Tag: M-PESA

Are telcos smart enough to make money work?

Telco consumer financial services propositions

Telcos face a perplexing challenge in consumer markets. On the one hand, telcos’ standing with consumers has improved through the COVID-19 pandemic, and demand for connectivity is strong and continues to grow. On the other hand, most consumers are not spending more money with telcos because operators have yet to create compelling new propositions that they can charge more for. In the broadest sense, telcos need to (and can in our view) create more value for consumers and society more generally.

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As discussed in our previous research, we believe the world is now entering a “Coordination Age” in which multiple stakeholders will work together to maximize the potential of the planet’s natural and human resources. New technologies – 5G, analytics, AI, automation, cloud – are making it feasible to coordinate and optimise the allocation of resources in real-time. As providers of connectivity that generates vast amounts of relevant data, telcos can play an important role in enabling this coordination. Although some operators have found it difficult to expand beyond connectivity, the opportunity still exists and may actually be expanding.

In this report, we consider how telcos can support more efficient allocation of capital by playing in the financial services sector.  Financial services (banking) sits in a “sweet spot” for operators: economies of scale are available at a national level, connected technology can change the industry.

Financial Services in the Telecoms sweet spot

financial services

Source STL Partners

The financial services industry is undergoing major disruption brought about by a combination of digitisation and liberalisation – new legislation, such as the EU’s Payment Services Directive, is making it easier for new players to enter the banking market. And there is more disruption to come with the advent of digital currencies – China and the EU have both indicated that they will launch digital currencies, while the U.S. is mulling going down the same route.

A digital currency is intended to be a digital version of cash that is underpinned directly by the country’s central bank. Rather than owning notes or coins, you would own a deposit directly with the central bank. The idea is that a digital currency, in an increasingly cash-free society, would help ensure financial stability by enabling people to store at least some of their money with a trusted official platform, rather than a company or bank that might go bust. A digital currency could also make it easier to bring unbanked citizens (the majority of the world’s population) into the financial system, as central banks could issue digital currencies directly to individuals without them needing to have a commercial bank account. Telcos (and other online service providers) could help consumers to hold digital currency directly with a central bank.

Although the financial services industry has already experienced major upheaval, there is much more to come. “There’s no question that digital currencies and the underlying technology have the potential to drive the next wave in financial services,” Dan Schulman, the CEO of PayPal told investors in February 2021. “I think those technologies can help solve some of the fundamental problems of the system. The fact that there’s this huge prevalence and cost of cash, that there’s lack of access for so many parts of the population into the system, that there’s limited liquidity, there’s high friction in commerce and payments.”

In light of this ongoing disruption, this report reviews the efforts of various operators, such as Orange, Telefónica and Turkcell, to expand into consumer financial services, notably the provision of loans and insurance. A close analysis of their various initiatives offers pointers to the success criteria in this market, while also highlighting some of the potential pitfalls to avoid.

Table of contents

  • Executive Summary
  • Introduction
  • Potential business models
    • Who are you serving?
    • What are you doing for the people you serve?
    • M-Pesa – a springboard into an array of services
    • Docomo demonstrates what can be done
    • But the competition is fierce
  • Applying AI to lending and insurance
    • Analysing hundreds of data points
    • Upstart – one of the frontrunners in automated lending
    • Takeaways
  • From payments to financial portal
    • Takeaways
  • Turkcell goes broad and deep
    • Paycell has a foothold
    • Consumer finance takes a hit
    • Regulation moving in the right direction
    • Turkcell’s broader expansion plans
    • Takeaways
  • Telefónica targets quick loans
    • Growing competition
    • Elsewhere in Latin America
    • Takeaways
  • Momentum builds for Orange
    • The cost of Orange Bank
    • Takeaways
  • Conclusions and recommendations
  • Index

This report builds on earlier STL Partners research, including:

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Cashing in on the end of cash

Introduction

As the rapid expansion of the digital economy threatens to sweep away coins and notes, telcos could be one of the major players in the transition to a cashless society. In the emerging Coordination Age (see STL Partners report: Telco 2030: New purpose, strategy and business models for the Coordination Age), telcos are well placed to help consumers and companies interact and transact far more efficiently and effectively than they have in the past.

This report explores what the global shift away from cash means for telcos and their partners. It identifies the factors driving the transition from cash payments to electronic transactions, considering the perspective of governments, banks, merchants and consumers, before explaining why cash might cling on at the margins.

The report then outlines the progress mobile operators are making in payments and financial services, drawing on examples from Africa, Asia and Europe. It also considers some of the partnerships telcos are striking with Internet players to help overcome some of the obstacles curbing greater use of mobile payment services, before drawing conclusions and making recommendations.

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This executive briefing builds on previous STL Partners reports including:

Calling time on cash

Despite the widespread adoption of the Internet and the subsequent rapid growth of online commerce, almost 90% of global retail1 still takes place at a physical point of sale in a store or at market stall. Although many traditional high streets and shopping malls are struggling, the value of point of sales transactions continues to grow, as an expanding middle class spends money at everything from coffee shops and restaurants to leisure centres and theme parks.

As you would expect, growth in developing markets tends to be markedly quicker than in developed. In India, point of sale transactions (using all payment mechanisms) are set to rise from US$893 billion in 2018 to US$1.36 trillion in value in 2022 (growth of 53%), according to leading payment processor Worldpay. Whereas in the U.S., point of sale transactions are set to grow from US$7.96 trillion in 2018 to US$10.33 trillion in value in 2022 (growth of 30%), according to Worldpay.

Even with the expansion of the digital economy, many transactions worldwide still involve the face-toface exchange of coins and/or notes. Cash is used to complete almost one third of payments (by value) at point of sale worldwide today, according to payments technology company Worldpay. But it predicts that figure will fall to 17% in 2022 – a dramatic change in just four years. Worldpay projects “that cash will be supplanted by debit cards as the leading point of sale payment method in 2019, falling to fourth place in 2022 behind debit cards, credit cards, and eWallets.”

These trends reflect the fact that using cash is expensive, cumbersome, inefficient and opaque. Cash may eventually become an anachronism. At least, that is what many large stakeholders in the public and private sectors are hoping. There are multiple drivers steering governments, banks, merchants, consumers and banks away from cash.

Why governments don’t like cash

Governments have several inter-related reasons for wanting to reduce the use of cash:

  • Tackle the black market: As cash is untraceable, it can facilitate crime, such as the trading of illegal or smuggled goods, and even terrorism. Governments periodically try and crack down on people who use large amounts of cash. In 2016, the government of India, for example, suddenly announced it was replacing 500 and 1,000 rupee notes (US$7.50 and US$15 respectively) with new notes in an effort to identify black marketers. People could exchange the old notes at banks, but those with large holdings had to account for the source of their cash. However, such measures only work up to a point: eradicating cash won’t eradicate crime. If necessary, criminals can always store and barter goods (e.g. drugs or guns), rather than hoarding cash.
  • Reduce corruption: In some countries, cash payments to and from the public sector are often vulnerable to being siphoned off by unscrupulous officials or other middlemen. Conversely, the digitisation of government benefit payments creates an electronic trail that reduces the risk of fraud and theft, and thereby ensures the money goes where it is intended. In 2010, when the Afghan National Police began using a mobile money service to pay salaries instead of cash, they discovered that 10 per cent of salaries were being paid to fictitious police officers, while some officers were not receiving their salaries in full, according to a report by CNN.
  • Greater transparency and less tax evasion: Cash-in-hand payments can result in lost tax revenue, as the recipients fail to declare their income or don’t pay VAT.
  • Reduce costs: If governments can distribute cash digitally, it can save both the public agency and the recipients both time and expenses: In Niger, converting a cash transfer programme to mobile money saved recipients over 20 hours, as they spent less time travelling and waiting for their transfers3.
  • Digital leadership: Some governments want to position their countries as digitally advanced and see the drive to get rid of cash as a means to digitise services and drive adoption of digital IDs, which are a key enabler of the digital vision.
  • Increase state control: Some authoritarian states are likely to see the digitisation of payments as an opportunity to enhance state power, or at least enhance security.

