News Column

SMART COMPANY: Book reveals how rivalry killed first mobile banking app

February 17, 2014

Lilian Ochieng' -1

The love-hate relationship between Kenya's giant firms, Equity Bank and Safaricom, is ostensibly the most under-reported story of the past decade.

And this is largely because the fight between the two was fought at the boardroom level, followed by a public display of friendship. This is according to a new book Money, Real Quick: The story of M-Pesa.

The book, authored by Tonny Omwansa and Nicholas Sullivan, tells of how suspicion between Equity Bank'sJames Mwangi and the then Safaricom chief executive Michael Joseph delayed development of what would pass as the first mobile banking application — M-Kesho — and eventually its demise, though technically the service is still in the market. 

That neither the two of the most "charismatic leaders with a great track record" in recent Kenya corporate history could trust the other in product development, which, looking at the current trend, was in itself half-a-decade ahead of the market, is a revelation on the tough world of corporate dealings. Each of the giants was out to guard its business empire.

"M-Kesho was hashed out through a series of one-on-one meetings between Joseph and Mwangi. You can imagine these two Goliaths of Kenyan business circling each other with caution. The design process was slow but steady; the commercial negotiations somewhat more contentious," Omwansa and Sullivan note.

"Equity felt all transaction fees should accrue to the bank; Safaricom felt its distribution channel would bring customers to the bank. Eventually, after a series of breakfast meetings between the CEOs, they worked out a deal. Unfortunately for the customer, both Safaricom and Equity are getting transaction fees."

The origin of the suspicion between the two is easy to decipher, if one goes to the root of how the duo built their empires to become the biggest, most profitable and most influential firms in the corporate history of Kenya.

Mr Mwangi came into Equity Bank in 1993 when it was just a struggling building society and was technically insolvent. He started to rebuild it and by 2001, the bank had roughly 100,000 customers.

Around the same time, Mr Joseph was seconded by Vodafone, which had bought 30 per cent stake at the then wholly government-owned Safaricom, as an engineer at the local mobile firm to help deploy its network.

He would later become the chief executive of Kenya's largest mobile network by subscriber base, profitability and network.  By 2001, Safaricom had about 100,000 subscribers. Journey to stardom

The two CEOs started their journey to stardom almost at the same time and at the same level, Joseph in telecom and Mwangi in financial service.  

In 2004, Equity Bank acquired a banking licence, ushering it to a period of supersonic growth, both in customer base and profitability.

"While most banks fought over high-end customers, Equity had developed products for the 'common man', promoting financial inclusion by attracting low-and mid-income account holders, and even deploying a 4WD Land Rover as a rural bank that roamed from village to village," says Omwansa and Sullivan in the book.

By 2010, Equity Bank boasted of five million account holders, accounting for over 56 per cent of all bank accounts in Kenya, leaving the other 43 banks to share the balance of 44 per cent.

The Safaricom growth model was equally premised on the same philosophy, addressing the needs of the common man. The fight to acquire subscribers among mobile companies was won by Safaricom using per second billing while its rival, then Kencell, used per minute charging. 

A raft of other products unveiled by Safaricom, such as low denomination airtime, low-priced handsets and promotions, won the hearts of majority Kenyans.

By March 2007, when it launched M-Pesa, Safaricom had about 7.8 million subscribers, generating Sh12 billion in net income. By 30 September, 2007, M-Pesa had 635,761 active mobile customers, gaining an average of 6,774 new subscribers daily. Both companies benefited from the generosity of DFID, the British development agency, who helped seed M-Pesa but also together with FSD funded Equity's rural outreach drive.

Before M-Pesa came along, Equity Bank was experiencing a rapid growth with its base in the lower stratum of the society. But the entry of M-Pesa changed all that. By 2010, M-Pesa had 12.5 million subscribers, making about Sh2 billion deals daily.

"Joseph had 17,500 agents to Mwangi's 165 branches and 550 ATMS. But the two fast-growing institutions are symbiotic, for most Equity account holders use M-Pesa, and a third of M-Pesa subscribers have accounts with Equity. It was only natural that they connect, although in a complex way because they were in many ways fighting over 'ownership' of the same customers," say Omwansa and Sullivan. "Needless to say, Equity saw M-Pesa as encroaching on its hard-won turf."

However, like most of the other banks, Equity Bank would realise that the best way to contain the M-Pesa threat was to partner with Safaricom. In 2010, Equity Bank joined hands with Safaricom, allowing M-Pesa customers to access cash from Equity's 550 ATMs.

Unlike the Family Bank deal which had come in earlier, an M-Pesa subscriber didn't need an Equity account to withdraw money.

"On the M-Pesa menu, a user selects 'withdraw funds', puts in agent code 286286 (treating the ATM like a regular agent), then a Safaricom phone number, and receives a code. Input the code into an Equity ATM and out tumbles the cash. This really was the first step in putting hitherto unbanked Kenyans in direct contact with a bank," say Omwansa and Sullivan.


