S2E7: Telcos, PalmPay, and the Future of Mobile Financial Services

Rama [00:13]: If you look at where a lot of mobile money providers are today, we're still very much at the perhaps earning and spending stage.

Justin [00:23]: That's Ramatoulaye Adama Diallo, the CEO of Orange Money Senegal.

Rama [00:27]: The next level is okay, how do you save and how do you invest? So that's where a lot of savings products and therefore, credit, microcredit products come in as the next generation. And that needs to be more widely available.

Justin [00:41]: It certainly goes without saying, but mobile network operators have an outsize impact on African markets - particularly from an innovation and financial inclusion perspective, given the proliferation and even ubiquity of mobile money and mobile financial services on the continent. And while we speak to a lot of amazing and impressive entrepreneurs building and scaling startups in this space, the telcos can't be ignored and, in fact, should be front and center in many of the conversations we have around startups, entrepreneurship, and innovation. So in this episode of The Flip, in addition to some of the aforementioned amazing and impressive entrepreneurs, I also spoke to those working for and with telcos to get some perspective on the evolution of mobile financial services and the opportunity for startups in working with big corporates who have the distribution and the userbase, and in many cases need the help of innovative and fast-moving startups who together can build the future we wish to see on the continent.

VO [01:35]: You're listening to The Flip, the podcast exploring more contextually relevant stories from entrepreneurs around Africa.

Justin [01:44]: Welcome back to The Flip, I'm your host Justin Norman. Let's talk mobile money and the evolution and future of mobile financial services. But before we talk with those with the telcos, let's explore the landscape.

Wiza [01:56]: My name is Wiza Jalakasi, I'm Head of Global Business Development and Strategy at Hover, Hover Developer Services.

Justin [02:02]: Wiza is one of the leading operators and thought leaders in the mobile money space on the continent, and he and I had an opportunity, pre-COVID, to sit down in Johannesburg and talk about the evolution of mobile money - from the so-called mobile money 1.0 to mobile money 2.0.

Wiza [02:16]: Mobile money 1.0 is the idea of the telco-led mobile financial service that is available and distributed on the SIM card. And the key thing is like, can I use it with only a SIM card or is the SIM card the only dependency? Yes. Do I use a SIM card interface? Yes. Then that's mobile money 1.0.

Justin [02:35]: The early days of mobile money 1.0 were built with SIM card interfaces like USSD and SIM toolkit, the technology that allows for offline apps - using basic feature phones.

Wiza [02:45]: USSD provides the perfect technical layer for you to implement these offline apps where the SIM card needs to talk to a server, but it cannot connect to the Internet, so it needs to find some other way of getting there. And that's the problem that USSD solves.

Justin [02:59]: But a problem with USSD - and using a text-based interface is that it's not a great user experience, especially for those who are less digitally savvy, and is also technologically limited when compared to smartphone apps. And as the penetration of smartphones continues to increase on the continent, we're now experiencing the evolution to mobile money 2.0.

Wiza [03:17]: And mobile money 2.0, for me, is about improving the way we interact with mobile financial services. And at the core of that is improving the core interface layer, which telcos are already doing on their own. So almost every mobile money service now has a smartphone app companion. And the smartphone app is usually considerably better than the USSD experience. And then another big part of making mobile money more useful is increasing the number of products and services that can be purchased natively with it. You now see this new form of mobile value that is stored digitally, natively on the device, and can be used and consumed on the device. And that, I think for me, defines a lot of what mobile money 2.0 is. It's mobile money, like 1.0, but the brain has been moved up a layer into the smartphone.

Justin [04:05]: So while the initial value proposition of mobile money was domestic remittances and peer-to-peer payments, we're now seeing a push to widen the use cases of mobile financial services beyond just P2P payments, which is also enabled by the products and services being built for smartphone apps and with open APIs and so on.

Wiza [04:21]: I think we need to build more sophisticated use cases for the existing mobile financial services that are there. Financial services don't operate in isolation. One of the big dependencies is identity and identity is closely linked to credit. And save for South Africa and a few other sophisticated markets, these things are all siloed and broken and fragmented. So it's very difficult for innovators to build a new type of service that only relies on the payment rails without having an identity layer or some sort of credit layer. And when we solve those two, I think we'll start to see very novel, context-specific fintech-style applications coming out of the continent. And that's where the long term value is.

Justin [05:11]: So amidst this evolution and a broadening of the use cases and value propositions of mobile financial services, what approach are the mobile network operators taking?

Chris [05:19]: Maybe for context, I guess our strength has been money transfer, domestic money transfer, and most of our users have been on feature phones.

Justin [05:27]: That's Chris Williamson, the Head of M-Pesa for Vodacom Group. Chris oversees M-Pesa in four of Vodacom's six M-Pesa markets.