However, in many cases, governments have to distribute or accept cash because many of their citizens still lack bank accounts. More than 60 million unbanked adults globally still receive government transfers, wages or pensions in cash, while 230 million unbanked adults work in the private sector and get paid in cash only, according to the World Bank’s Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017.

Banks and merchants find cash costly

But the biggest driver behind the decline of cash could simply be the costs of the underlying infrastructure and merchants’ growing reluctance to accept cash. For a small retailer, bar or coffee shop, cash consumes time – it needs to be counted and taken to the bank. It also poses a security risk, whereas digital payments automatically end up in the merchant’s bank account and are very unlikely to go missing.

Cash is also a burden for the financial services ecosystem, which has to make ATMs and bank branches available. In the U.K., the Access to Cash Review, a report published in March 2019, warned: “As we stand, we have a cash infrastructure which is fast becoming unsustainable, with largely fixed costs, but where income is declining fast. Britain’s cash infrastructure costs around £5 billion a year to run, paid for predominantly by the retail banks, and run mostly by commercial operators. Much of this cost is currently fixed, whether in physical cash sorting centres or ATMs. But as cash use declines, the economics of the current cash model are becoming seriously challenged.”

Consumers’ mixed feelings about cash

Although some consumers may want to use cash to avoid taxes and maintain privacy, there are several reasons why they too might favour digital payments. Every deposit, withdrawal, transfer or payment made digitally creates a recorded financial history. These transparent transaction records can help protect customers’ rights – they can help prove that they have paid for a specific product or service. Moreover, using digital payments, rather than cash, can help individuals build a credit history, which could make it easier to get a loan. Digital records should also help consumers to monitor and budget their spending, although some studies have found that some forms of digital payments, such as contactless payment cards, can result in consumers spending more than if they were solely reliant on cash.

In the developing world, where credit scores are scarce, merchants are turning to digital mechanisms to help consumers pay in instalments for appliances, such as TVs, radios, lighting, cooking stoves and solar water pumps (all of which can increase household and agricultural productivity). In Kenya, for example, SunCulture enables farmers to pay for solar-powered irrigation pumps in instalments via a mobile money service. As a result, they can improve their productivity and, ultimately, their incomes. Farmers who use SunCulture have reported an average 300% increase in crop yield per year, according to a study by the mobile trade group GSMA.

A vicious circle for cash

While Worldpay point of sale data show cash is in steady decline, there are good reasons to believe it may actually be under-estimating the speed at which other payment methods will take over. In many markets, cash is approaching a potentially decisive tipping point. With consumers ambivalent and governments, merchants and banks all favouring alternatives, cash is in the grip of a vicious circle:

  • The deregulation of the banking system is increasing competition and putting pressure on banks to cut costs and close branches.
  • Small businesses find that the closure of bank branches makes it more expensive and riskier to handle cash. In some cases, merchants stop accepting cash or give people incentives to pay digitally.
  • As fewer merchants accept cash, consumers become increasingly reliant on digital alternatives.
  • As people use cash less and less, they make fewer visits to ATMs and bank branches.
  • Banks continue to close ATMs and branches, making it increasingly hard for anyone to keep using cash. Once the cash infrastructure in a specific locality has gone, everyone living in that area really much has to go digital.

If this vicious circle kicks in, providers of mobile payment services need to be ready for a very sharp fall in the usage of cash. In practice, that will mean upgrading back-end systems so they can handle large numbers of simultaneous transactions, while also preparing for a fresh competitive onslaught from new entrants hungry for potentially valuable transaction data.

 

Table of contents

  • Executive Summary
  • Introduction
  • Calling time on cash
    • Why governments don’t like cash
    • Banks and merchants find cash costly
    • Consumers’ mixed feelings about cash
    • The rise of the electronic wallet
    • A vicious circle for cash
    • The convenience economy
    • Why cash might persist
  • Mobile operators’ financial services
    • M-Pesa makes mixed progress in Kenya
    • The importance of interoperability
    • Telcos as banks
  • Conversational commerce
  • Partnering with Internet players
    • Learning from China’s Internet platforms
    • Other partnerships between Internet players and telcos
  • Conclusions and recommendations

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Telco apps: What works?

Introduction

Part of STL Partners’ (Re)connecting with Consumers stream, this report analyses a selection of successful mobile apps run by telcos or their subsidiaries. It explains why mobile apps will continue to play a major in the digital economy for the foreseeable future before considering the factors that have made particular telco apps successful. Most of the apps considered in the report are from Asia, primarily because operators in that world have typically been more aggressive in pursuing the digital services market than their counterparts elsewhere. Note, the list of apps analysed in this report is far from exhaustive – there are other successful telco-run apps on the market.

The ultimate goal of this report is to explain how apps can engage customers and give telcos greater traction with consumers. Although many apps are rarely used and quickly discarded, the most popular apps, such as Instagram, Spotify and YouTube, have become an integral part of the daily lives of hundreds of millions of people. Some apps, such as Uber and Google Maps, regularly provide people with services and/or information that make their lives much easier – getting a taxi or navigating through an unfamiliar city is now much easier than it used to be. Indeed, a well-designed app dedicated to a specific service can deliver both relevance and revenues.

This report builds on previous STL research, notably:

Can Netflix and Spotify make the leap to the top tier?

AI in customer services: It’s not all about chatbots

AI on the Smartphone: What telcos should do 

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Why apps matter for telcos

Telcos’ most successful digital services, notably SMS, pre-date the smartphone app era.  Even more recent triumphs, such as the M-Pesa, the ground breaking mobile money service in Kenya, were originally designed to work on feature phones.  Many similar services, such as MTN Money and Orange Money, aimed at the large numbers of people without bank accounts in Africa and developing Asia, continue to be accessed largely through text-based menus via SIM toolkit.

But the widespread adoption of smartphones in developed and developing markets alike mean that telcos everywhere need to ensure all the consumer services they offer can be accessed via well-designed and intuitive apps with graphical user interfaces. By the end of 2017, there were 4.3 billion smartphones in use worldwide, according to Ericsson’s estimates. Moreover, smartphone adoption continues to rise rapidly, particularly in Africa, India and other developing countries. Ericsson reckons the number of smartphone subscriptions will reach 7.2 billion in 2023 (see Figure 3).

Figure 3: The number of smartphones in use is rising steadily across the world

Global App take up

Source: Ericsson Mobility Report, June 2018

Subscriptions associated with smartphones now account for around 60% of all mobile phone subscriptions, according to Ericsson, which says that 85% of all mobile phones sold in the first quarter of 2018 were smartphones.

With smartphones the default handset for people in developed markets and many developing markets, apps have become a major medium for interactions between consumers and service providers across the economy. Now approximately ten years old, the so-called app economy is worth tens of billions of dollars per annum.

Although there has been a backlash, as people’s smartphones get clogged up with apps, the sector still has considerable momentum.

The most popular apps, such as Uber and Amazon Shopping, combine ease of access (straightforward authentication), with ease-of-use and ease-of-payment, enabling them to attract tens of millions of users.

With some justification, proponents contend that apps will continue to be one of the main drivers of the digital economy for the foreseeable future. The broader app economy will be worth $6.3 trillion by 2021, up from $1.3 trillion in 2016, according to App Annie. Note, those figures include in-app ads and mobile commerce, as well as the revenues generated through app stores. In other words, this is the total value of the business conducted via apps, rather than the revenue accrued by app stores and developers. This dramatic forecast assumes the ongoing shift of physical transactions to the mobile medium continues apace: App Annie expects the value of mobile commerce transactions to rise from $344 per user in 2016 to $946 by 2021.