When Equity joined M-Pesa, following in the footsteps of KCB, Barclays and Family Bank who had join the network earlier, it meant that M-Pesa was accessible in more than 1,310 ATMS in Kenya.

Sensing the threat, banks lobbied the regulator, Central Bank of Kenya, to allow them to roll out agency banking. The rules were passed in the Finance Act 2009. Equity Bank was the first to deploy agency banking.

"The expansion we see in Kenya is more to use delivery channels offered by telecoms and agencies," CEO Mwangi told reporters after announcing record profits in 2010. "Instead of branches, we open an agent in every village."

However, it will be more difficult for banks to build a network than it was for Safaricom. First, they have to offer better deals than Safaricom. Second, they cannot 'share' M-Pesa agents, because M-Pesa agencies have signed exclusive contracts with Safaricom. Third, banks cannot create their own exclusive agents as it is against the law, so any network one bank builds could potentially be used by another. Was the Central Bank creating double standards?

The bankers had all along argued that M-Pesa was being favoured by Central Bank regulations. At the height of this debate, Central Bank and the Treasury wrote a full page commentary in the press in support of M-Pesa.

"At the onset, the bank welcomes innovation that has been introduced in the Kenya's financial sector through the use of mobile telephony," CBK governor Njuguna Ndung'u wrote. Treasury PS Joseph Kinyua would be more candid. In any case, he noted, there is nothing wrong with competition as long as it is underpinned by a level playing field.

The industry suspicion would be replayed between the two CEOs during the development of M-Kesho.

"There was a lot of suspicion between the two companies," Mr Joseph told Omwansa and Sullivan. "The revenue we made on M-Kesho had to be 50-50. If they made more than we made, we had to get another costing pricing formula."

Once they settled on the money-sharing formula, the two then directed their teams to work on the application.

"M-Kesho is a true mobile-banking solution. In one sense, M-Kesho goes a step or two beyond the other ATM arrangements M-Pesa had spawned. Through M-Kesho,  Equity account holders were able to withdraw money from an ATM, and send money directly from their accounts to M-Pesa. It is what the application currently being launched by other banks are doing, enabling people to transaction without visiting banks.

"M-Kesho was revolutionary in this sense: non-account holders could open an equity savings account and deposit as little of Sh100 ($1.25), on which they would earn 1 per cent interest. Not much, but this was truly an opportunity for the unbanked to join the banked, to move from the informal and quasi-formal financial sector to the formal sector," the new book says.

"Savings was just one aspect of M-Kesho, although the easiest to explain and execute. (The 2009) FinAccess survey found that 90 per cent of Kenyans understood the term 'saving,' while only 50 per cent understood the term 'credit,' and even fewer 'equity.'

M-Kesho also included a microcredit component, which would allow a non-Equity Bank customer to take a loan of up to Sh5,000 based on a review of six months of M-Pesa and M-Kesho transactions. This means M-Kesho could be used to establish a credit history.

Equity Bank, true to its name, was giving those without collateral a way to build credit. M-Kesho also offered micro-insurance against accidents."

The rivalry between the two firms would again play out during the launch of M-Kesho. "CEOs Joseph and Mwangi, in their joint introduction, did their best to outdo each other. Joseph crowed that M-Kesho had the 'potential to introduce a savings culture in Kenya.' Mr Mwangi crowed that if all 11 million M-Pesa subscribers were to save Sh10,000 ($125), it would be a 'colossal' mobilisation equal to Sh120 billion. That was a businessman's fantasy: In 2010, all Equity deposits equalled Sh104 billion. But Mwangi saw a bright Kesho."


"In the first four months, 650,000 customers opened M-Kesho accounts. The uptake was faster than that of M-Pesa, but nearly 90 per cent of M-Kesho customers were already Equity Bank customers just looking for an easier way to move money between the bank and M-Pesa subscribers, many of whom eyed banks warily, and for whom a marginal interest on savings was less important than safe storage and quick transfers, which M-Pesa already allowed.

Double transaction fees didn't help. The long-term success of M-Kesho is far from assured; it may, in retrospect, be viewed as a first and somewhat clumsy effort to mix and match two very different products and two very different customer bases."

Today, none of the two companies is comfortable talking about M-Kesho. Equity Bank has since entered into other mobile banking services deals with both Airtel and Orange.

Safaricom, on the other hand, has moved on launching M-Shwari with Commercial Bank of Africa and giving KCB and Family Bank access to use M-Pesa database to launch mobile banking apps.

The frustrations by non-mobile operator in getting in mobile money agreement could be best depicted by Mr John Stanley, Equity Bank head of mobile money sentiment, in the book. "If we are going to provide mobile services for customers, we need access to SIM cards," says Mr Stanley. "Whoever controls the SIM card controls the ecosystem."

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Source: Nation (Kenya)

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