big players continue to fight it out, the small players are innovating where they can. We’re seeing mobile payment aggregators, such as PesaPal, begin to see success as their web options catch on with merchants, schools and events. Meanwhile, groups like KopoKopo are going further down the stack, providing a subscription-based mobile payments processing package for SMEs.

New startups like Niko Hapa are creating locally-relevant incentive systems for merchants that works with everyday customers. Others, like M-Order, are creating simplified mobile and web-based ordering systems for customers to order services and products. MIH-backed Dealfish and Ringier-backed Rupu/Pigia continue to duke it out against each other across sub-saharan Africa, getting small merchants to list their goods on their marketplaces.

What I’m pointing out is that we have a wave of new products and services specifically aimed at merchants. Most of them are small and don’t have critical mass, but that is changing rapidly. These are just the first movers.

Shifting Sands

Bonk is a t-shirt company in Nairobi that offers the coolest designs around for their target market of urban Nairobians, and they have a shop set up in a nice shopping center in town (Junction). Let’s call them the high-end of the small merchants who need a good way to get payments. Their current setup allowing Visa transactions account for around half of their customers, and they have to pay a rather large 5% transaction fee. They don’t have an online store (yet… Shame on them.), so walk-ins are their only sales channel and they do very well with them.

Other examples of small businesses that run the range of medium- to lower-level transactions would be auto parts stores, retail clothes shops and restaurants. They all have a need to attract customers and they are all served better by having an easier way to setup a merchant account and have easier ways for their clientele to pay.

There are hundreds of thousands of these small businesses across Africa. Few of them have any solution other than cash. Companies that accept credit cards, like Bonk, are the anomaly.

A Hybrid Solution

What would a Square-type solution look like for them? What if a company were to create a simple (for customers) payment system that solved the problem that Square is solving? That is, a way to get your hands on a solution easily, without oversized transaction fees, and which also worked within the local context of mobile payments plus credit cards.

I can imagine someone coming up with an device that works on most phones. Probably Android phones here instead of iOS devices. That way, as a merchant I can buy an $80 IDEOS Android phone, get one of these swiping devices, that also has a chip in it for near-field communication payments and which seamlessly works with Mpesa and other mobile payment options. It’s simplified, and it works across not just a country, but across the continent.

What would this device look like? How could it connect to the phone? What type of technology would be embedded in it to make it work right? Which merchant systems could be signed on in order to allow people to signup and get started?

What Should Google Do in Africa?

This week I’ll be speaking to a delegation of around 30 Associate Product Managers (APMs) who are exploring leadership positions within Google. Along with them is Marissa Mayer, VP of Location and Local Services. Like I did when I addressed Nokia’s Africa leadership last year, this is a chance for them to hear from more than just one person with one opinion.

I will bring them your answers to the questions below:

  • What is Google doing well in Africa that they should continue?
  • What should Google be doing better, differently or new in Africa?

A Few of My Thoughts

Google has done what few other tech companies have done on this continent. Having 54 countries to scale across isn’t easy, so anyone trying it gets a lot of credit.

  • They’ve invested in people; both their own and the community in general.
  • They realized early that there was a need for tech policy change, and put time, resources and energy into that.
  • They have surfaced content, from maps to books to government data that wasn’t available before.
  • They have localized search into multiple local languages, made their services more mobile phone friendly and experimented with services for farmers, health workers and traders.
  • Their Google Global Cache has sped up the internet by upwards of 300% for some countries.

Here’s are my suggestions:

Double down on Android. Do this in two ways; first, keep driving the costs down, like what was done with the IDEOS handset. Second, help your partners (Huawei and the operators) push the spread of these beyond the few countries they’re in now (and at the same price as in Kenya).

Gmail ties everything together. Google has been the beneficiary of most other companies ignoring Africa. Facebook is the only challenger in the chat, mail and social spaces. Get started on zero-rating Gmail with the mobile operators, figure out how to make Google Voice work here, and extend Gmail SMS Chat beyond the 8 countries that it currently works in.

Figure out payments. It’s still difficult to get paid if you’re running ads or making Android apps, you’re not on an even playing field with your counterparts in other areas of the world. It is clear that Google Wallet is a strong personalized LBS play on consumers in the US. Take that same energy and figure out how to crack Africa, realize just how much money there is in a payment system that spans the continent.