Although most of the leading apps are free, many do generate a subscription fee or one-off sales. Annual consumer spending in app stores is set to rise 18% between 2016 and 2021 to reach $139 billion worldwide, according to specialist app analytics firm App Annie, which also forecasts the total time spent in apps will grow to 3.5 trillion hours in 2021, up from 1.6 trillion in 2016.

In reality, some of these aggressive forecasts may prove to be too bullish, as consumers begin to make greater use of messaging services and voice-activated speakers to interact with local merchants and purchase digital content and services.  Even so, it is clear that the leading mobile apps will continue to be a major consumer engagement tool for many brands and merchants well into the next decade. In some cases, such as Spotify or the fitness app Strava, the user has typically put significant effort into creating a personalised experience, helping to cement their loyalty.

In developed countries, some telcos, notably AT&T and Verizon, have belatedly and expensively acquired a major presence in the app economy by buying leading digital content producers and service providers. With the $85.4 billion acquisition of Time Warner, AT&T is now the owner of HBO Now, which was the third highest app by consumer spend in the US in 2017, according to App Annie. HBO Now also ranked fifth in Mexico and eighth in the world on this measure. Having acquired Yahoo! and AOL apps over the past few years, Verizon ranked eighth among companies in terms of downloads in the US in 2017.

The delicate transition from SIM toolkit to app

But expensive acquisitions are not the only way into the app economy. For telcos that have developed consumer services from the ground-up, the rise of the smartphone offers opportunities to provide much richer functionality and a more intuitive interface, as well cross-selling and up-selling. In Kenya, Safaricom has been expanding the mobile money transfer service M-Pesa into a much broader financial services proposition, while prodding users to switch from the SIM toolkit to the app, which can properly highlight M-Pesa’s wider proposition. At the same time, the telco has integrated M-Pesa into its customer service app, mySafaricom, helping it to promote its broader telecoms offering to frequent users of its mobile money services.

However, Safaricom is well aware that it needs to tread cautiously, continuing to cater for those customers who are comfortable with the SIM toolkit experience. Its softly-softly approach is to reassure Kenyans that they can always fall back on the SIM toolkit, if they don’t like the app.  In a Safaricom-sponsored article from August 2017, Emmanuel Chenze wrote the following on the online site, Android Kenya:

“For over a year now, Safaricom has had the mySafaricom application available on the Google Play Store for users to be able to better manage the services they receive from the telecommunications company. However, it wasn’t until March this year when the application was updated to include M-PESA.

“With M-PESA finally integrated, the over 1 million smartphone users can now take full advantage and transact even faster thanks to the app. While good ol’ SIM toolkit still works wonders and remains a good backup option when you’re not connected to the internet or when the mySafaricom app is acting up, using the application, which has since been updated to reflect Safaricom’s recent rebranding, is way better than using the otherwise cumbersome SIM toolkit.”

If they can make their apps straightforward and easily accessible, Africa’s telcos could still become major players in the app economy – as Figure 4 indicates, the number of smartphones in use in sub-Saharan Africa could double between now and 2023. That gives telcos a major opportunity to promote their apps to first-time smartphone users as they buy their new handsets. Pan-Africa operator MTN is pursuing this strategy with its MTN Game+ , Music+ and video apps (see Figure 4).

Figure 4: MTN is pushing its entertainment apps to new smartphone users

Safaricom app chart

Source: MTN interim results presentation for the six months ended June 2018

In Asia, some telcos have successfully developed widely used apps from scratch, notably in the customer care space, as explained in the next section (continued in full report).

Table of Contents

  • Executive Summary
  • Introduction
  • Why apps matter
  • The delicate transition from SIM toolkit to app
  • Telcos can build on customer care
  • My AIS – a top ten app in Thailand
  • Takeaways
  • Information apps have traction
  • Call management apps prove popular in South Korea
  • T Map in top ten apps in South Korea
  • Takeaways
  • Telcos’ entertainment apps go regional
  • PCCW’s Viu plays in sixteen markets
  • Liberty Global
  • Takeaways
  • Turkcell: Using apps to up engagement
  • Competitive in communications
  • Takeaways

Table of Figures

  • Figure 1: Alternative routes for telcos to build out their app proposition
  • Figure 2: Overview of the telco-owned apps covered in this report
  • Figure 3: The number of smartphones in use is rising steadily across the world
  • Figure 4: MTN is pushing its entertainment apps to new smartphone users
  • Figure 5: My AIS supports payments and loyalty points, as well as usage monitoring
  • Figure 6: The True iService app has a clear and straightforward graphic interface
  • Figure 7: True Digital’s app portfolio covers everything from coffee to communications
  • Figure 8: WhoWho helps user manage incoming calls on phones and wearables
  • Figure 9: SK Telecom’s T map app for public transport covers trains, buses and taxis
  • Figure 10: KKBOX Claims Strong Customer Base Among iPhone Users
  • Figure 11: Turkcell’s broad portfolio of apps covers content and communications
  • Figure 12: Turkcell’s BiP Messenger is designed to be fun
  • Figure 13: Turkcell is focused on how much time customers spend in its apps
  • Figure 14: Turkcell’s foreign subsidiaries are much smaller than its domestic operation

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Digital Services: What is Your Digital Business Worth?

Introduction

When Hewlett Packard’s then-CEO (Carly Fiorina) defended HP’s infamous acquisition of Compaq in 2002, she offered a number of arguments as to why the deal made sense. Firstly, the combined entity would now be able to meet the demands of customers for “solutions on a truly global basis.” Secondly, she claimed that the firm would be able to offer products “from top to bottom, from low-end to high-end.” Lastly, but perhaps most importantly, the merger would generate “synergies that are compelling.”

‘Synergy’ is a straightforward concept: the interaction of two or more entities to produce a combined effect greater than the sum of their parts. Synergistic phenomena are ubiquitous in the natural world, ranging from physics (e.g. the building blocks of atoms), to genetics (e.g. the cooperative interactions among genes in genomes) and the synergies produced by socially-organised groups (e.g. the division of labour).

In the business world, ‘synergy’ refers to the value that is generated by combining two organisations to create a new, more valuable entity. Synergies here can be ‘operational’, such as the combination of functional strengths, or ‘financial’, such as tax benefits or diversification. Traditionally, however, investors have been deeply sceptical of synergies, in terms of both their existence and the ability of M&A activity to deliver them. This was the case with the HP-Compaq merger: the day the merger was announced HP’s stock closed at $18.87, down sharply from $23.21 the previous day.

Recently, ‘synergy’ has also become an increasingly familiar term within the telecommunications industry, owing to activities in two distinct areas. These are now discussed in turn.

Fixed-Mobile Convergence: How tangible are the synergies?

Fixed-mobile convergence (FMC) is a hot topic, and numerous substantial M&A transactions have occurred in this space in recent years (especially in Europe). Figure 1 charts some of these transactions, including publicly available synergy estimates (reflecting cost savings, revenue benefits, or both), below:

Figure 1: Fixed-mobile convergence driven by synergy value

 

Source: Vodafone, Analysys Mason, STL Partners
* Synergy run-rate by 2016; ** Revenue synergies only

With synergies estimated to account for over 10% of each of these transactions’ valuations, and in the case of Vodafone/KDG nearly 30%, they are clearly perceived as an important driver of value. However, there are two key qualifications to be made here:

  1. Discounted Cash Flow, or ‘DCF’, is theoretically sound but less credible in practice: Each of the estimates of ‘synergy value’ in Figure 1 were constructed using DCF techniques, which attempt to forecast future cash flows and ‘discount’ these to their overall value today (e.g. because one can save cash and earn interest) . Although theoretically sound, there are several problems with DCF in practice.
  2. Certain FMC synergies are more tangible than others: Whilst cost-centric synergies, such as economies of scale (e.g. combined call centres) and access to mobile backhaul, are tangible and easier to quantify, revenue-centric synergies (e.g. quad-play and upselling) are less tangible and more challenging to quantify

These qualifications mirror those raised in the ‘Valuing Digital: A Contentious Yet Vital Business’ Executive Briefing, which discusses the challenges telecoms operators are facing when seeking to generate formal valuations of their digital businesses.

