M-Pesa’s meteoric rise has been one of Africa’s biggest success stories in recent history. Their business model, however, did not translate well in South Africa. There are however some M-Pesa lessons you can learn from their failure.
Launched by Kenyan mobile network operator, Safaricom in 2007 in Kenya, the mobile phone-based money transfer service allows users to deposit, withdraw, transfer money and pay for goods and services using their mobile devices. The service went on to record more than 20 million subscribers in its primary market, Kenya, and some 7 million subscribers in its second biggest market, Tanzania, according to a report by Quartz Africa.
This success has, however, not translated in South Africa, with BDLive reporting that the service has, since its launch by Vodacom in 2010, only managed to reach one million subscribers and 76 000 active users at the end of March 2015, despite Vodacom’s initial projections that it would sign up 10 million users within three years after its launch in September 2010.
Even after M-Pesa’s revamp and relaunch of the platform in August 2014, the platform has failed to make any inroads into the South African market and Vodacom admitted in its Integrated Report for the year ending 31 March 2015 that, “progress has been slower than we’d like”.
Fintech opportunities in SA
M-Pesa’s disappointing performance in South Africa seems to go against perceptions of the industry. The sector is considered as fertile ground for tech startups to provide innovative tech solutions, particularly in light of the financial exclusion of the majority of the continent’s population.
Results from a global PwC survey, Blurred Lines: How fintech is shaping financial services, looking at the rise of new technologies and the impact of fintech on market players in the financial services sector, released in March this year, revealed that established financial services incumbents surveyed believe 23% of their business could be at risk due to further development of fintech and that fintech companies themselves anticipate they could capture 33% of the incumbents’ business.
Paul Mitchell, fintech leader, PwC South Africa said in a Bizcommunity article that both old and new financial services players in South Africa are uniquely positioned in a sophisticated industry on a high growth continent.
“The opportunities for innovative solutions for a young and adaptable population is huge, and the impact of fintech in Africa could well overtake what we are seeing in the US and Europe,” he says.
M-Pesa in SA
But what does M-Pesa’s failure in South Africa mean for local entrepreneurs who are keen to get a piece of the fintech pie? Is there still room for new players and innovators in fintech? To find out SME South Africa speaks to Dominique Collett.
Collett, an influential player in South Africa’s innovative fintech scene and financial services investor, is also the head of AlphaCode, Rand Merchant Investment’s hub for fintech startups and has herself seen incredible success as co-founder of fintech startup, Tyme, which was rumored to have been acquired by the Commonwealth Bank of Australia for about USD30 million.
Find out why she says M-Pesa’s failure in South Africa wasn’t a technology problem and why you need to make sure you understand the system you are looking to disrupt.
“It is very difficult to lift a model from another country and just paste it into a new market”
M-Pesa was a unique success story in Kenya for a number of reasons – dominance of Safaricom, regulatory loopholes, significant money pipes etc. We don’t have the same set of circumstances here in South Africa and wallets have historically suffered in this country because we have significant bank infrastructure and it is difficult for closed loop systems to compete with our open loop architecture. We also don’t have the same favourable regulatory environment for wallets.
“Financial services are very market specific”
You [need] to understand the cultural nuances of a market – how customers interact with money, their relationships with each other. Also, each country has very specific regulatory requirements which need to be considered. The competitive landscape also needs to be carefully considered as what was a gap in one market may not be a gap in another market.
“The failure in South Africa hasn’t been on a technology front”
The M-Pesa success in Kenya was partly technology mostly distribution – the fact that they had a dominant mobile network operator (MNO) and significant agent distribution – therefore the product worked and was ubiquitous. The failure in South Africa hasn’t been on a technology front – it has been because they lacked distribution and they lacked the network effect which is what is required to make a closed loop wallet work. What I see in a lot of fintech businesses is that they focus a lot on tech and the product and don’t pay enough attention to the distribution of the product. Most of the innovation in financial services is actually in how you get the products to customers so this is where fintech founders need to really focus. Rather get a product that is 80% right out to a large portion of the population than a product that is 100% right to a tiny base.
“A product like M-Pesa needs to blend into a consumer’s life”
It’s all about making sure the product has utility and is available. People need to be able to access cash-in/out points anywhere and send money to a large number of people. That is not about the tech – it’s about distribution. The product also needs to solve a need for a customer and keep them engaged. Fintech startups that focus on solving a pain point for a customer and then keep that customer engaged are the ones that win.
“Kenya’s success boiled down to a dominant Safaricom”
Safaricom had more than 70% market share so you were able to send money to more than 70% of the country. This meant that a closed loop wallet system could thrive. In SA, Vodacom didn’t have the same dominant market position. Also, M-Pesa in SA didn’t have the same liquidity and cash presence that was required to make a money remittance product work whereas in Kenya this was one of the key problems they solved. There wasn’t as big a gap in the market here in SA. For example, in SA you have systems like Shoprite Money Market to send money – this is an easy to use system that is available countrywide. M-Pesa would have had to deliver a 10x value proposition to Shoprite to compete which they weren’t able to do here.
“The ticket to play in this [banking] game is integration into this system”
South Africa has one of the most sophisticated banking systems in the world and we have significant bank infrastructure. We also have a consumer base that is used to ATMs, cards etc – even low end consumers. Therefore, the ticket to play in this game is integration into this system which is very expensive and complex. We also have a very good regulator who is very punitive of those who don’t follow guidelines. Therefore, you have to really understand the landscape very well to play in this market. I always say – make sure you know what you are breaking before you break it. To disrupt a system, really know its weak points first.
Lessons that fintech entrepreneurs should come away with from Vodacom SA’s struggles with M-Pesa in SA
- Focus on your distribution
- Make sure you deliver something that is 10x better than what is currently available
- Pay attention to execution and operations – rather underpromise and overdeliver
- Make sure your product has utility and is relevant to a consumer
Opportunities in Fintech
- There are amazing opportunities in SME banking – I believe this is a massively underserved segment but one that needs better products and service. We also really need to start promoting and building SMEs if we want to move SA forward
- Using advanced data analytics for credit scoring, insurance, etc. Making use of alternative data sets to make better decisions about consumers
- Blockchain and bitcoin are going to transform the rails of the financial services industry
- “Socialization of finance” – leveraging the power of communities and social media to make financial services more relevant and also using this data to deliver more meaningful financial services