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Wednesday 30, May 2018 by Jessica Combes

Does mobile money benefit banks?


Banks should poise themselves to take advantage of mobile money, Nomanini CEO & Co-founder Vahid Monadjem tells Banker Africa

What kind of opportunity does mobile money present on the African continent?
A recent report from McKinsey & Company indicated that digital finance has the potential to reach over 1.6 billion new retail customers in emerging economies and to increase the volume of loans extended to individuals and businesses by $2.1 trillion. Another report by McKinsey & Company last year estimated the opportunity in Africa for electronic payments is approximately $6.6 billion in annual revenue.  

What challenges need to be overcome in order for mobile money to succeed?
For financial institutions to realise the opportunity in Africa, it will take innovative new partnerships. At Nomanini, we have identified this to be especially true in Africa, where markets are highly fragmented. Different consumer attitudes, market-specific needs, and varying regulations all require solutions tailored for each unique market.

To enable this, we believe that partnerships are necessary and will only be viable when there is increased interoperability and specialisation. In an interoperable system, clearly defined and mutually beneficial partnerships emerge. A merchant acquirer can provide a base for multiple consumer wallets, a liquidity manager can support multiple agent bases, and a specialised insurer can provide solutions across multiple user bases. This trend is already emerging and will accelerate as telcos and banks figure out how to build on the initial potential and address the challenges arising from mobile money.

Partnerships based on interoperability work to a bank’s favour as their licensing and balance sheet give them considerable advantage over non-financial institutions. However, they typically lack the channel and user-centricity in low-income areas, which is where non-bank partners can play a role.  

What role can governments play in supporting the growth of mobile money?
Many government are already pushing for incumbents in the payments space to adopt interoperability – to varying degrees of success. Beyond the regulatory push, they can also provide incentives such as digitising government payments with the condition that participating systems are openly interoperable.

Beyond that, there is a lot of work to be done in KYC infrastructure and regulation. Too many unbanked people lack access to proper identification, which prohibits financial institutions from banking them. Some governments have provided tiered KYC regulation; however, this needs to be extended and the tiers made easier to access.   

How can banks and financial Institutions benefit from mobile money?
For banks, mobile money presents the opportunity to increase payments income as well as earn interest on increased deposits—an income stream which is usually not accessible to telcos. Ultimately, every dollar of cash that is moved to a digital store of value will land on the balance sheet of a financial institution which can then be lent out multiple times over. In markets where interbank interest rates can range from 10-40 per cent, this presents considerable income potential.  

Competition in the mobile money space has come from fintechs and telcos in the past, what can banks and financial institutions do to remain relevant?
From the start, telcos had digital reach to consumers and a broad revenue channel that have become the agent network. Banks did not have this kind of reach to serve consumers at low cost. However, the context is changing quickly. Banks are rapidly adopting digital banking products and reaching consumers in a low-cost manner via increasingly ubiquitous smartphones.

Therefore, telcos are no longer the gatekeepers to direct digital engagement with consumers. Since banks have access to an additional income channel in the form of interest, they will retain a long-term advantage over other players such as telcos. The missing piece where banks can really compete with telcos is distribution. The traditional channels that banks are familiar with such as branches, ATMs and point-of-sales machines are too costly to serve lower income markets. This is the part that Nomanini focuses on: building low-cost and pervasive agent and merchant networks using existing informal retailers and the mobile and FMCG channels already reaching them.

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