Recap: Digital businesses are especially challenging to value

As telecoms operators’ ambitions in digital services continue to grow, they are increasingly asking what the value of their specific digital initiatives are. Without understanding the value of their digital businesses, telcos cannot effectively govern their individual digital activities: prioritisation, budget allocation and knowing when to close initiatives (‘fast failure’) within digital is challenging without a clear idea of the return on investment different verticals and initiatives are generating. However, telcos face significant challenges across three areas when attempting to value their businesses:

  1. There are challenges in valuing any business (analogue or digital): Although DCF has its drawbacks (see above), any quantitative ‘model’ is necessarily a simplification of reality
  2. Traditional approaches to valuation (e.g. DCF) are inadequate for digital businesses: DCF is especially inappropriate when valuing early-stage digital businesses due to their unique characteristics
  3. The potential for digital services to generate ‘synergy value’ presents further challenges for valuation: Synergy value presents additional conceptual and practical challenges when digital businesses are held within telecoms operators. Figure 2 outlines these below:

Figure 2: Conceptual and practical challenges caused by synergy value

 

Source: STL Partners

Therefore, telcos (but also the broader technology ecosystem in general) need a new set of tools to answer questions in two key areas. For example:

  1. How should telcos model the market value of their digital businesses?
    • Introducing ‘proxy models’
    • What are the advantages and disadvantages of proxy models?
    • How can a proxy be built to account for issues around limited data availability?
    • Case studies: example valuations of high-profile but privately-held initiatives
  2. How should telcos think about the ‘synergy value’ generated by their digital businesses?
    • What is a useful framework for thinking about synergy value?
    • How are some telcos using clinical trials to assist in the ‘measurement’ of synergies?

 

  • Executive Summary
  • Introduction
  • Fixed-Mobile Convergence: How tangible are the synergies?
  • Recap: Digital businesses are especially challenging to value
  • A Digital Valuation Framework
  • ‘Net synergy’ has four components: benefits and costs, to and from the core
  • Benchmark data theoretically leads to conservative valuations
  • How to Build a Proxy Model
  • What is a ‘Proxy Model’?
  • Proxy models have several advantages over DCF, but they also have data availability challenges
  • Case Study: SK Telecom’s MelOn could be worth $1bn+
  • How to Measure Synergies
  • The Theory: Clinical trials reduce the synergy problem
  • Case Study: A leading European MNO works with its OpCos to run clinical trials
  • Conclusions and Next Steps
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Fixed-mobile convergence driven by synergy value
  • Figure 2: Conceptual and practical challenges caused by synergy value
  • Figure 3: MTN Mobile Money Uganda, Gross Profit Contribution, 2009-12
  • Figure 4: ‘Net synergy’ across four categories
  • Figure 5: ‘Net synergy’ as a component of digital business value
  • Figure 6: Facebook monthly active users vs. valuation, Q1 2010-Present
  • Figure 7: Proxy model output – SME SaaS providers (financial driver)
  • Figure 8: Total VC Investment by Geography, 2010-13
  • Figure 9: Example operational and financial ‘Emerging Market Discounts’
  • Figure 10: Proxy model output – Digital Music (operational driver; South Korea)
  • Figure 11: Correlation vs. Causation

 

The Digital Dashboard: How new metrics drive success in telco digital initiatives

Introduction

As core services revenues, margins and cash generation decline quickly, Communications Service Providers (CSPs) are seeking to invest in and grow new (digital) services. STL Partners estimates that digital business should represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. The move to digital is challenging for CSPs.  It will require large established organisations to define and implement new sustainable business models with new services delivered to existing and new customers via new channels and partners underpinned by new technology and supported by new operating, revenue and cost models. This requires a fundamental shift from a traditional infrastructure-based business to a complex amalgam of infrastructure, platform and product innovation businesses:

  • Historically, the telecoms industry has been an infrastructure business. It has invested large amounts of capital on things such as spectrum purchases, fibre and tower deployments. The result has been three largely undifferentiated services and revenue streams that have been ‘bundled in’ with the networks – voice, messaging and data. In the past, being a good communications service provider involved:
    • Making effective capital investment decisions, and then
    • Operating the network efficiently and affectively.

  • The Internet has changed everything by fracturing the integration between the network and services so that voice and messaging are no longer the sole domain of CSPs. CSPs now need to continue to hone their infrastructure business skills (in a world where every dollar of revenue is competed for hard by other operators and by ‘OTT’ players), and must also develop a range of new skills, assets, partnerships, customer relationships and operating and financial models if they are to compete in the new digital service areas.

In our recent survey (see Reality Check: Are operators’ lofty digital ambitions unrealistic given slow progress to date?), Telco practitioners were asked to comment on the importance of nine things that needed to be addressed to complete their digital business model transformation and the progress made to tackle them (see Figure 1).

Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

 

Source: STL Partners/Telco 2.0 Operator Survey, November 2014

Measurement using new digital operational/financial metrics was highlighted in the global survey as one of the ‘big 6’ challenges that need to be addressed for CSPs to be successful in future. However, to date, it has often been neglected by CSPs (metrics are often an after-thought and not an integral part of the digital transformation process).

In this report, we argue that the reverse is true: effective metrics lie at the heart of change. Without measurement, it is impossible to make decisions and engender change: an organisation continues on its existing path even if that ultimately leads to decline. We will:

  1. Look at why it is important to capture, synthesise and act upon appropriate metrics.
  2. Examine traditional and new approaches to the use of performance metrics and identify the factors that contribute to success and failure.
  3. Highlight ‘telco best-practice’ via a case-study from a leading Asian CSP, Telkom Indonesia.

Why metrics matter

There is a common misconception that start-ups and digital companies do not – and do not need to – measure and report the performance of their businesses and initiatives. Digital start-ups are often portrayed as small creative teams working on ‘exciting stuff’ with no sense of business rigour or control. This could not be further from the truth. Most start-ups follow a LEAN & agile approach to product ideation and development are steered by one motto… “What you cannot measure, you cannot manage”.  This is even more true if they are VC-backed and therefore reliant on hitting specific targets to receive their next round of funding.

Start-ups rely on operational and actionable metrics to measure progress, identify when to pivot as an organisation and translate strategic objectives into daily activities. By applying the “Build – Measure – Learn” concept (see Figure 2), innovators create something (Build), evaluate how well it is received (Measure), and adjust it in response to the feedback they receive (Learn).

Figure 2: “Build – Measure – Learn” concept

Source: LEAN Analytics – Use Data to Build a Better Startup Faster

Metrics evolve over time. Start-ups are continuously searching for the ‘right’ metrics at any given stage of their development because their businesses are constantly evolving – either because they have just started on their journey or because they may have recently changed direction (or ‘pivoted’ from their original value proposition). Metrics are perceived as an operational toolset to quickly iterate to the right product and market before the money runs out. This ‘sword of Damocles’ hanging over entrepreneurs’ heads is a world away from the world inhabited by telcos’ employees.

Indeed, CSPs’ current approach to business targets & funding allocation is unlikely to create a sense of urgency that will drive and stimulate the success of digital initiatives. Based on extensive interviews with CSPs, digital start-ups and VCs, STL Partners concludes that CSPs should focus on:

  • Removing the Telco ‘safety net’. To succeed in creating truly compelling customer experiences CSPs need to mimic a VC-like environment and create a culture of higher-reward in return for higher risk by targeting employees more tightly on their digital initiative’s performance:

    • Reward success more heavily: this could be ‘shadow’ share options in the venture which yield value in the form of shares or cash bonus for hitting targets which would takes an employee’s overall package way beyond what could be earned in the core business.

    • Create risk for individuals: the quid pro quo of a big upside could be a reduced salary to, say, 60% of normal Telco pay (i.e. similar to what might be earned in a typical start-up) or offer contracts that only renew if an initiative hits its targets – if you fall short, you leave the business and are not simply moved elsewhere in the organisation.

