Developments in Mobile Money in East Africa

Anthea Paelo

The provision of mobile money services has been a dynamic and fast-growing sector in Africa. Beyond money transfer, the industry in different countries has evolved to provide additional services such as bill and merchant payments as well as financial services such as credit, insurance and savings. In East Africa, Tanzania, Uganda and Kenya have at least one mobile money provider offering a savings and credit facility.

In sub-Saharan Africa, cases of anticompetitive conduct in the provision of these services have been reported in Kenya, Uganda, and Zimbabwe as discussed in previous articles in this Review. The high barriers to entry, concentrated nature of the market and the network externalities inherent create an environment in which incumbent players have market power and can employ anticompetitive strategies to protect their market position and profitability. Most recently there have been developments in Uganda and Kenya, which we consider below.

One of the main competition bottlenecks identified in the mobile money value chain of countries in the region is access to connectivity and key infrastructure. There are two main channels through which mobile financial services may be provided: through unstructured supplementary service data (USSD) or through short message service (SMS). Although mobile money services can also be accessed via applications on smartphones using data, the primary channel for delivery of these services is USSD and SMS. The SMS and USSD channel is thus critical, leveraging infrastructure primarily owned by Mobile Network Operators (MNOs). Non-MNO mobile financial services providers (third-party providers) may gain access to this infrastructure from the MNO. These third-party providers include banks wishing to extend mobile banking services to their customers as well as companies that offer value added services such as bulk SMSes and subscription-based news updates. This, however, makes them both customers and rivals of MNOs, a fact which may give MNOs an incentive to engage in anticompetitive conduct to foreclose the downstream rivals. The MNO can do this in three ways: by outright refusal to provide the third-party with access to the infrastructure, charging excessive prices for access to the services, or providing poor quality services.

In 2016, MTN Uganda, one of the largest MNOs in the country was penalised for its refusal to provide services to EzeeMoney. MTN was reported to have described EzeeMoney as being in “direct competition” with it in the provision of mobile money services. Furthermore, a 2017 report commissioned by the Uganda Communications Commission (UCC), found that MNOs in Uganda may have been impeding third-party access to their USSD and SMS platforms by charging excessively for access. The study found that both the SMS interconnect rates and the USSD rates that the third-party providers are charged by MNOs were significantly above benchmark rates. Interconnect rates are the charges that MNOs charge each other to allow SMSes to be sent from one network to another. The interconnect rate is, therefore, the minimum price that an MNO can charge a customer to send an SMS. The benchmark rates used were a comparison with prices charged in countries with relatively more competitive industries internationally. The actual interconnect rates charged in Uganda were found to be as high as UGX 26 (US$0.01), about 1200% above the benchmark. Moreover, with regards to USSD prices, the two largest MNOs in Uganda were, as of December 2017, found to charge as much as ten times the rate charged by Safaricom M-PESA, a monopoly mobile money provider in neighbouring Kenya.

In addition to the significantly high tariffs the MNOs charge third-party providers, the report detailed complaints from the third-party providers on the terms and conditions governing the contracts with MNOs. Because MNOs own the key infrastructure, they have substantial bargaining power in prescribing the terms of the contract with third-party players, many of which were unfavourable to the third-party providers.

A key concern relates to the means by which third-party providers are billed for USSD usage for their clients. There are three models through which third-party providers may be billed: base retail pricing, zero-rating and revenue share. In base retail pricing, the subscriber is charged the MNO’s base rate. With zero-rating, the third-party provider could absorb the full charge allowing the subscriber to enjoy the service for free (zero-rating). In the third case of revenue sharing, the customer pays the MNO the price set by the third-party provider after which the MNO’s revenues from the transaction are shared with the third-party provider.

Many providers prefer to use the zero-rating method of billing as it attracts more customers but have instead been forced to use base retail pricing when MNOs refuse to provide zero-rating. This raises the costs for the third-party’s customers and discourages potential consumers. Even where revenue share is used as a billing method, MNOs skew the profit ratios in their own favour. Table 1 shows the revenue percentage shares between the four main MNOs in Uganda and third-party providers. It shows that MNOs receive the majority of the revenue, an average of 60%, while the third-parties receive the smaller share of revenue.

Table 1: MNO revenue shares with third-party providers

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Source: Study on USSD and SMS Services in Uganda

he study found that the share due to third-party providers has in fact been reducing over time, an illustration of the MNOs’ bargaining power. The smaller share for third-party providers is the case even when the third-party has developed a novel new product or provided the technology and applications necessary to provide the service. While it might be argued that it is the MNOs who are actually providing the service and underlying infrastructure and deserve the large share of the revenues, it should be understood that it is the third-party providers who often come up with innovative service offerings and add-ons that bring customers onto the network.

Interoperability of mobile money services in Kenya

The mobile money sector in Kenya appears to be shifting into the next phase of its evolution in which mobile money services are interoperable across networks. In January 2018, Safaricom M-PESA and Airtel Money Kenya began to pilot mobile money interoperability in January 2018 to enable consumers to carry out cross-network transfers. Currently, in order to receive money from a mobile money user on a different network, a customer receives a voucher which they then use to withdraw the money from the sender’s mobile money agent. Money from a user on the same network is transferred directly into the recipient’s mobile wallet. Interoperability, therefore, brings about greater convenience and reduces the costs for the consumers.

Interoperability is more likely to take place in markets where players have relatively similar market shares such that the players are likely to gain more through access to more customers as was the case in Tanzania. The decision by Safaricom in Kenya to interoperate is somewhat unexpected given that Safaricom’s M-PESA platform has 90% market share in terms of usage and therefore has little to gain from the arrangement as it would instead be providing its smaller rivals with access to its wide network of consumers. As such, it is likely that the decision to interoperate is a result of significant regulatory pressure from regulatory authorities. Further to this, the increased use of mobile data through smartphones and future revenue Safaricom is likely to earn from the continued expansion of data may have created an incentive for Safaricom to interoperate to be able to capitalise on the trend.

Concluding remarks

There are a number of competition issues in the provision of mobile money services in country markets in East Africa that still need to be dealt including the refusal to provide access to key infrastructure as well as excessive pricing to third-party providers of mobile money services. This points to an important role for telecommunications regulators and competition authorities in continuing to reshape the rules to favour the entry of rivals and competition based on innovation and effort, rather than on incumbency and control of key infrastructure.