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Though Kenya tends to get all the headlines, its neighbor Uganda is also a hotbed of mobile financial innovation. Its leading telco, MTN Uganda, recently tallied 10 million subscribers, over 6 million of whom also use its mobile money product, to the tune of over 28 million transactions per month.

But though MTN Mobile Money offers services that include bill payment, purchase of goods and services, payment of salaries, and person-to-person money transfers (including remittances from abroad), it has struggled to bring those services to rural customers.

That’s one reason behind the company’s partnership with Grameen Foundation and the Bill & Melinda Gates Foundation, aimed at bringing mobile-based financial services to rural Ugandans. The AppLab incubator supports new mobile money product development for the base of the pyramid, and the scaling of mobile money services and campaigns in these areas. And the Mobile Financial Services Accelerator has approached this mission by forging a collaboration between the same entities that are locked in mortal combat in other markets: telcos and financial institutions.

We spoke with Henry Maloba, who leads the Mobile Financial Services Accelerator in Uganda, about the initiative. In part one of our Q&A, he discusses the challenges of reaching the rural poor, and how banks and mobile network operators can work together to address them. (Note: Grameen Foundation is a NextBillion Content Partner.)

James Militzer: Why has it been so hard for financial products to reach rural communities in Uganda, and how will this project help?

Henry Maloba: Part of this project was to address the problem of financial inclusion in Uganda – looking at other East African markets, they seems to lag behind in that regard. In Kenya and Tanzania, there is evidence of a lot of bilateral connections [linking individual bank accounts with mobile money wallets]. But that is not actually happening here in Uganda. I can identify two main areas that hinder this from happening. The first is the cost of putting in place a platform to connect the financial institutions and telcos to a particular mobile money channel to deliver financial products to rural communities. And the second problem is limited collaboration between financial institutions and mobile network operators (MNOs).

Part of the Mobile Financial Services Accelerator project’s mandate was to come up with what we called “middleware” – a digital financial services platform that will potentially connect all the mobile money providers in Uganda to the financial institutions, giving customers the full experience of all the mobile wallets – especially those living in the rural areas with little or no access to bank branches. For the past three years we have been working with Pride Microfinance and Centenary Bank, as they have deliberate strategies to reach this segment. There is a huge mobile money agent network in place that caters to the vast majority of communities that live in the rural areas. So linking bank accounts to mobile wallets will give financial access to those who live in rural Uganda. And we do hope that these two pioneer financial institution partners will serve as a catalyst for financial products to be available to the BoP who mainly live in the rural areas, and in the near future we hope to see more financial institutions join in the financial inclusion space.

JM: Why is it important to involve financial institutions in these transactions, rather than just letting telcos handle it?

HM: I will speak a little bit about Kenya. If you look at some of the surveys done in Kenya, some people do up to 90 percent of their transactions on the mobile money channel. If the mobile money channel is not taken into account, then the true financial score or credit score of such users [isn’t tracked] and they cannot access credit in the formal banks. MShwari, a partnership between Commercial Bank of Africa and Safaricom, is a good example of such transactions done through a mobile network operator.

(Left: Henry Maloba)

Building a similar system will help Ugandans who are not financially visible but are very active transacting through mobile money channels to access financial products. Mobile money is widely used in Uganda, and it is in this regard we are developing financial products that will mimic the existing mobile money transactional behaviors that most Ugandans use to transfer value and pay for goods and services. Building on the existing layer will make it easy for customers to use the new service, as it is not materially different from the mobile money service. And the moment we have these partnerships, more Ugandans will be visible to financial institutions, and these transactions can be used to churn out innovative financial products to take advantage of increased transactions and user patterns.

JM: You’ve acted as an intermediary between financial institutions and telcos – have the banks been excited by the opportunities or wary of the risks? And would the telcos prefer to create some of these products themselves and not let the banks in?

HM: It’s a mix. We’ve had, of course, to go through the risks that come with this new [mobile money] channel. We’ve had a lot of meetings to clarify points, and we have borrowed best practices from the [financial] industry. It is a very involving but exciting project where we have a lot of touch points to smoothly implement the intended objectives. It is my opinion that the Ugandan market has turned a corner in terms of adopting the new channel and looking at the emerging risks, and learning every day from the experiences. However, fraud is an area that participating institutions and the government will have to monitor closely, as this is the biggest risk for the mobile money channel.

But both sides have realized that there are a lot of transactions on each others’ networks. The banks could be able to receive more deposits because customers who are not able to get to the branches can use the mobile money channels to be able to actually bank. And at the same time it’s very important for the telcos, because customers are able to access their bank accounts at any time and are able to transact – and they will be using the telcos’ channel. That has sunk in here in Uganda. And we’re happy to report that we think we will be one of the few initiatives to help Uganda open the mobile channel in a big way, especially for the segment that we are looking at.

JM: Do you think that this sort of collaboration is the way forward for telcos and banks, or is it more likely that we’ll see more turf battles like the one between Safaricom and Equity Bank in Kenya?

HM: I think collaboration will continue to be a more favorable route to take, because financial institutions are very good at doing money-related business, they’ve been doing it for over 300 years, In retrospect, telcos are very good at the distribution network, and such partnerships will significantly save on costs for customer acquisition.

However, the case of Kenya is a little bit unique. Safaricom is the strong one in Kenya, but I also am encouraged by the route that Equity Bank has taken. Why do I say so? If you look at the transaction fees that are going to be levied to customers, they are a tenth of what [mobile network] operators are charging. [Note: since our interview, both companies have slashed their fees further.] And some studies have shown that M-Pesa doesn’t really reach the poorest customers. So I think [competition from Equity] will … give access to the very bottom of the pyramid. Because at the end of the day, they are the people who really have to scrutinize each and every cost before they actually transact. So it’s a little bit different in Kenya. But looking at other African markets, Tanzania, Rwanda, Congo, Zimbabwe, Zambia, Namibia – in all these other countries, I think collaboration will be a very important aspect as we move ahead.

James Militzer is the editor of NextBillion Financial Innovation.