Keep experimenting. Many don’t know of the apps and services you build and test out in various hyper-local areas. Some work, some fail. This curiosity and willingness to try something innovative and new is what makes the open web such a great space, and it is what helps us all overcome the walled gardens of the operators. Don’t stop.

Finally, though you have all the power and brand name needed to make things happen, remember that it’s the local devs and companies who need to own their space and especially their data. While flexing your muscle, especially with government types who own vasts amounts of data, do push for local ownership over taking it for yourself.

[Notes: hat tip on this post goes to Steve Song who started thinking through this years ago. Image credits from Memeburn.]

Banks Blocking Mobile Money Innovation in Africa?

There’s an good post over at the CGAP blog about mobile money’s innovation crisis. The author claims that nothing new has happened in mobile money since Mpesa was launched in Kenya, except for maybe the launch of Mkesho this year in Kenya as well. Besides that, everyone around the world pretty much tries to duplicate what Safaricom is doing in this space.

Why?

“There may also be one partnership in particular that could be hampering innovation—that with the banks. Historically, these two players have taken very different strategies for new product development, especially in resource poor countries.”

Thinking big picture

You can send up to $500 for as little as 37 cents using Mpesa. On Zain it will cost you 74 cents. That’s an insanely low transaction cost compared to what banks charge, and that’s not even going into the fact that they can’t do transactions as low as 50 to 100 Ksh ($.60 to $1.24). The kicker, you can store your money in it for no fee at all (unlike the usurious rates that the banks charge).

Simply put, banks cannot compete with mobile operators when it comes to transacting payments for the majority of Africans.

Regulators make and enforce the rules around everything. How do they make their decisions, who lobbies them and why? Is the reason that we haven’t seen a true replication of Mpesa anywhere besides Kenya due to the banking sector protecting its interest?

Opportunity lost

Right now anyone in Kenya can do every type of transaction within our own borders, and if creative into neighboring countries as well. A few other countries have the ability to do this type of thing as well, if less efficient and/or elegantly conceived.

Currently opportunity is lost by local merchants in not integrating mobile payment structures better into goods and services offered to both businesses and the public. This is changing, businessmen are quick to move to figure out new ways to increase margins and customers. It’s only held back by the operators not willingly opening up their platforms for easier integration into business.

11% of Kenya’s GDP was shifted through Mpesa in 2009, and the company expects that to be around 20% this year.

We can all agree those are big numbers and that a massive ability to make money has been shown in Kenya. This begs two questions:

  • Why has no one allowed it to truly replicate in another country?
  • Why is no one throwing big money after this, trying to figure a way to scale a mobile operator and bank agnostic payment solution across a region, if not the whole continent?

There are big players trying to break into the greater African market (I’m looking at you Naspers). There are banks who have the money to spend on figuring this out, but aren’t thinking beyond their own brand, so continue to fail. Maybe the answer is we just should sit here and let all this lost opportunity continue to drift by us, waiting on the big credit card players of the world like Visa or Mastercard to make a move.

That’s a fatalistic stance, and I certainly hope it’s not true. Unfortunately, I don’t think we’ll see this service come from 2 guys coding in a garage. Instead, I hope that there are mobile operators and banks banding together to make something bigger than themselves that make more profits for everyone. If not them, a big investor willing to wager millions of dollars on making billions.

A Mobile Payment Trifecta in Kenya

Kenya is quickly gaining a competitive advantage in the mobile payments space. Led by mobile operator giant Safaricom with their Mpesa product, the market locally sees huge value in mobile money transactions. Add to that a regulatory system that is relaxed enough for innovation to be encouraged, and you have a great space for interesting things to happen.

Pay.Zunguka

The team at Symbiotic always have more than one iron in the fire. I was surprised by their most recent release of a new product called Pay.Zunguka last week. Simply put, it’s a payment gateway and aggregator, allowing merchants, developers and content providers a way to monetize their work with the public.

There are two sources of inspiration in Pay.Zunguka (guys, we need to talk about names at some point…), that is the ability for people to utilize international online payment methods like PayPal and Google Checkout, but more importantly that users here in Kenya can do it all without a credit card, only using their phones. That’s a big deal, and it’s a nod towards recognizing that credit cards aren’t necessary, we can bypass that mess.