  • Adopting ‘start-up culture’ and ways of thinking. For example, when negotiating for funds, employees should be negotiating for their survival, not for a budget or a budget increase. Also, Telcos should start using the vocabulary / parlance commonly used in the digital space as such burn rate, time before cash runs out, cash break-even date, etc.

  • Establishing new processes to manage KPIs and performance metrics. In the fast-paced digital environment, it usually does not make sense to use 18-24 month targets derived from a detailed business case backed by financial metrics (such as revenue, EBITDA, etc.) – particularly for early-stage start-ups.  Google actually identified a move away from this approach to one focused on a stable strategic foundation (make sure the initial proposition is viable by defining a clear problem we are trying to solve and how the solution will differentiate from alternative solutions) + fluid plans as one of the pillars of its success (see Figure 3
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    )

Figure 3: Business plan and financial metrics are out-of-date in a digital world

Source: How Google works, Eric Schmidt, Jonathan Rosenberg and Alan Eagle

Metrics are a powerful tool that CSPs should use to foster sustainable commercial growth through validated learning. Unfortunately, metrics are often an “after-thought” and very few CSPs have implemented a consistent approach to metrics.  From a series of interviews, undertaken by STL for this research, it became apparent that most initiatives failed to develop regular reporting that engages (or is even understood by) other stakeholders. At best, operators are inconsistent in tracking digital innovation, at worst, negligent.

 

  • Executive Summary
  • Introduction
  • Why metrics matter
  • Metrics make a difference: 3 case studies from telecoms operators
  • 3 additional reasons why Telcos need digital metrics
  • Alternative approaches to digital metrics for telecoms operators
  • Introduction
  • The corporate approach – the Balanced Scorecard
  • The start-up approach – LEAN & AARRR methodology
  • Telkom Indonesia’s approach to digital metrics
  • Background
  • Telkom’s current digital strengths
  • Telkom Indonesia’s digital metrics system
  • Benefits of the digital metrics system to Telkom Indonesia
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

  • Figure 2: “Build – Measure – Learn” concept

  • Figure 3: Business plan and financial metrics are out-of-date in a digital world

  • Figure 4: Near perfect correlation between number of agents and number of M-Pesa subscribers, R2 = 0.96

  • Figure 5: Metrics reporting by M-Pesa, December 2012

  • Figure 6: Turkcell’s Mobile Marketing Platform Overview

  • Figure 7: Turkcell’s continuous development of it Mobile Marketing portfolio

  • Figure 8: Libon single roadmap enables rapid evolution and rich features

  • Figure 9: Libon – Cost per Monthly Active Users (M)

  • Figure 10: Illustrative Net Synergy Make up (Hypothetical case)

  • Figure 11: Facebook vs. Yield Businesses: Revenue and Enterprise Value (EV)

  • Figure 12: Facebook: Monthly Active Users vs. Valuation

  • Figure 13: Different players’ metrics requirements

  • Figure 14: Balance Scorecard concept

  • Figure 15: AARRR model

  • Figure 16: Pros & Cons – Summary table

  • Figure 17: Telkom Indonesia’s Metrics Approach – Characteristics

  • Figure 18: Telkom Indonesia’s digital strengths

  • Figure 19: Telcos – slow by design?

  • Figure 20: Telkom Indonesia’s TIMES service portfolio

  • Figure 21: LEAN start-up approach

  • Figure 22: Delivering Innovation – Telkom’s internal organisation

  • Figure 23: Telco 2.0 Domain Framework

  • Figure 24: Metrics Prioritisation & Outcomes Example

  • Figure 25: Governance process – Phase 1 & 2

  • Figure 26: Innovation Governance – Case studies examples

Telco-Driven Disruption: Hits & Misses (Part 1)

Introduction

Part of STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. It analyses a variety of disruptive moves by telcos, some long-standing and well established, others relatively new. It covers telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

In each case, this briefing describes the underlying strategy, the implementation and the results, before setting out STL’s key takeaways. The conclusions section outlines the lessons other would-be disruptors can learn from telcos’ attempts to move into new markets and develop new value propositions.

Note, this report is not exhaustive. The examples it covers are intended to be representative. Part 2 of this report will analyse other telcos who have successfully disrupted adjacent markets or created new ones. In particular, it will take a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses.  DOCOMO reported a 13% year-on-year increase in revenues from its new businesses in the six months to September 30th 2014 to 363 billion Japanese yen (more than US$3 billion). Its target for the full financial year is 770 billion yen (almost US$6.5 billion). Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 18% to 205 billion yen in the six months to September 30th 2014, while its dmarket content store now has 7.8 million subscribers. In the six months to September 30th, the total value of dmarket transactions rose 30% year-on-year to 34.6 billion yen.

In South Korea, leading telco KT is trying to use smartphone-based apps and services to disrupt the digital commerce market, as are the leading U.K. and U.S. mobile operators through their respective Weve and Softcard joint ventures.  In the Philippines, Smart Communications and Globe Telecom have recast the financial services market by enabling people to send each other money using text messages.

Several major telcos are seeking to use their network infrastructure to change the game in the cloud services market. For example, U.S. telco Verizon has made a major push into cloud services, spending US$1.4 billion to acquire specialist Terremark in 2011. At the same time, Verizon and AT&T are having to respond to an aggressive play by T-Mobile USA to reshape the U.S. telecoms market with its Un-carrier strategy.

Some of these companies and their strategies are covered in other STL Partners reports, including:

Telcos can and do disrupt

In the digital economy, innovative start-ups, such as Spotify, Twitter, Instagram and the four big Internet platforms (Amazon, Apple, Facebook and Google) are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have succeeded in creating entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to reduce churn in the core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues (see Figure 1).

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

 

The next section of this paper explores the disruptive moves in the top right hand corner of Figure 1 – those that have taken telcos into new markets and have had a significant financial impact on their businesses.

Offensive, major financial impact 

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at three examples – SK Telecom’s SK Planet, Safaricom’s M-Pesa and KDDI’s au Smart Pass – and what other companies in the digital economy can learn from these largely successful moves. Unlike many disruptive moves by telcos, the three businesses covered in this section have had sufficient impact to properly register on investors’ radar screens. They have moved the needle for their parent’s telcos and given their investors confidence in their ability to innovate.

SK Planet – an ambitious mobile commerce play

Owned by SK Telecom, SK Planet is a major broker in South Korea’s world-leading mobile commerce market. It has developed several two-sided online services that are similar in some respects to those offered by Google. SK Planet operates the T Map, a turn-by-turn navigation service, the T Store Android app store, the Smart Wallet payment, loyalty and couponing service, the OK Cashbag loyalty marketing programme and the 11th St online marketplace.


Strategy

Taking advantage of South Koreans’ appetite for new technologies, SK Telecom is using its home market as a test bed for mobile commerce solutions that could be deployed more widely. As well as seeking to generate revenues from enabling payments, advertising, loyalty, couponing and other forms of direct marketing in South Korea, it is aiming to become a leading mobile commerce player in other markets in Asia and North America.

SK Telecom’s approach has been to launch services early and then refine these services in response to feedback from the Korean market. It launched a mobile couponing service, for example, as early as 2008. To reduce the impact of corporate bureaucracy, in 2011, SK Telecom placed its digital commerce activities into a separate company, called SK Planet. The new entity has since focused on the development of a two-sided platform that aims to provide consumers with convenient shopping channels and merchants and brands with a wide range of marketing solutions both online and in the bricks and mortar arena. Although its services are over-the-top, in the sense that they don’t require consumers to use SK Telecom, SK Planet continues to work closely with SK Telecom – its sole owner.

Downstream, SK Planet is trying to differentiate itself by putting consumers’ interests first, giving them considerable control and transparency over the digital marketing they receive. Upstream, SK Planet is putting a lot of emphasis on helping traditional bricks and mortars stores go digital and reverse so-called showrooming, so that consumers research products online, but actually buy them from bricks and mortar retailers.

