Something disruptive has been simmering for some time now in Kenya’s rapidly evolving digital finance market. M-PESA the lauded and the most successful mobile money offering in the world has started to feel it too. At the core of the disruption is the “Thin-SIM”, a decade old technological innovation from China.

M-PESA – The Benchmark

A survey conducted in Kenya found that mobile money usage is twice traditional banking services. Compared to 2013, mobile transactions increased by 26% in the first half of 2014 and amounted to US$12.5 billion. The market has so far been dominated by M-PESA with 73% of market share and75% of the adult population using M-PESA for their money transfer needs and (increasingly) some of their daily purchases. Such is the brand domination that 43% of Kenya’s GDP flows through M-PESA. It is for these reasons that M-PESA is considered to be the benchmark for mobile money deployments worldwide.

M-PESA till now has enjoyed a quasi-monopoly in the Kenyan mobile money business, and while many competitors tried, none managed to make a significant dent in its market share. Until recently the agent network of M-PESA, which amounts to 85,000 agents, was under an exclusive contract arrangement with M-PESA. But recently because of the changes in regulations, which were long fought by Safaricom, M-PESA had to open up this exclusive agent network to others.  While move seemed to have the potential to end M-PESA’s monopoly, three months have passed, and it has not really affected M-PESA at all.

In a country like Kenya where the majority of the population is already comfortable with mobile transactions, a new entrant can compete in the mobile money market in two ways. They could either customize offerings to attract customers who have not been brought under a formal financial umbrella or (probably the easier) they could target existing M-PESA users. The thin SIM technology focuses on the latter.

Equity Bank – The Challenger

In April 2014, Equity Bank acquired a license of Mobile Virtual Network Operator (MVNO) to make its financial services more accessible and affordable – and to respond to the challenges posed by a competitor (Safaricom) owning the channel infrastructure. An MVNO is wherein an existing brand enters the mobile telephony business without actually investing and owning the radio spectrum.FinServe Africa, the MVNO established by Equity Bank, will trade as Equitel and deliver its services on the Airtel network. It has partnered with a Taiwan based organization, Taisys, for ultra-thin SIM cards. These SIM cards are 0.1 mm thick and can be laid on top of an existing SIM card thus converting a single SIM slot mobile phone to a dual SIM phone without any hardware adjustments.

Equity Bank plans to provide these SIM cards free to its existing customers in Kenya through its network of branches and agents.  The bank believes the market is mature enough to route a basket of asset and liability products through this initiative. By using the thin SIM as the channel, Equity Bank has plans to disrupt the Kenya’s digital finance market. To do so they have announced access to instant loans through Equitel at a monthly interest rate of 2% as compared to M-Shwari’s industry standard of 7.5%. Also to compete with M-PESA on mobile money remittances, Equity Bank originally announced transaction charges of 1% subject to a maximum of Ksh.25 ($0.28). This was also way less than the current market charges of 16%. Equity Bank is thus offering a very real price-based, customer value proposition. But on September 15th, CEO James Mwangi sought the further increase the pressure on Safaricom by announcing that Equity Bank would not charge for transfers within its MVNO network. “We shall use USSD which is not expensive and so we opted to give money transfer services for free,” he said. “If we do this, we can collectively save Ksh43 billion[US$ 505 million], which is what Kenyans paid for to transfer cash last year. It costs nothing for us to offer that service because USSD is free for a telecom.” With approximately 9 million accounts at Equity Bank, this service could result in the very rapid emergence of competition and capture a significant proportion of M-PESA’s market share of 17 million customers.

Security Fears – Or Delaying Tactics?

Safaricom has opposed this technology expressing concerns about the security of thin SIMs. This has managed to delay the commercial launch of Equitel by six months. GSMA, the mobile network operators association,  has also advised using an independent consultant to ascertain the risks involved before regulators allow the commercial launch of this technology. But since this technology has been tried and tested in the past in China, Singapore, and other developed nations, it was reasonably likely that Safaricom’s concerns would not prevent the launch for very long.

In July 2014, Bob Collymore noted that he was not worried about losing customers to any of the three new MVNOs. “Customers have stayed with us because of the total proposition, which includes network size, coverage, speed, and reliability … Our concern about the slim SIM is its potential to compromise customer security”. But James Mwangi, CEO of Equity Bank remains confident about the security of the thin SIM technology, as shown in this fascinating video interview, and charges Safaricom with irresponsible scare-mongering. And, of course, those really concerned about security, but wanted access to Equity Bank’s cheaper fees can buy a dedicated SIM, to use alone or in parallel with a Safaricom/M-PESA SIM in one of the dual SIM phones that are so common in Kenya.

Despite this, there is now a protracted tussle going on between the Communications Authority of Kenya (which has given the go-ahead for the trial launch of Equitel for a year – with the intent of monitoring and reviewing the security during the rollout) and the National Assembly’s Committee on Energy, Information and Communication Technology (which wants a security audit of the thin SIM technology before allowing Equity Bank to take it to market). CAK Director-General Francis Wangusi insists that the approval for a one-year trial given to Equitel, was still valid despite the directive issued by MPs stopping the commercial launch, noting, “We are an independent authority and it should be clear that this means there should not be interference by political, government or commercial interests”.

Amid the crossfire, there is some suggestion that the parliamentarians’ intervention is politically motivated. “”Being partly owned by the government, it becomes hard to regulate Safaricom and even harder to allow a direct competitor to its suppliers. Safaricom’s M-PESA is hosted by Kenya’s Commercial Bank of Africa-a bank said to have ties with the first family. It would be hard for anyone to let go of their golden goose just like that,” said a political economist who doesn’t want to be named.”