Mbugua Njihia, CEO of Symbiotic, tells me that their plan is to first integrate with content providers and create an easy-to-use micropayment space, charging 3% per transaction. This will be followed by a partnership campaign to work with larger organizations who don’t have an efficient payment platform for consumers.

PesaPal

PesaPal I’ve written about before. It’s a mobile payment gateway as well, but one with a specific focus online. Liko and team have made great headway recently, but not just in the technology, which is critical. They’ve made headway in some other important areas, funding and marketing.

We’ve talked about the need for local investors to buy into local technology startups. When that doesn’t happen, the international ones swoop in and take advantage of local investor myopia. In this case, PesaPal is receiving a healthy seed capital investment for scaling and marketing. With cash flow happening right now, it’s a good time to invest, and I’m glad to see someone doing so with this team.

I talked to Liko yesterday about this. Their strategy has shifted somewhat since last year, instead of just focusing on web merchants, the PesaPal team is working on relationships with educational institutions and educational book suppliers to make parents lives easier when their child starts the school year. The parent can now pay their child’s school fees using Mpesa or Zap, and then are directly linked to the list of that year’s books with the option to buy them too, and have them delivered to the school for their child’s first day. Brilliant!

This is the kind of fresh thinking that is great to see coming from tech startups: they’re not thinking or selling the tech, they’re selling a solution to a problem.

Zynde

Zynde is a new player in the space, but you’ll start to see a pattern here when you jump over to their website. Because none of the large companies are addressing the very real need for agnostic payment gateways the market is filling in that gap for them.

A quick email chat with David Kagiri of Zynde gave me more insight into their focus behind the service:

“My main driver was that new technologies existed that could enable me deliver cost effective solutions. After interaction with owners of small businesses I realized that most don’t keep track of their business finances and the cost of the available off shelf software that would help them with that was beyond their reach. I came up with a simple solution that uses the SaaS (software as a service) model so that I could deliver cost-effective solutions to them and an API that will enable creative developers to extend it to multiple mobile platforms and reach the masses.”

Zynde will have to prove themselves in what is quickly turning out to be a highly competitive space with competent players.

Talking Mobile Banking in Kenya

I’m attending the Fletcher mBanking conference in Nairobi today and tomorrow. Right now I’m sitting in the panel on “Perspectives on Mobile and Branchless Financial Services”. It’s quite a panel with, among others, Michael Joseph of Safaricom (of Mpesa fame), Adan Mohamed of Barclays Bank, David Proteous of Bankable Frontier Associates.

mbanking-kenya1

Points from the Panelists

David Porteous
He challenges Kenya to create a Kenyan model, not just of one-off success stories, but a Kenyan one that is open and usable by multiple actors in the country, not just one or two. Something that can be duplicated and used around the world. Lastly, he warns of “Regulator Flu”, much like Swine Flu it sweeps around the world and stifles innovation.

Adan Mohamed of Barclays
Adan starts with this provocative statement, “We will never have an environment where we have no branches.” He says it is ingrained in our psyche to use branches, and we will always need branches, so this idea of a branchless banking system is nice, but will run concurrently with the old status quo system. The use of technology continues to be small, it’s patchy, it’s mixed. There’s a long way to go, as people are nervous of what goes on behind this internet system.

Specific challenges revolve around regulation. For instance, if you want to run it 24/7, you have to get permission, you have to deal with money laundering rules, etc… He thinks that the central bank needs to be given a greater mandate. However, we need to see this space not revert back to the old ways, even as more control is given.

Customer contact tends to be low in a branchless system. He thinks this is a place where people want to be in touch and face-to-face with people. A lot of focus has so far been on the payment side of the occasion – we need to focus on the savings side of the equation as well.

Mark Pickens of CGAP
What we have today, is not necessarily what things will look like in the future, “what could disrupt the current landscape?” Mobile network operators are leading the charge. We think there will be 120+ initiatives like Mpesa in the next year around the world.

What is driving this for the mobile operators?

  • 2.93B shillings from Mpesa of revenue
  • Increases in loyalty
  • Increases in users
  • Globally think there is 1b ppl with a mobile phone but no bank account

Where else could innovation come from?
What if the kinds of technology that poor people had in their hand changed dramatically? If the phones that people had in their hands could browse the internet. Not smart phones, but sub $100 phones for this.