SK Planet CEO Jinwoo So talks about enabling “Next Commerce” by which he means the seamless integration of online and bricks and mortar commerce.  “Just as Amazon became the global leader in e-commerce by revolutionizing the industry, SK Planet aims to
become the global ‘Next Commerce’ leader in the offline market by driving mobile innovation that will eventually
break down the walls which separate the online and offline worlds,” he says.

Estimating the offline commerce market in South Korea is worth 230 trillion won (more than 210 US billion dollars), SK Planet is aggressively adapting its existing digital commerce platforms, which are underpinned by SK Telecom’s network assets, for mobile commerce. It is also making extensive use of the big data generated by its existing platforms to hone its offerings.

At the 2014 Mobile World Congress, SK Planet CEO Jinwoo So outlined how SK Planet has worked closely with SK Telecom to develop algorithms that use customer data to predict churn and provide personalized recommendations and offers. “We combined the traditional data mining with text mining,” he said. “How people create the search criteria or the sites they visit, we came up with a very unique formula, which gives up much two times better performance than before. … In 11th street, we have achieved almost three times better performance by applying our recommendation engine, which we developed. Now we are trying to prove the ROI for marketing budgets for brands and merchants.”

 

  • Introduction
  • Executive Summary
  • Telcos can and do disrupt
  • Offensive, major financial impact (Strategy, Implementation, Results)
  • SK Planet – an ambitious mobile commerce play
  • M-Pesa – reinventing financial services
  • KDDI au Smart Pass – curating online commerce
  • Offensive, limited financial impact (Strategy, Implementation, Results)
  • Deutsche Telekom’s start-stop Scout 24 investments
  • AT&T Digital Life – slow burn for the smart home
  • Defensive, major financial impact (Strategy, Implementation, Results)
  • BT Sport and BT Wi-Fi – High perceived value
  • Defensive, minor financial impact (Strategy, Implementation, Results)
  • Orange Libon – disrupting the disruptors
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: SK Planet’s Syrup Wallet stores loyalty cards, coupons and payment cards
  • Figure 3: Shopkick enables US retailers to interact with customers in store
  • Figure 4: SK Planet is an increasingly important part of SK Telecom’s business
  • Figure 5: The flywheel effect: how upstream partners can increase relevance
  • Figure 6: M-Pesa continues to grow in Kenya seven years after launch
  • Figure 7: Vodacom Tanzania has made it easy to register for M-Pesa
  • Figure 8: KDDI’s revenues and profits from value added services grow steadily
  • Figure 9: au Smart Pass is bolstering KDDI’s ARPU
  • Figure 10: Immobilienscout24 has seen a steady increase in traffic
  • Figure 11: AT&T Digital Life gives consumers remote control over their homes
  • Figure 12:  Investors value BT Sport’s contribution
  • Figure 13: BT Sport has driven broadband net-adds, but at considerable expense
  • Figure 14: Orange’s multi-faceted positioning of Libon in the App Store

 

Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players

Introduction – Digital Commerce 2.0

Digital commerce is centred on the better use of the vast amounts of data created and captured in the digital world. Businesses want to use this data to make better strategic and operational decisions, and to trade more efficiently and effectively, while consumers want more convenience, better service, greater value and personalised offerings. To address these needs, Internet and technology players, payment networks, banks and telcos are vying to become digital commerce intermediaries and win a share of the tens of billions of dollars that merchants and brands spend finding and serving customers.

Mobile commerce is frequently considered in isolation from other aspects of digital commerce, yet it should be seen as a springboard to a wider digital commerce proposition based on an enduring and trusted relationship with consumers. Moreover, there are major potential benefits to giving individuals direct control over the vast amount of personal data their smartphones are generating.

We have been developing strategies in these fields for a number of years, including our engagement with the World Economic Forum’s (WEF) Rethinking Personal Data project, and ongoing research into user data and privacy, digital money and payments, and digital advertising and marketing.

This report brings all of these themes together and is the first comprehensive strategic playbook on how smartphones and authenticated personal data can be combined to deliver a compelling digital commerce proposition for both merchants and consumers. It will save customers valuable time, effort and money by providing a fast-track to developing and / or benchmarking a leading edge strategy and approach in the fast-evolving new world of digital commerce.

Benefits of the Report to Telcos, Other Players, Investors and Merchants


For telcos, this strategy report:

  • Shows how to evaluate and implement a comprehensive and successful digital commerce strategy worth up to c.$50bn (5% of core revenues in 5 years)
  • Saves time and money by providing a fast-track for decision making and an outline business case
  • Rapidly challenges / validates existing strategy and services against relevant ‘best in class’, including their peers, ‘OTT players’ and other leading edge players.


For other players including Internet companies, technology vendors, banks and payment networks:

  • The report provides independent market insight on how telcos and other players will be seeking to generate $ multi-billion revenues from digital commerce
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others) that will need to make commensurate investment in technologies and partnerships to achieve their value creation goals
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving a detailed and independent picture of the rationale and strategic approach you and your competitors will need to take


For merchants building digital commerce strategies, it will:

 

  • Help to improve revenue outlook, return on investment and shareholder value by improving the quality of insight to strategic decisions, opportunities and threats lying ahead in digital commerce
  • Save vital time and effort by accelerating internal decision making and speed to market


For investors, it will:

  • Improve investment decisions and strategies returning shareholder value by improving the quality of insight on the outlook of telcos and other digital commerce players
  • Save vital time and effort by accelerating decision making and investment decisions
  • Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors

Digital Commerce 2.0: Report Content Summary

  • Executive Summary. (9 pages outlining the opportunity and key strategic options)
  • Strategy. The shape and scope of the opportunities, the convergence of personal data, mobile, digital payments and advertising, and personal cloud. The importance of giving consumers control. and the nature of the opportunity, including Amazon and Vodafone case studies.
  • The Marketplace. Cultural, commercial and regulatory factors, and strategies of the market leading players. Further analysis of Google, Facebook, Apple, eBay and PayPal, telco and financial services market plays.
  • The Value Proposition. How to build attractive customer propositions in mobile commerce and personal cloud. Solutions for banked and unbanked markets, including how to address consumers and merchants.
  • The Internal Value Network. The need for change in organisational structure in telcos and banks, including an analysis of Telefonica and Vodafone case studies.
  • The External Value Network. Where to collaborate, partner and compete in the value chain – working with telcos, retailers, banks and payment networks. Building platforms and relationships with Internet players. Case studies include Weve, Isis, and the Merchant Customer Exchange.
  • Technology. Making appropriate use of personal data in different contexts. Tools for merchants and point-of-sale transactions. Building a flexible, user-friendly digital wallet.
  • Finance. Potential revenue streams from mobile commerce, personal cloud, raw big data, professional services, and internal use.
  • Appendix – the cutting edge. An analysis of fourteen best practice and potentially disruptive plays in various areas of the market.

 

Full Article: Mobile Payments: Lessons from the world’s leading exponents

Payments technology and how telcos can profit from it is a favourite topic for study by the Telco 2.0 initiative. Fundamentally payment systems are two-sided markets – payers and payees interact not directly, but through a platform to conclude transactions. Pricing, and which side pays, is crucial to maximize participation, volume and liquidity on the platform. Interconnection strategies with other payment platforms also play a vital role, not only in increasing convenience but in determining share of the value chain.

In this article, we examine in depth two African mobile payments solutions that we consider to be the leading examples of mobile payment, M-PESA and Wizzit. These payment solutions take very different approaches – M-PESA is very much a classic Telco 2.0 style platform business, and Wizzit is designed as an extension to traditional banking. We consider lessons learnt from both for operators worldwide.

M-PESA in Kenya – a star following the ‘Golden Rules’ of platform businesses

There is no doubt that M-Pesa is the star of the current mobile payments landscape, however, one seldom quoted fact is that the platform is not yet profitable more than two years after launch. This was revealed by the CEO of Safaricom, Michael Joseph, in the recent results conference call. This is perhaps the first golden rule of platform business – it requires patience and takes time to build both critical mass and profitability.

