A trinity: finance, mobile phones & Africa

Why do I keep coming back to these subjects?

Banking over mobile phones in Africa. Very nice. We get it already.

Clearly this is a fascinating a very important development for what it is. But my interest goes beyond the obvious or first degree impact or consequences. My interest is stoked by the belief that this trinity may be the nexus of a new way of experiencing financial services. For anyone. Everyone. Call it pervasive finance. Ubiquitous finance.

Why Africa? Well it’s not New York, NY…but if you make it here…can you make it anywhere??? What can one learn from doing business in Africa and other markets where most people are poor and physical and legal infrastructure is often lacking? If you can provide a service or a product in such a difficult environment, certainly one should be able to offer it anywhere? If you can provide a service or a product profitably at a price point that works for a sub-saharan farmer, certainly one should be able to be a price leader anywhere?

I have a suspicion that most businesses in developed countries continuously underestimate their customers, and indeed when their customers don’t respond to a product or service the default attitude is all too often that it must be due to some shortfall in the customer – their understanding, their purchasing power (or more pointedly lack thereof) rather than a problem in the product or the way it is presented or packaged. At the risk of over-generalizing, I think most people in most places are smarter than businesses give them credit for. They may not be able to clearly articulate what they need or want all the time, but they know what outcome they want most of the time. Give them the means to acheive these outcomes and they will respond. And they don’t need to know, and often really don’t care to know how you do it – it is the result that matters. Financial services (albeit in no way unique) are particularly prone to this somewhat patronizing approach to their customers. To successfully do business in Africa implicitly one has to have faith in the potential customers.

(from The Economist) Companies are being started and successfully built in many African countries, especially in banking, retailing and mobile telephones. The region’s economy is growing steadily (see chart 1) and could expand by 5.8% this year. In part this is because of a commodities boom and debt forgiveness. But more peace, political stability and better economic management have done their bit, too.

…When Celtel, a mobile-phone operator, set up in Zambia eight years ago, it concentrated on the densely populated corridor between Victoria Falls (on the border with Zimbabwe), Lusaka and the industrial copper belt. This was thought to be the only area in which to do business. Yet in 2003, the company decided to invest in rural services, too, and was astonished at the result.

Although most rural customers had never used a telephone, they were keen to have one. This encouraged more people in the cities to obtain mobile phones to talk to relatives in the countryside. The introduction of Me2U, a service that allows callers to use text-messaging to send airtime credit to other mobiles, provided a further boost. Most people do not have bank accounts and the service has become a convenient and cheap way to transfer money. In villages it has also emerged as a substitute for cash, with people using airtime to pay for their shopping. Shopkeepers cash in their accumulated phone credits with people who make money by offering callers use of their mobile phones as a sort of public phone. Within the past two years, Celtel’s Zambian customers have grown from 70,000 to over 1m.

Celtel found that it succeeded if it adapted products and services to local tastes, needs and small budgets…

Although many Africans are poor, they are willing to pay for what they need. (my emphasis)

Adapting to local conditions and habits is critical to success – the humility not to assume what works elsewhere will work everywhere. This kind of open-mindedness can breed success even in the face of scepticism as to your customers’ ability to understand your product:

In Ghana Barclays, a British bank, started working with “Susu collectors”, who gather savings daily from informal traders without access to banking, to keep their money safe. There are an estimated 5,000 Susu collectors in the country, each working with an average of 400 clients. This is a $140m market that exists below the traditional banking radar. Barclays now offers special bank accounts, training and lending to the Susu collectors, who can provide credit to their clients. The bank was taken aback by the amount of money, sophistication and willingness to save in the informal economy.

The keys to success in Africa are not fundamentally different than the keys to success in the developed world; the difference is that if you get any of them wrong in Africa, you don’t survive. In developed countries however you can often get away with getting many things wrong and still muddle through given a much more forgiving and less challenging business environment. What’s the point? That perhaps there is a lot to learn from businesses operating successfully in Africa.

Another interesting angle when looking at doing business in Africa or other developing regions, is to consider the effects of technological “leapfrogging”. Again the Economist does a good job summarizing:

The lesson to be drawn from all of this is that it is wrong to assume that developing countries will follow the same technological course as developed nations. Having skipped fixed-line telephones, some parts of the world may well skip desktop computers in favour of portable devices, for example. Entire economies may even leapfrog from agriculture straight to high-tech industries. That is what happened in Israel, which went from citrus farming to microchips; India, similarly, is doing its best to jump straight to a high-tech service economy. Rwanda even hopes to turn itself into an African tech hub.

