What can we expect from MTN's MoMo PSB?

In many ways, the mobile phone democratised the financial services industry.

In its 10th annual report on the State of the Industry on Mobile Money, the GSMA revealed that mobile money adoption and use saw continued growth in 2021, processing a record $1 trillion annually. The industry enjoyed a substantial increase in the number of registered accounts globally, up 18% since 2020.

According to the report, the volume of person-to-person transactions was up to more than 1.5 million every hour. Mobile money is also very important in Sub-Saharan Africa (SSA). The region is currently responsible for an estimate of at least $697.7 billion in transaction value in 2021 alone (nearly 70% of the global figure). 

Basically, there is nowhere else in the developing world that moves more money purely on mobile phones than SSA. Just in case you haven’t heard about mobile money, here’s a breakdown: In a nutshell, mobile money allows people to deposit their money in an account linked to just a phone, which is then transferred to other users, and then converted back into cash. Essentially, it makes sending money to someone else as easy as sending a text message. Crucially, given that bank account ownership is less than 50% in SSA, mobile money doesn’t need a bank account to work.

In its early days, mobile money was regarded as largely a telco-led initiative in many parts of Africa. In Uganda, MTN enjoys over half the market share for mobile money. In this newsletter, the author claims that there are four billion-dollar financial services businesses in Africa hidden inside telcos because they all generate up to $1 billion in yearly revenues (driven by their mobile money businesses).

Up until recently though, people felt that Nigeria was left out of the mobile money conversation. However, this is starting to change. In 2020 (the fateful pandemic year), the Central Bank of Nigeria finally granted telcos the licence to independently operate in financial services. And just last week, news headlines were awash with MTN Nigeria’s final approval to operate a mobile money initiative as Momo Payment Service Bank Limited (MoMo PSB). 

While they might have enjoyed dominance, telcos are not the only providers of mobile money services. Different market actors including traditional and digital banks have attempted to tap into the market. For example, Access Bank has reportedly grown a 100,000 agent network to deliver mobile banking services, while pure-play agency banking players such as Opay and Paga have experienced rapid growth. In 2021, OPay raised $400 million (at a $2 billion valuation) from global investor SoftBank.

At the heart of the mobile money discussion is always the impact on the financial system, which is unsurprising. Remember what I said about mobile money allowing people to store money on their phones and send it to other people like they would a text message?

The underlying appeal (and success) of mobile money is that it changes the primary unit or method of financial access from bank accounts, which can be expensive to access and manage, to a phone line, which is much cheaper to access, manage, and use. 

So it makes sense that people got excited about the MoMo PSB news. I even checked Google Search trends data and noticed that the word MTN had grown in popularity in the past week alone, reaching peak popularity levels. Last week, MTN Nigeria shares reached a record high of ₦213 per share. Some Twitter users even claimed that this development might spell trouble for fintech founders.

But how valid is that? Let’s find out.

Just how great are telcos at delivering mobile money services?

Existing data shows that telcos have a good track record for delivering mobile money. Unsurprisingly, Safaricom’s M-Pesa is the most widely cited example of a telco-led mobile money initiative that has been successful at scale. According to the Central Bank of Kenya, Kenyans made 1.9 trillion mobile money transactions in the first 11 months of 2021, worth more than $55 billion, a significant chunk of which was through M-PESA. Telcos’ success in the mobile money space is largely a product of their ability to deliver at scale so they can cater to the mass market. We are going to get to this in a second. But let’s start with some important caveats.

First, the CBN did not actually grant a mobile money licence to MTN Nigeria. What MTN Nigeria actually has is a payment service bank (PSB) licence, which allows telecoms to maintain savings accounts and accept deposits from individuals and small businesses, issue debit and prepaid cards, and operate an electronic purse or wallet. 

Granting a PSB licence essentially means that MTN’s “mobile money” solution in Nigeria is going to exclude other services such as providing credit and foreign exchange (FX) transactions, which are still reserved for traditional banks. It’s one of the main reasons why MTN’s entry will not necessarily move the needle by much with financial inclusion.

That’s unlike what we have seen with the likes of Kenya and Ghana where MTN MoMo has offered a broad spectrum of financial services including paying school fees, buying concert tickets, paying for a Netflix subscription and even getting a loan. Side note: the growth in the Buy Now Pay Later space tells you all you need to know about the market demand for credit on this side of the world. Again, the underlying appeal of mobile money is that it offers a cheaper and more accessible alternative to traditional banks for financial services. 

But how much of an impact does the MoMo PSB service have if Nigerians and small businesses here can’t use it to access the loans they need to fund large ticket purchases they can’t afford immediately? It’s just like we have argued in the past—financial inclusion is not just about having a bank account or spending money through a bank account. It’s about a broader range of financial services (such as credit), of which more than 90% of the population is still excluded. In fact, according to the World Bank Global Findex database, only 4% of Nigerians borrow from financial institutions, while 28% borrow from family and friends.

This is a crucial point to raise here because it makes us wonder if the MoMo PSB service as it currently stands actually offers a viable substitute for what traditional banks currently offer. That matters especially in a country like Nigeria, where the payments infrastructure is more sophisticated than in other parts of Africa that have seen telco-led mobile money services succeed. 