The next golden rule of the platform business is that pricing is crucial, especially when deciding which side pays the fees.

kmm-payments.png

The first and perhaps the most important pricing point about M-PESA is that it is free to join – there are currently no membership fees or recurring charges, everything is transacted on a pay-as-you-go basis. While this may seem obvious, it is not always the case with all payments platforms, especially some high-end credit cards. Such is the success of the M-PESA registration scheme that as at end of March-09, M-PESA had 6.175m users which is 46% of the Safaricom base. There was an average of 11k registrations per day during March. To further encourage registrations, there is differential pricing between off-net and on-net pricing: M-PESA users can send money to non-registered users, but it is much more expensive.

The second most important pricing point about M-Pesa is that there are no associated carriage costs (e.g. SMS cost) in using the system – the price of the mobile network usage is bundled in with the transaction costs. Similarly, to deposit money is free – the cost of the “cash-in” process is paid for by the transactions that the cash generates. Also, using cash to buy airtime (either for yourself or someone else) is free – this is paid for by normal voice & text usage charges. The M-PESA system is designed so that the “cash-out” transactions subsidise both the registration and cash-in processes.

The next pricing feature of the M-PESA system is that it is “receiver-pays”, the sender pays a nominal charge but the receiver pays the majority of the transaction cost. This is very similar to how most credit and debit cards operate, but completely different to how voice calls are charged in “calling-party-pays” environments.

Used for paying bills, at ATMs, paying wages, and person to person

M-PESA originally started as a person-to-person money transfer system, but the PayBill features indicates how the capabilities of the platform are growing over time. M-PESA currently has 51 PayBill partners and users can pay a variety of bills from utilities, transport to even school fees through the platform. M-PESA has added these capabilities as the registered users have grown and the payment platform was proven in an adjacent field. Safaricom is in a much stronger position to negotiate the rates now the platform has achieved critical mass – and enforce the “receiver-pays” design of the transaction fee.

Originally the “cash-out” process could only be undertaken at M-PESA authorized agents. Again, now the platform has reached critical mass, an ATM operator, PesaPoint, signed a deal with Safaricom in Sept 2008 to allow cash withdrawals at their ATMs. Again, Safaricom is a strong negotiating position understanding fully the cost of their current “cash-out” process

Even more interesting is that M-PESA is now being used to pay wages, especially of casual workers. The pricing here is not declared, but I’m sure it is not “receiver-pays”. An innovative use of the platform was that Safaricom used it themselves to pay their maiden dividend below KES 35,000 to its 830k shareholders. Safaricom estimated the saving by using M-PESA as KES73m (USD940k) compared to traditional payment mechanisms. A very effective case study of using M-PESA for micropayments.

Key Challenges for M-PESA

The development of M-PESA has been achieved without Safaricom holding a banking licence. The money being circulated is deposited in a physical bank account at the Commercial Bank of Africa, which supervises the daily transactions of M-PESA. Users make their transactions using virtual information.

This is the challenge for M-PESA going forward – ensuring that they get the right support from the banking regulators. The potential problem is that banking regulation could both add additional cost to the platform and hamper innovation going forward. In addition, the traditional telco regulators will probably want to examine at some time in the future if the M-PESA platform is supporting the dominant position of Safaricom in the mobile world – Safaricom themselves estimate they have 85% share of mobile revenues. Also, future interconnection into the existing banking infrastructure needs to be achieved at a rate which does not increase the transaction costs of the platform.

Wizzit in South Africa – a mobile extension of traditional banking

Wizzit is another transformational banking service launched in 2005 aimed at serving both the unbanked and underbanked which are estimated to be in excess of 14m people in South Africa alone. Wizzit positions itself as a virtual bank and has no branches of its own. Wizzit uses a combination of mobile and traditional payments technology. On mobile, each user interacts with an USSD-based application for person to person transfers, person to business transactions, pre-paid purchases, any other internet-enabled banking processes, and to let it act as a point of sale device in the informal sector, rather like Oi Paggo. The application works on all mobile phones on all mobile networks. Wizzit also issues a Maestro branded debit card for transactions in the formal sector and ATM cash withdrawals. Wizzit has a banking license through an arrangement with the South African Bank of Athens. Therefore, Wizzit cannot be viewed as pure mobile banking application, but instead as an extension of traditional banking infrastructure. Wizzit has attracted venture capital from the International Finance Corporation.

Building a new route to market

Safaricom in Kenya already had a distribution network of entrepreneurs selling handsets and airtime and a brand well-known for handling balances; Wizzit’s first hurdle to overcome as a start-up was to build this trusted brand, which is essential in banking, and build a sales force. (We discussed the vital importance of this element here after Zain’s ZAP launched as a competitor to M-PESA.)

kmm-payments1.png

Wizzit’s innovative solution was to recruit the jobless, who have an intimate knowledge of the potential customers, and today Wizzit has a direct salesforce in excess of 3,000. The Wizzit Kids are paid a commission based upon both registrations and transactions. Registration is not free and costs ZAR50 (USD6). Although cheaper than opening an account at a major South African bank and a much simpler process, the registration fee represents a significant barrier to entry for the platform.

The transaction fees also appear to be not as favourable to a two-sided business model compared to M-PESA. Rather than a “receiver-pays” type of model, every individual transaction is charged. One of the key lessons from two-sided business model theory is that the ultimate beneficiary of any transaction should be the one who pays. However, the relative cost of banking is much cheaper than traditional banking accounts and the fees are geared to the cost of using the traditional clearing system.

kmm-payments2.png

Wizzit had competition almost from day one with MobileMoney, a rival service with a very similar cost structure. MobileMoney is, a joint venture between MTN, the second largest mobile operator, and Standard Bank launching a rival service with a very similar cost structure. MobileMoney uses a SIM toolkit approach, rather than the more lightweight USSD service.

Wizzit does not advertise its customer base or operating metrics, but a recent article in the Financial Times puts its user base at 250,000. Wizzit has plans to break-even in 2010 and is currently loss-making. The key challenge for Wizzit going forward is not competition from the traditional banking sector, but what happens if a competitor emerges, targeting their demographic with a M-PESA type charging model.

Vodacom, South Africa’s leading mobile operator, is part of the same group that launched M-PESA in Kenya. Vodacom have launched the M-PESA service in Tanzania and it is probably only a matter of time before the service arrives in South Africa.

Lessons from the leaders

Mobile banking solutions will always be a creature of the environment they operate in. Two similar services targeting a similar demographic (the unbanked) have ended up with radically different designs especially in terms of cost and different take-ups. However the trend is clear – mobile payments in emerging markets, of whatever nature, offer a real solution to a real problem with potential for mass market take-up.

For Western operators, like Zoompass, the task is much more complex with most of the population already having existing banking facilities with often multiple providers – operators are not trying to best the deficiencies of cash transactions, but the efficiency of plastic transactions. Western operators also suffer from not having the same low cost, entrepreneurial distribution networks. Most “cash-in” transactions for prepaid mobile users are already served electronically from banking accounts; and even where cash is used, the points-of-sale for electronic top-ups already have a multitude of devices for accepting plastic and have limited loyalty to the mobile operators.

Payment platforms win or lose on four key features: security, availability, simplicity and cost. Mobile payments have a high hurdle to overcome with security and availability, but simplicity and cost is definitely an potential area to innovate in going forward. And crucially, it is vital to design payments platforms on 2-sided business model principles and avoid duplicating pricing models from the banking world.

Full Article: M-Banking: can Zain’s new business model for ZAP rival M-PESA?

One of the major successes of the mobile industry in recent years has been the growth of m-banking in the developing world. Although a considerable number of well-funded, vendor- and operator-backed efforts to deploy m-payments systems in Europe have failed, m-banking succeeded in Africa and Asia – largely because it catered to needs that the rest of the financial system simply didn’t supply. Now, a major emerging market operator, Zain, has entered the game with a radically different business model.

