Ideas Thinkpieces

The Law of Unintended Consequences: How M-PESA can Gain from Adversity

Following up on Safaricom: Past, Present & Future and in response to the ongoing conversation regarding possible regulatory action that may lead to splitting the M-PESA operation from the Safaricom business, or opening up the M-PESA platform to other players. I make my case as follows. From the get-go, I am not convinced that splitting M-PESA from Safaricom would lead to significant increase in competition, a principal argument for the proposed split. Forcing the company to open up a key business segment to competitors does not coincide with my idea of capitalism.

Philosophically, the company should not be punished by the law for its success. The law should ensure that Safaricom, M-PESA and all other players in the market abide by a fair set of rules. A set of rules that aims to enable customers get value for their money, that protects customers’ civil rights, and enables shareholders have a fair chance of making profit in the process. While the M-PESA business is certainly head and shoulders above the rest in terms of market share, the market cannot be called a monopoly (see the Merriam-Webster dictionary definition of monopoly here). Airtel Money, Orange Money, Tangaza Pesa, Equitel and now Pesalink are all players in the mobile money game. A law that seeks to govern the operation of entities in the mobile money space is welcome. But the law cannot be used as a tool to destroy the competitive advantages built by one player to enhance the competitiveness of others. That, I believe, is no just law.

According to Safaricom’s 2016 annual report, Safaricom Limited “operates the M-PESA business on a license basis” from Vodafone Sales and Service Limited (VSSL). VSSL owns M-PESA and, through a Managed Services Agreement, charges Safaricom a quarterly license fee to operate M-PESA. The license fee, which is a percentage of the M-PESA revenue, was 10% up to 31 July 2015, and 5% from then onwards. M-PESA Holding Company, the report says, “acts as the trustee for M-PESA customers and holds funds the M-PESA business in trust to ensure that those funds are safeguarded at all times.” The M-PESA application is installed on a customer’s SIM card, and the company earns revenue principally in 2 ways:

i. A tariff, graduated based on the amount being transacted, is charged on all transfers and withdrawals performed by customers, and,

ii. Through a partnership with the Commercial Bank of Africa and KCB, customers can save and get loans. Revenue from this service, Mshwari, is earned at the point of loan disbursement and is shared between Safaricom and the banks.

While I expect the status quo will remain, I do not consider it impossible that the M-PESA operation can be forced open or to split from the Safaricom business. If such an event was to occur, I do not believe it would necessarily spell doom for Safaricom. In fact, I think there are some possibilities in which such actions could present great opportunities for the company.

Scenario I — Status quo

Revenue from M-PESA operations has been growing at a phenomenal rate over the last 5 years, with the full-year 2016 revenues 2.5 times that reported in 2011, and 4.5 times that reported in 2010. At no point in the last 5 years has revenue growth dropped below 20% per year, and as of the 2016 report, M-PESA contributes over 20% of the company’s total revenue. With the exception of a significant security event, I have no reason to believe that this will change.

M-PESA revenues to the company over the last 5 years would have any capitalist’s tongue wagging | Source: Company annual reports
The number of total customers and M-PESA agents over the last 5 years | Source: Company annual reports

Scenario II — Forced split

In the event that Safaricom is required to separate M-PESA from its core operations, I imagine one way of doing this would be by creating a separate legal entity for M-PESA operations (e.g. “M-PESA Operations Limited”, ‘MOL”). MOL would be a wholly owned subsidiary of Safaricom Limited, and it could be licensed by Vodafone Sales and Services Limited (M-PESA’s owner) to operate the M-PESA business on a license basis, just as Safaricom has been doing. MOL would be free to partner with other entities, such as its parent company Safaricom, to operate the M-PESA platform through a mobile phone SIM card application. In such a scenario, I do not see any material changes to the customers’ M-PESA experience, and no significant changes to operating expenses. In fact, other than the administrative nuisance and associated expenses, I see this working out to result in business as usual.

Granted, this is an oversimplification, but if separation were required, innovation around legal forms would be enough to do the trick.

Scenario III — Forced interoperability

Interoperability has been said to be the ICT Ministry’s preference on the matter. While the exact structure has yet to be revealed, I propose the following form. Like in scenario II, the newly created “M-PESA Operations Limited” is free to partner with mobile telecommunications operators. In the case of merely splitting the companies, scenario II suffices, with MOL limiting its partnership with telcos to Safaricom. If interoperability were required, or desired, MOL could easily partner with other telcos. Unlike in the current case where the M-PESA application is baked into Safaricom SIM cards only, this could be extended to the SIM cards of partner telcos. Alternatively, a USSD or software application could be created, through which the customers of partner telcos could access M-PESA. In this scenario, infrastructure costs and likely to be significant, with the telcos and MOL having to streamline IT systems and the like, but over time, Airtel customers in Kenya would be able to use M-PESA as easily as Safaricom customers.

Again, an oversimplification; I imagine opening-up the platform would result in an arrangement such as this

Given the adoption of M-PESA and competitive advantages such as its 100,744 agents across the country (FY 2016), I think that Safaricom could end up gaining the most. Simply, if an Airtel or Orange Money customer uses the M-PESA service more than their parent company’s service, M-PESA would gain market share and earn revenue from sources it previously was unable to access. Recall that the law would cut both ways; Airtel and Orange would also be required to open up their mobile money platforms. Consequently, the advantages network operators bear by baking mobile money applications into their SIM cards would be erased. In effect, any mobile phone user in Kenya could potentially have their pick of mobile money service provider to choose from, regardless of their network operator. In such a scenario, I am convinced that the other telcos would have much more to lose than they stand to gain. By opening-up the M-PESA operation to other players with the aim of increasing competition, it could result in reinforcing the platform’s leadership position in the market, reducing competition.

In a complex world, things we imagine cannot happen, frequently do. It is possible that Safaricom will be required to separate the M-PESA platform from its core business operation. It is also possible that in doing so, M-PESA’s market dominance in fact could be reinforced and competition in the mobile money space suppressed. Who stands to benefit? Safaricom. Beware of unintended consequences.


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By Brian

I’m Brian Gachichio. I write and advise on strategy design and execution and performance measurement and management in organizations.

My goal is to provide the innovative thinking that leads to high-impact solutions to business problems and help produce above-average results.