Nigerian banks currently do a good job of providing a wide range of financial services to people, and innovatively as well. Nigeria’s payments system is well known for its interoperability (I don’t need to have a Zenith bank account to send money to my sister who banks with GTCO) and instant bank transfer services. This is something that many African countries are still struggling to build.  When telcos stepped into the mobile money world in countries like Ghana or Uganda, they were up against systems that were slow to meet consumers’ needs. 

In fact, Nigeria already has a very good mobile banking solution, which is USSD-based and decent agency banking (we will unpack this later on). USSD is generally used for financial services such as transferring money, balancing cheques and purchasing airtime and data bundles. Between January and December 2020, the value of USSD transfers increased, going from roughly ₦30 billion to ₦551 billion. The massive adoption of USSD makes sense because the technology is available to both feature phones and smartphones, which allows it to reach a broader audience. So we can argue that the only new thing MoMo PSB (in its current form) is bringing to the table is removing the need for a bank account to conduct financial services. Therefore, the likely success of MoMo PSB will come from analysing how impactful the act of delinking financial services from bank accounts would be in Nigeria specifically. 

And so, MoMo PSB is going up against a relatively formal financial services space with decent interoperability. At the same time, MoMo PSB cannot offer a wide range of financial services because of regulatory guidelines. This leads me to believe that MoMo’s success may depend on how well they can integrate other financial services onto their platform. If MoMo’s strength is distribution and brand (which many fintechs are still building) and their weakness is product variety (which fintechs are solving), then the real impact of MoMo’s entry might just be more strategic partnerships based on each actor’s strengths.
 

But what about agents?

A popular point that people tend to raise in favour of MTN’s ability to “win” the mobile money market is how successfully telcos have managed to expand into even the hardest to reach regions within African countries. In Uganda, MTN MoMo is very popular even in areas without electricity. Now, this is where the conversation around scale becomes relevant. Any financial provider looking at serving African markets will need to have distribution that enables widespread financial service delivery at the top of their minds. That is because African consumers are likely to be difficult and expensive to acquire and retain, and tend not to tolerate fully digital modes of distribution.

So to reach the people that are underserved by existing solutions (thereby tapping into latent markets), you need to hack distribution to suit our context. This is where people might claim MoMo PSB, through its affiliation with MTN Nigeria, might have an edge over other actors. A simple comparison to illustrate the dominance of telco distribution over bank distribution is when we compare customer bases.

Nigeria has about 190.0 million active lines, of which 99.8% are mobile (GSM) lines. Between MTN and Airtel, that’s a combined 125 million in their customer base. While we shouldn’t forget that one person can have more than one sim card, it’s worth acknowledging that the telco subscriber base is almost four times as large as the 54 million bank customers with bank verification numbers. 

This large customer base appears to give MoMo PSB an advantage. However, having access to customers is one thing. You also need to be able to serve them, and this is where agents come in.

For companies with primarily digitally distributed products, agents help service providers (the principal) distribute their products and services, educate consumers and even collect payments on behalf of the principal. The key advantage is that agents plug a gap by acting as a link to the final consumer, which is extremely important when trying to reach the digitally excluded.

In the mobile money space, agents matter because at the end of the day, in a market like Nigeria, cash is still king. And so, an instrumental component of any mobile financial service is the ease with which users can convert their cash into the digital wallet (on-ramps) and liquidate to cash (off-ramps).

And it’s true, in other countries, telcos have done a good job of using agents to grow their network and operate their mobile financial service from end to end without relying on any third party. We saw this earlier when we talked about M-Pesa’s success in scaling across the Kenyan market to serve millions of customers. But the truth is, the agent network industry has changed significantly since the earliest iteration of mobile money services pioneered by telcos and their agent network.

For example, today, there is no agent exclusivity and agents tend to serve multiple players (OPay, Paga, MoMo PSB, etc). That’s particularly important to remember given that Paga—a fintech that has run operations for up to 10 years—has already built a 120,000+ strong agent network. So even if we accept that the first thing MoMo PSB will do is build their own agent network, we can’t just assume that MoMo PSB is going to get in and dominate the market. Today, agent networks might be a necessary condition for winning the mobile money space, but it’s not sufficient.

Wave-ing goodbye

All of that said though, we should all still remain excited about MoMo PSB’s entry into Nigeria’s mobile money space because it could spell new things for the industry. We cannot discount the fact that telco-led mobile money models have been good tools for financial inclusion elsewhere, and more competition in this space is good for the private sector—it will drive more innovative solutions and give consumers more options, which is always a plus.

We need to remember that telcos are not necessarily the ultimate saviours for delivering financial inclusion through mobile money. This matters especially in a unique market like Nigeria where the combined forces of regulation and well-developed payments infrastructure means that MTN will need to think differently as they go up against banks and funded digital banks.

In fact, Wave (a Senegalese fintech) that outperformed Orange (a telco) shows that being a telco isn’t a shoe-in for success. It’s still early to say what exactly MoMo PSB’s impact on Nigeria’s financial (and mobile money) services will be. Before we jump to the conclusion that MTN will end up muscling out the likes of Paga and friends, we should remember that the financial services ecosystem has changed.

The rules are different now.

*This article was edited on the 25th of April at 11:40 am - An earlier version stated that Paga had 23,000 agents in their network. This was corrected to show that the correct number is 120,000+.