Mobile Money Interoperability is the Biggest Risk to Safaricom Shareholders

biggest threat to Safaricom

The biggest near-term risk to Safaricom’s shareholders is mobile money interoperability which will begin piloting today. In layman’s terms, mobile money interoperability will allow users to send or receive money across different platforms such as M-Pesa and Airtel Money seamlessly without incurring any additional charges.

Currently, if a customer makes a cross-platform transaction, a text message alert notifies the recipient of the money to collect it from an agent registered with the sender’s network.

In the past, Information Cabinet Secretary Joe Mucheru has reiterated that interoperability will improve access and efficiency in the industry. “One of the reasons we need interoperability is to make sure that people are not limited by a closed network, you should send money to anyone on any network and receive from anyone,” he said.

According to a report from eServGlobal, a financial transactions technology company, “Lack of interoperability has been highlighted as a major barrier to the development of the mobile money market. The strongest reason for enabling interoperability is the dramatic increase in mobile money transactions that will result.”

While this may be good news for the Kenyan consumer and industry, Safaricom shareholders should be prepared for some pain going forward as I expect this move will have a negative impact on earnings.

A quick look at Safaricom’s FY2017 annual report clearly shows how big an impact M-Pesa’s revenue has on the bottom line. During the period, Safaricom booked approximately Ksh. 221.9 billion in revenue representing an 8.8 percent growth compared to 2016, driven largely by M-Pesa which now accounts for close to a quarter of all revenue.

Mpesa revenue growth

Safaricom’s CFO Sateesh Kamath notes, “M-PESA is currently our largest revenue growth driver, contributing to just over half of our total service revenue growth”, further illustrating the importance of the unit.

Over the past five years, M-Pesa has been one of the fastest growing segments in Kenya’s largest publicly traded company growing at a CAGR of 27 percent, coming only second to mobile data revenue which posted a CAGR 45 percent over the same period.

The latest data from the Communications Authority of Kenya puts Safaricom’s share of the mobile money market at 74.17 percent with its agents accounting for 88 percent of the entire mobile money agents network.

Since most mobile money transactions take place on Safaricom’s network, the general consensus has been that the telco’s decision to charge cash transfers to Airtel Money customers at double the price charged on Safaricom-to-Safaricom customers amounts to unfair competition and is also responsible for M-Pesa’s dominance.

Although a 2016 study of Tanzania by the GSM Association argued that the flow of funds among inter-operable mobile money networks appeared to be two-way, allaying concerns that only one provider would benefit, we can now confirm that the actual results are vastly different as the chart below shows.

Mpesa losing market share
Source: Tanzania Communications Regulatory Authority (TCRA)

With this hurdle removed, there is no doubt in my mind that M-Pesa’s market share will be gradually eroded by other players such as Airtel and Equity bank just like what happened in neighboring Tanzania.

A 1 percent market share loss for Safaricom’s Mpesa in Kenya would result in a revenue dip of approximately half a billion Kenya shillings, money which the telco can’t afford to lose especially now that it’s increasing operational costs to improve coverage, capacity and quality of its network.

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