Vodafone targets Africa’s unbanked with ambitious plans for M-Pesa

Vodafone plans to transform its M-Pesa African mobile payments service into a financial platform spanning the continent as it seeks to unlock the value of one of the world’s largest fintech networks.

M-Pesa, launched in Kenya a decade ago as a peer-to-peer mobile money service for people without a bank account, has grown into Africa’s largest payments service. A push to offer more sophisticated financial and ecommerce services could open the door to a stake sale to highlight the business’s value.

Nick Read, who took over as Vodafone chief executive in 2018, has laid the ground to separate the company’s huge tower business into an independent company, a move that has lifted the company’s flagging stock price by about 10 per cent.

Analysts see M-Pesa, like the towers, as an under-exploited asset on Vodafone’s balance sheet. Shareholders attribute it little value because they regard it as a small part of a mature telecoms company rather than as a pioneering fintech business.
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While it only accounts for 3.5 per cent of revenue at Vodacom, Vodafone’s African arm, applying a valuation in line with other payment technology companies — roughly 20 times earnings — would make M-Pesa worth as much as $1.5bn, three times its current implied value. Expanding its range of products and its geographic scope could significantly boost its value.

Vodafone’s strategy is to expand M-Pesa’s business rapidly in the seven African countries where it already operates as well as in new markets such as Ethiopia, where the British company has no telecoms network.

“I believe we can turn it into Africa’s largest unbanked bank,” Mr Read told the Financial Times. “To achieve this, we need to explore strategic technology partnerships and work with key financial institutions. I believe there is the opportunity to roll out M-Pesa into other countries where we do not have existing mobile operations when the platform is further developed.”

Read also: Vodafone strikes deal with BT to expand broadband coverage

M-Pesa was launched in 2007 by Safaricom, the Kenyan telecoms company jointly owned by Vodafone and the Kenyan government.

Named after the Swahili word for money, the basic transfer service quickly took off in a market with limited banking infrastructure. Kenyans could suddenly use mobile phones to send money to friends, relatives and merchants at the click of a few buttons.

As basic phones were replaced by feature phones and then smartphones, M-Pesa’s functions expanded to include the ability to pay for everything from electricity and rent to air fares.
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Now used by two-in-five Kenyans, the system provides the payments backbone to a multitude of digital services. Safaricom expects M-Pesa to account for more than half its revenue within four years, up from just over 30 per cent currently.

The service has been launched in six other African markets, including Tanzania, Egypt and Ghana, and the customer base is growing across the continent. Their numbers rose 12 per cent to 37m in the year to the end of March, while revenues were up 21 per cent to €750m. More than €10bn is processed over the M-Pesa platform every month.

It has not all been plain sailing. Launches in countries including India, Afghanistan, Romania, Albania and South Africa failed to work and the service was closed down.

And in Kenya, Safaricom has been forced to allay concerns that M-Pesa could be caught up in tensions between the US and China — Safaricom and Vodafone migrated the M-Pesa customer base to Huawei’s Mobile Money Platform in 2015.

A year ago US authorities issued a “denial order” that prevents international companies from working with Huawei. Vodafone had to pull phones made by the Chinese company, which use Google’s Android operating system, from its 5G launch in the UK.

However, Safaricom has played down any prospect of a ripple effect on M-Pesa from Huawei’s woes.

“They have been a very competent and very close partner of ours for a very many years and I hope they continue to be,” Bob Collymore, Safaricom chief executive until his death this summer, told investors in May. “Our policy as a company is not going to be driven by Donald Trump . . . We will make independent decisions, similarly I believe the government of Kenya is making decisions, which are independent of America-China geopolitics.”

Collymore is to be replaced with Safaricom’s first Kenyan CEO, Peter Ndegwa, who will join from Diageo next year.

Any move to disrupt M-Pesa would have a dramatic effect on the Kenyan economy. Joshua Oigara, head of the Kenyan bank KCB Group which is a partner of Safaricom for M-Pesa, estimates that about a quarter of Kenya’s gross domestic product is processed over the platform.

M-Pesa is already used to pay salaries, book bus tickets and settle invoices in most of its markets. In Kenya it has expanded into more advanced financial services including small loans, supply chain finance, insurance and a growing number of in-store and ecommerce services.

Mr Oigara said data generated by M-Pesa users would be key to introducing credit scores to African markets.

The business does not have an open goal, however. Banks including Standard Chartered have identified Africa as a potential growth market while other telecoms companies, including South Africa’s MTN, France’s Orange and India’s Airtel, have launched rival payment services. There were 135 live mobile money services across sub-Saharan Africa and 122m active accounts at the end of 2017, the most recent data available, according to global mobile phone trade body the GSMA.

Well-funded Silicon Valley players have also targeted the region. San Franciscan lenders Branch International, backed by Visa, and Tala, which counts PayPal as an investor, have both launched in sub-Saharan Africa.

And other telecoms companies, notably Orange, have targeted banking as a new growth area both in Africa and Europe. A rapid expansion of M-Pesa over the next 12 to 18 months could become a similar growth driver for Vodafone.

“The future of telecoms businesses like Safaricom is using M-Pesa to go into more ecosystems beyond telecoms,” said Mr Oigara, highlighting financial services, education and healthcare as industries that could be further stimulated as mobile payments grow on the back of smartphones. “You can capture the value of the transactions which is really what the business is today.”