Expanding the Platform: What’s holding back Kenya’s mobile money ecosystem – and how to improve it
Mobile money, especially M-Pesa, has been widely successful in Kenya, and I have previously written about its promise for BoP customers. But we clearly need to go beyond remittances and look into a much broader range of payment use cases – including SME, asset finance and others – to fully realize the benefits of mobile financial platforms.
That was the challenge I put forward to a Wharton Global Curriculum Practicum (GCP) team consisting of five MBA students each from HEC Paris and Wharton. Specifically, the team was tasked with identifying technologies that can be applied to solve issues in mobile finance in Kenya, and to increase access to financial services while remaining profitable for the providers.
The team conducted six months of research and over 60 interviews, including a field trip to Kenya, to speak with representatives of the public and private sector, technology companies, startups, major banks, MNOs, insurance providers, M-Pesa agents, intermediaries, think-tanks, and regular people in both urban and rural areas. The team identified both the specific market challenges as well as some potential technology solutions to solve those challenges. Challenges around credit, insurance, savings, liquidity management and transaction costs emerged as the most pressing issues for improving the mobile money ecosystem to benefit BoP customers. Those challenges include:
- A lack of credit scoring models: Banks and other financial institutions do not have alternative and reliable risk models to evaluate the creditworthiness of consumers who are under-banked and un-banked, and who have limited financial histories as a consequence.
- A lack of financial activity data: Compounding the above, individual financial histories are not being stored and recorded over time. Because a lot of financial activity happens informally (via co-ops used to pool and invest savings, MFIs and other informal institutions), credit and other transactional history of individuals involved with these institutions is not recorded by any credit bureau.
- Difficulties in financial data ownership: There is no easy way for customers to consolidate their financial activity through mobile finance integration into one document/file and present it as a proof of positive credit history.
- Inefficient onboarding and fraud reduction in insurance: Current inefficiencies in the customer acquisition and distribution channels increase the level of fraud, which also translates to higher costs that ultimately pose a significant problem to adoption of insurance products for low-income consumers.
- Lack of well-designed savings products: People at the BoP do not have well-designed savings commitment accounts for important future events, e.g. education, medical expenses, housing, etc. Current means of savings are not adequately protected/earmarked, and can easily be withdrawn or used by friends/family for other purposes.
- Lack of inter-operability across MNOs: Mobile financial products from different banks and financial service providers can’t currently function across different MNOs. This puts banks and other mobile money platforms at a competitive disadvantage compared to M-Pesa, which is offered through Kenya’s largest mobile network. This lack of interoperability allows M-Pesa to continue its monopoly and dictate transaction prices.
- Inadequate liquidity management in agent networks: Inadequate liquidity management often leads to shortages of cash or e-float (virtual money credited to a mobile-money account), which limits service to the client and inconveniences local agents.
The team then identified around 20 technology solutions to solve these issues, prioritizing five solution options:
- Alternative risk scoring models based on capture of mobile data: One high-potential area with only a few entrants at the moment focuses on leveraging alternative data sources and sophisticated analytics to generate a reliable credit score for unbanked customers based on their cell phone usage patterns and other data. This will enable the market to design customized and risk tolerant financial products for BoP consumers.
- ID authentication tools to improve customer acquisition: There appears to be significant scope for using biometric technology and mobile imaging systems for customer activation, Know Your Customer efforts (ie: due diligence activities that financial institutions must perform to ascertain client information), document authentication, and processing of insurance claims. This will enhance speed and accuracy, and reduce costs associated with providing financial services to BoP consumers.
- Contactless technologies: This solution is focused on using RF SIM/Near Field Communication technologies (which establish radio communication between mobile phones by bringing them into close proximity) to create a level playing field among competitors in the mobile finance ecosystem in Kenya. This, in turn, will reduce costs and enhance the quality and variety or products available to BoP consumers.
- Agent liquidity management tools: Though this has not been tried by any market participants we spoke to, we believe there is significant potential in using location analytics/geographic information system technology to smoothen agent liquidity flows and improve the quality of service available to BoP consumers.
- Social networks as enablers in the mobile money ecosystem: Social reinforcement, peer pressure and other aspects of social networks can be utilized across the mobile money ecosystem to create new financial products, manage liquidity problems, encourage savings and credit repayment, prevent fraud, etc.
Finally, the team recommended that credit scores, social networks and mobile imaging would be the highest priorities for financial service provider investments. The detailed analysis can be found here.
Going forward, it will be interesting to see how the market unfolds around these key innovation areas, which ones gain traction naturally, and which ones need more support from donors and the public sector.