Another driver of success was that the developers of M-PESA and other systems observed that the airtime credit transfer features built into their prepaid OSS solutions were being used by their subscribers as a crude money transfer system; rather than prescribing a solution, they built on user creativity. Telco 2.0 is interested in this not only because this form of development is profoundly Telco 2.0, but also because m-banking is the ultimate example of the opportunities that appear where there is a large and positive difference between the quantity of data transferred, and its social value.

By far the best-known systems are M-PESA, developed in-house by Safaricom in Kenya and now deployed in several other countries, and Smart Telecom in the Philippines. However, as you’d expect, the success of these has attracted imitators and competitors as well as emulators. If you’d asked most people in the industry which operator was likely to reach the market first with such a product, they would probably have said Celtel, the hugely respected emerging market GSM specialists founded by Mo Ibrahim. After all, by 2006 they’d already integrated their East African HLRs, ending roaming charges in the area and permitting cross-border credit transfer, a single currency of sorts.

Well, Celtel was sold to Kuwait’s MTC not long after that, changing its name to Zain. Mo Ibrahim took his money and began offering African presidents a bonus for retiring peacefully. Now, however, Zain has moved into the mobile money business. It is certain that this will be an important moment in its development; Zain’s sheer scale makes that certain. The initial deployment covers some 100 million subscribers. This also means that some markets now have competing mobile payments services – Tanzania, for example, has Zain’s ZAP and two competing M-PESA deployments. This is probably going to teach us a lot about this business in the next few months.

Cash: the crucial application in cashless payments systems

The killer application for mobile payments is cash. This is one of the reasons projects like Simpay failed; rather than extending the existing financial system they tried to leap directly to a cashless system. Network effects are vital to understanding this; if the money in the system can’t be converted into cash, the whole system is afflicted by a first-fax problem as no-one is likely to accept payment from it. It’s therefore crucial that it deals with cash.

Cash is also the form of payment that mobile banking systems compete with. This is another reason why the successes were in cash or pre-cash economies, rather than in Western Europe – most people where Simpay was trialled have access to modern banking and ATMs readily distribute cash for all and sundry. Handling cash is always expensive and risky, whereever in the world you are; it is frequently stolen or embezzled, it needs guarding. These problems are much aggravated if there is no effective policing. Hence, in large parts of the world, people are excluded from the ability to save (or to borrow), and are reliant on expensive and frequently risky informal transfer networks.

Mobile operators were able to step into the breach because the development of PAYG (Pay As You Go) service had created an alternative, lightweight financial infrastructure, consisting of real-time OSS solutions in the network and an extended user interface, made up of various tokens (vouchers, SMS transfers) and a network of micro-entrepreneurs who sell them. The business process here essentially provides a way of authenticating to the OSS that the user presenting a voucher code has indeed paid cash to acquire a given number of minutes of use, and then recovering cash into the operator through a wholesale business relationship with the vendors. There is really very little difference between this and the corresponding process of ingesting cash into a mobile payments system – which the subscribers were quick to understand and repurpose the airtime-selling network accordingly.

But as the invaluable Valuable Bits blog points out, there is one big difference between informal airtime credit transfer and formal m-banking; transaction cost. You can be confident of getting the minutes of use you pay for, but what happens when it comes to converting them back into cash? Well, you don’t know. Valuable Bits estimates that the transaction cost ranges between 5 and 40 – 40! – per cent of the transaction, a figure that makes even Western Union’s margins look modest. And worse, it’s not a risk but an uncertainty. This form of money varies in value between people and between markets, and also in time. The canonical purposes of money are as a means of exchange, a store of value, and a unit of account – stability is crucial for all of these.

Trusted agent networks are decisive

So, it’s crucial to build a network of agents who are trusted by both the network and the public, so that the system can both accept cash and pay it back out. The golden rule of cellular has always been that superior coverage wins. If you’re already selling airtime this way, you’ve got an advantage; and in fact, there is an earlier alternative system that works this way. In some places, bus companies use the fact they collect cash in strange and remote places to run a similar money transfer business. In fact, you don’t necessarily need a transport system at all – the hawala has worked rather well for many, many years purely on trust and the assumption that transfers roughly balance out.

In a realistic deployment, it’s likely that there will be clearly defined source and sink areas, though – for example, people in the city (a source) send money to the countryside (a sink), migrants to the Gulf (a source) send money back to East Africa (a sink). So it’s more complicated than we often think; the wholesale element may need to advance cash to agents in some places in order to keep the system liquid, rather like a central bank. But whatever else you do, first of all, you need the agents, which means that the business model must make room for them to earn a living.

M-PESA originally used the simplest possible option – a fixed transaction fee. This has the problem that it is regressive; the poor pay more as a percentage of their transactions. In an environment where the competition is cash or the informal sector, this worked against their interests; they later introduced a scale of pricing that tapered the transaction fee off as the transaction size fell. Either way, the pricing was pre-determined with regard to the end user.

ZAP works completely differently. Instead of a rate card, ZAP has a revenue-share between the agents and the network, and the vendors can set whatever price they believe the market will bear. Further, Zain is planning to monetise this by collecting an explicit transaction fee from their agents in cash; most other operators have instead used an implicit fee by charging for SMS or USSD traffic used by the service.

Reducing uncertainty – Zain and the Kerala example

In an oversimplified way, this ought to have the effect of rapidly discovering the market clearing price. However, it’s also true that the market for this service is likely to be geographically fragmented, locally monopolistic, and skewed by asymmetric information. In pure economic theory, this may be a problem but it won’t be for long – the markets will eventually converge. But businesses don’t live in theory – they live in practice, and a bad start can easily wreck your chances for good. Remember WAP.

It’s a brave decision from Zain, but we’re concerned it may defeat the purpose of m-banking. After all, one of the main sources of value to the end-user is getting rid of the uncertainty, risk, and transaction costs associated with informal solutions. The famous Kerala study showed that the deployment of GSM radically cut the volatility of the price of fish, and also the spreads between different markets, with the result that the volume of fish that failed to find a buyer before going off was drastically curtailed. The chart below shows the price of fish over time at three markets which successively received GSM coverage; the drop in volatility is clearly shown.

jensenplot.jpg (Source here.)

Uncertainty and transaction costs are exactly the friction that Telco 2.0 keeps saying that telcos should specialise in getting rid of; they are also very often the reason why people decide to form a two-sided trading hub.Hernando de Soto, the Peruvian economist who argues that secure title to property and land is the crucial factor in economic development, has paid the price of success by having his views turn into an oversimplified cliche, but few would disagree with his basic contention that uncertainty and insecurity are a major brake on bottom-up economic development. Therefore we’re concerned that a degree of this seems to be inherent in this model.

Conclusions: more two-sidedness needed

Perhaps this is intended to encourage the recruitment of agents. However, field reports suggest that the agents themselves are harder to find than their competitors. Zain is also charging for both deposits and withdrawals; two-sided theory would suggest that it would be wiser to choose one side to subsidise in order to build transaction numbers.

Experience in West Africa with Orange’s m-banking operations shows that a significant (15%) share of revenue can come from bank interest on customer balances, and the greater the volume of money in the system, the more likely it is that transactions will be carried out by credit transfer rather than cash.

Our preliminary analysis is therefore that deposits should probably be free, that pricing should be as stable and transparent as possible and probably collected implicitly (as SMS or USSD service charges), and that agents should perhaps receive an allocation of free minutes of use for sale in recognition of their recruitment of users rather than cash, minimising the complexity of the system’s internal economy and its need for internal cash transfers.

Do’s and Don’ts of M-banking

On this score, we suspect that Zain may need to change its m-banking business model to compete with M-PESA and Z-PESA effectively.

  • M-banking’s value proposition is reduced cost and uncertainty

  • Agent recruitment is vital

  • Minimise internal cash transfers as far as possible