In the latest twist, Equity Bank now faces another legal challenge from a “data specialist”, Daniel Murage, who has, surprisingly, taken it upon himself to go to court to “Restrain Equity Bank from conducting a one-year trial of the thin-SIM technology until pending issues on data protection are addressed,” on the basis that “The bank intends to subject its customers to the service without providing any safeguard to the vulnerability and safety of (the) personal data of the account holders in their possession since the system’s vulnerability is at high risk”. Given that Mr. Murage is under no compulsion to use the Equitel services, this challenge seems almost as bizarre as the one from Consumers Federation of Kenya (Cofek) in June 2014, which claimed that the MVNO licenses were unlawful as there was no public consultation regarding the allocation of “scarce natural resources”  (by which they meant bandwidth). As many commentators have pointed out, it is very strange to see Cofek challenging market developments that can only benefit consumers in terms of choice and price. One cannot help wondering what really underlies these challenges.

Safaricom’s Competitive Response

Through their MVNO, Equity Bank rides on the Airtel network, and with no investments in infrastructure they can focus on customer acquisition – including through offering lower rates. Aware of this move, Safaricom has already responded. After stating on July 8th, 2014 that there were no plans to reduce M-PESA tariffs, on August 19th, 2014, in a proactive move, Safaricom reduced their cost of sending money (P2P) by 67% for small and medium value of transactions (while also raising charges for larger ones), well before the commercial launch of Equitel. Some observers have suggested that this move shows just how worried Safaricom are about Equitel. Either way, the increase in costs for larger transactions means that it has become harder (or at least more expensive) for businesses to use M-PESA to transfer cash … a move that may well drive them into the arms of Equitel.

Win-Win For All?

While the thin SIM technology is still in the very nascent stage, the price war has already picked its winner: the end user. Some immediately foreseeable benefits include lower costs for mobile money transactions, cheaper access to credit, the benefit of dual-SIM without any additional costs, eventual opening of a wide range of innovative products, and improved customer experience as the bank now controls the channel itself, to name a few.  Customers will be able to access both M-PESA and Equity Bank’s Eazzy24/7 and related banking services on a single handset. Once Equity Bank offers many of their banking services on mobile phones, customers can actually use a very significantly enhanced product range well beyond money transfer, payments, and the savings and the short-term credit offered by Safaricom and Commercial Bank of Africa through M-Shwari. Safaricom, in turn, will no doubt use its new system and user-friendly APIs to encourage and support new waves of innovation.

At first glance, it appears to be a win-win for most stakeholders – including the Central Bank of Kenya which is seeking to further enhance financial inclusion in the country. But for Safaricom, it is also time to rethink their strategies. The reduction in tariffs for small and medium money transfers is a start, but there is more to come. Bob Collymore, CEO of Safaricom, notes that 95% of transactions in Kenya are still made in cash and that digitizing these represents the very large and very real market opportunity. On September 16th, 2014 he announced, “We have been working on a new upgraded version of M-PESA for three years now and have already undertaken software and hardware upgrades”. The new M-PESA system, which is expected to launch in early 2015, will allow Safaricom to increase its integration with a range of partners including banks and utility companies and thus offer a broader range of services. And since it able to process 600 transactions per second (just less than twice the capacity of the current system), it should offer the increased reliability that customers seek.

What does the future hold?

So will this thin-SIM technology and the lower tariffs offered by Equity Bank revolutionize the mobile money market in Kenya? Will it really disrupt the market or will the fears raised by Safaricom around the security of the thin SIM mean that customers refuse to use them? Commenting on this, in an excellent discussion in The Helix LinkedIn Group, Edward Obiko, Card Management and Multichannel Services at Bank of Africa–Kenya, noted, “When it comes to small transactions, convenience eats security for breakfast”. But Jaqueline Jumah, Manager – Digital Financial Services, MicroSave notes, “I still feel it will be tough changing the perceptions of the users”. Furthermore, it is important to note that Airtel previously eliminated charges for P2P transfers in an attempt to disrupt Safaricom’s dominance of the mobile money market but failed to do so. Some, however, suggest that this because Airtel’s agent network was insufficient (or insufficiently active with the liquidity to transact) to create the network effect that is so essential for successful mobile money systems.

Equity Bank’s agent network is already widespread with over 11,000 agents. It is well organized, monitored and supported by the bank, and is recognized and appreciated by Equity Bank’s customers. Indeed the bank’s agent network is already conducting 3,000,000 transactions a month – more than their branches or ATMs. The agency business is already yielding huge volumes of net deposits for the bank to intermediate (see graphs). The Central Bank of Kenya Supervision Report 2013 tells us that the average value of a deposit at a bank agent in 2013 was KSh.8,676 (US$102) and the average value of a withdrawal at a bank agent in 2013 was Ksh.3,987 (US$47) – with an average transaction value of Ksh.5,616 (US$66). From the graphs below, we can see that the average transaction size at an Equity Bank agent in March 2014 was Ksh.6,234 ($73) – far above the typical M-PESA transaction which lies in the range of Ksh.1,000-2,000, with an average cash in transaction size of about Ksh.1,220 ($14).

But perhaps we should leave the last word to the Kenyan wananchi commenting on newspaper articles, the vast majority of whom seem to enthusiastically embrace what Equity Bank is trying to do. “The competition is so healthy since it accords the consumer a fair price determination. I am so impressed at Equity Bank’s innovation much to the delight of the ordinary Kenyan. The bank revolutionized the banking industry, which was riddled by unhealthy practices and higher end principles and policies bringing the service to within reach by all. It is time such a healthy competition entered the money transfer business …”.

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