  1. Why would this matter?
  2. GPRS and EDGE are dramatically cheaper than SMS (75x cheaper)
  3. Mobile operators and banks would not own the customer due to owning the infrastructure. Anyone could reach out and find customers directly. The incumbents wouldn’t be as privelaged.
    Localized creation of tools

3 main points:
Regulation. Particularly openness for non-banks to operate. Would there be a regulatory framework where this could be open for others to access and bes safe operating within? If we think that banking infrastructure needs to be openly accessible, then what is needed in the openness of mobile infrastructure?

Agents. The preponderance of Mpesa agents make a profit of $5/day. If there is limited capital in these dukas and agents, then how will he get liquidity to do it for anyone else? Maybe it can be done by extending lines of credit to the agents.

Consumers. The next round of innovation is beyond payments, but to use the wallet to store value. Who are the players that can provide this service on a safe basis? Paying for products directly would cut the cost for agents directly, and it would cut the cost of money within the system to the gov’t (2-3% of GDP). Poor people do have money, and they do save, but they put it at home in a jar, under the matress. What comes next innovation, is that the mobile needs to beat the matress

Peter Rinfretof Iris Wireless
Friction will continue to increase between operators, banks and other institutions like Western Union, etc.

The regulations and regulatory environment will change a lot for everyone. You’ll see regulations in one country that affect other countries. His example is the US is the largest remittance market in the world, and that has huge repercussions to what happens in the other countries around the world. Anti-money laundering rules will become stricter and more difficult for receiving countries to comply.

We’re not talking about a change of habit that is relatively new. This is money, something we’ve been dealing with for millenia. We’re talking about old habits dealing with money, so it will take time and it will evolve slowly. And it has to make sense within the market that you’re in. No two markets will look the same.

Michael Joseph of Safaricom
Mpesa launched in March 2007. It’s surprising to see how fast it’s grown. 19% of the population is banked, but 71% who have access to mobile phones in Kenya. The key success of Mpesa is not just good working technology, but to be successful with it you need to understand distribution. It’s not cheap. It’s not easy to put together an agent network that operates with integrity. “It is not build it and they will come.”

Customer growth is at 6.2 million customers in March of 2009 with over 11,000 new registrations each day. Trends: $1.7B moved in P2P transfers since launch. Average P2P transaction is just under 2500/= shillings ($30).

“This is what worries the banks, that we’re moving all this money around and they’re not getting any fees.” We’re not a competitor to banks, because they couldn’t operate on these small 30/= fee.

Safaricom has 300 staff dedicated to Mpesa. There are now over 10,000 agents. It’s the McDonalds effect” – whenever you are hungry there is a MacDonald’s. For us, whenever you turn around there is an agent.

“It is so important to have a regulator that is willing to take a risk with you.” It took nearly 9 months to convince the regulators in Kenya to allow them to launch Mpesa. We are treading new ground in Kenya, so having a courageous and risk-taking regulator made it possible. For money transfer we need some sort of regulation – a level playing field for others to do this a well. Regulation should facilitate and not frustrate.

“When we look back, money transfer will be the biggest thing that we ever did in the telecommunications world.”

Mobile Phone Quick Hits Around Africa

I find that there are more mobile phone projects going on in Africa than I can write about. Instead, here are some quick links for you to follow on the ones that I find the most interesting:

Mobile Phone with Money in Kenya

Mobile banking and payments

(Probably the most lucrative space in mobiles in Africa right now, it’s amazing it’s taken this long to really get started)

Canadian firm Redknee selected to supply Uganda Telecom with mobile money services.

Mxit (South African chat client) starts bridging the gap with mobile money. It uses Standard Bank’s MiMoney as an electronic payment voucher that can be purchased through self-banking channels and various retailers.

The Bill & Melinda Gates Foundation, along with the GSM Association, have announced a programme that will expand the availability of mobile banking services in the developing world. The Mobile Money for the Unbanked (MMU) programme, supported by a US$12.5 million grant from the foundation

Mobile health services

(This is all the rage now in the foundation and non-profit space)

50 case studies of mHealth projects, the majority of which are in sub-Saharan Africa, by the UN Foundation. (Download the 4.3Mb PDF)

Opportunities

Nokia and Adobe have announced a $10 million fund to develop Flash based applications for mobile phones. The new fund is a result of the Open Screen Project, an industry-wide initiative of more than 20 industry leaders set to enable a consistent experience for web browsing and standalone applications.