Those who anticipate and facilitate leapfrogging can prosper as a result. Those who fail to see it coming risk being jumped over. Kodak, for example, hit by the sudden rise of digital cameras in the developed world, wrongly assumed that it would still be able to sell old-fashioned film and film cameras in China instead. But the emerging Chinese middle classes leapfrogged straight to digital cameras—and even those are now outnumbered by camera-phones.

It seems clear that mobile phones (as opposed to personal computers) will be the most important device for access and connectivity in the developing world, and probably everywhere eventually. But access to the internet and computing will become more and more common everywhere, with many different initiatives – both technological and financial – focused on bringing down the cost and expanding the market for computing in the developing world.

As has been written many many times before, mobile phones are changing everything. From politics to business to culture. The digital generation is but a subset of the connected generation, a worldwide phenomenon. Again, this is probably being felt more strongly in developing countries – not so much because the effect is greater or different – but because the contrast with what came before is that much more marked. This extension of connectedness enabled by mobile telephony taps into something that is inate in humans; it extends our ability to form communities unbounded by geographical or even political constraints.

(from The Economist) In short, the use of mobiles in protest and politics and even banking (see article) is evolving faster than governments’ efforts to control it. Academics also find the phenomenon baffling, though they are studying it hard. Four eggheads with links to California’s Annenberg School of Communication will publish next month a book based on a two-year study of mobile phones and society. Their punchy conclusion? “When the dominant institutions of society no longer have the monopoly of mass-communication networks, the dialectics between power and counter-power is, for better or worse, altered for ever.” True enough, though the average teenage texter might put it better: “whn u cn fon u r in chrge 4vr”.

Or to quote Stowe Boyd:

Once power migrates to the edge, the edglings are unlikely to give it back.

I will finish by highlighting the growth of mobile phone banking in South Africa. Once again making reference to a great article in the Economist, (I guess I should really have a link on this site to send them potential subscribers ) South Africa is a particularly interesting laboratory for considering and observing the nexus of finance and mobile telephony, with aspects of both developed and develping worlds existing in the business environment.

About half a million South Africans now use their mobile phones as a bank. Besides sending money to relatives and paying for goods, they can check balances, buy mobile airtime and settle utility bills. Traditional banks offer mobile banking as an added service to existing customers, most of whom are quite well off. But Wizzit, and to some extent First National Bank (FNB) and MTN Banking (a joint venture between Standard Bank and a mobile-phone network), are chasing another market: the 16m South Africans, over half of the adult population, with no bank account. Significantly, 30% of these people do have mobile phones. Wizzit hired and trained over 2,000 unemployed people, known as Wizzkids, to drum up business. It worked: eight out of ten Wizzit customers previously had no bank account and had never used an ATM.

…In most of Africa, meanwhile, only a fraction of people have bank accounts—but there is huge demand for cheap and convenient ways to send money and buy prepaid services such as airtime. Many Africans, having skipped landlines and jumped to mobiles, already use prepaid airtime as a way of transferring money.

They could now leap from a world of cash to cellular banking. In Kenya, a pilot scheme called M-Pesa is being used to disburse and pay micro-loans by phone. Meanwhile Celpay, which FNB bought last year from Celtel, a mobile-phone company, is offering platforms for banks and phone companies in Zambia and Congo.

This is all pretty interesting and exciting in its own right, but I get most intrigued and excited about the ability to extend this mobile financial platform to a converged set of financial products beyond payments and basic credit (loans and deposits.) With a foundation payments infrastructure built, the ability to offer trading, insurance and other risk management products to anyone, anywhere in the world doesn’t seem too daunting. Indeed developing markets may also see financial ‘leap-frogging’ as the lack of incumbents, inertia and regulatory capture leads to the adoption of truly modern and converged financial services.

Clearly I am not alone in my fascination for microfinance and financial services generally in the developing world. It’s importance was probably for too long underestimated, but with Muhammad Yunus winning the Nobel peace prize for his role in promoting financial services for the poor, clearly this is no longer the case. But Grameen Bank (and phone) are just the beginning and I don’t think we’ll have to wait more than a few years before business models defined and refined to prosper in the harsh light of emerging markets are exported to the developing world. We are used to giving the lessons. Will we be better students than teachers?

This is why I’m so excited about going to TED Global in Tanzania next June. The theme is Africa: The Next Chapter. I’ll be taking notes.

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