Chris [05:34]: Looking forwards, we're evolving into a digital cloud-based open platform. If I can unpack that, when I say digital, I mean really designed for the smartphone age. At the moment, it's about a third of our customers that have a smartphone. So it's still a minority, although they tend to be our power users. Cloud-based. So at the moment, the M-Pesa platform, partly for historical reasons, but also for regulatory reasons, is separate in each market. So if we want to do a partnership with a global payments player, or global remittance partner, it's like one integration per market, one contract per market, one settlement process per market. So we're putting more and more of the new functionality on the platform into central hubs and over time that will evolve into cloud. And then the third part, so I said digital and cloud-based open platform, and I really mean that. We have launched open APIs now in most of our markets and that's being consolidated at the moment into a single open API gateway for all M-Pesa markets. So basically we'll be one M-Pesa partner for anyone that wants to integrate with us, they don't have to do a separate integration per market.

Justin [06:47]: For M-Pesa, open also means interoperable.

Chris [06:49]: I think the other key component we're moving towards, actually an over-the-top model for M-Pesa, and we've stated this publicly in a couple of markets, where we don't think that M-Pesa should only be limited to Vodacom or Safaricom SIM cardholders. It should be whatever network you're using, you can use the M-Pesa app. That's the future of financial services anyways so we're embracing that.

Justin [07:13]: Another evolution for M-Pesa is in their endeavor to broaden mobile money acceptance and usage amongst merchants.

Chris [07:18]: I think one of the key learning has been in our markets people are still pretty much living in the cash economy. They have used M-Pesa for payments that they couldn't do face-to-face, like sending money to someone in another city. But when it comes to face-to-face payments, they're quite comfortable paying with cash and merchants always have cash. So you've got to offer a proposition, beyond just the actual payment, you've got to give value to the customer that they wouldn't get otherwise, and you've got to give the merchant a way to really build their business. And that's why we're launching a wide range of business services for merchants. And increasingly we're offering things like financial services to the merchants, as well.

Justin [08:00]: This again, is where there is a need and opportunity for other fintechs and financial services companies to build on top of M-Pesa's infrastructure.

Chris [08:07]: We want to enable a very wide range of players to build their own products and services through our rails. At the same time, we may launch our own products and services that compete in that space as well. We're about to launch what we call the loan marketplace. So we have a wide range of credit and savings products at the moment, but generally, we've built them working very closely with one specific bank. The concept of the loan marketplace is to put all of the necessary ingredients like credit scoring APIs and payment rails and messaging rails and loan management rails into really accessible APIs so that then in each of our markets, any licensed financial services player - it could be a bank or, or an MFI - can build really innovative financial services products and offer them on our marketplaces. So I'm excited about that model and that's a space where, you know, frankly, we're not a licensed bank or an MFI, so we can't offer any interest-bearing products ourselves.

Justin [09:08]: But the key here is not just interoperability or leveraging M-Pesa's distribution, but also making sure that what's being built and offered is of value to the target end-user.

Chris [09:17]: I think what I'd slightly take objection to is this, and particularly in the sort of development community, there seems to be an idea that interoperability is a silver bullet for financial inclusion and that if we are interoperable with everyone, then that means that suddenly millions of rural customers that don't yet use mobile money are going to start using it. Where we've introduced it, for example, in Tanzania, we launched I think four years ago now, interoperability with the other mobile money players, we have pretty similar market share. Actually, we've only seen like only about 10% of our P2Ps are going off-net and it's similar for the other players. And that's because a lot of people before that were using multiple SIMs or they were using send vouchers and things. So it's more complex than people think. People need to focus, not just on interoperability, but on actually what value do merchants and consumers get from going digital.

Justin [10:28]: Let's hear from another mobile network operator - Orange. Here's Rama again, who we heard from in the opener, the CEO of Orange Money Senegal.

Rama [10:35]: Orange overall has more than 125 million customers across the African footprint and within that, a good 50 million are Orange Money subscribers. And we're in 19 countries now, so clearly this is the growth engine within the growth engine of Orange overall. Financial services is no longer a side business. It's definitely at the center of our strategic plan in terms of growth and Middle East Africa is definitely a growth engine within the larger group.

Justin [11:03]: To be sure, for Rama and Orange, the opportunity, particularly from a financial inclusion perspective, is to extend the usage and utility of Orange Money beyond peer-to-peer payments.

Rama [11:13]: If you look at where a lot of mobile money providers are today, we're still very much at the perhaps earning and spending stage. Merchant payments are a big part of the business, but not as big as they should be. So helping people pay with their phones is still budding across the continent. There's a whole lot more for us to do. The next level is okay, how do you save and how do you invest? And the idea there is very much, not just for individual customers, but I think the biggest opportunity is in what I call the micro-entrepreneurs. So that's where a lot of savings products and therefore credit, microcredit products come in as the next generation. And that needs to be more widely available. I think there's something that's very much needed on the continent. And it's also, I believe, something that can really, really deepen financial inclusion.

Justin [12:13]: And to achieve these aims, Orange, similar to M-Pesa, is focused on taking an open approach and building the infrastructure for other partners to leverage and build on top of.

Rama [12:21]: So I think the idea of definitely opening up to the ecosystem and laying the rails and partnering, with banks, for example, is very much at the center of what we're doing. I think the idea of also partnering with the startup ecosystem is very much at the center of Orange’s ethos. You've talked about APIs and that's also incredibly important and is ongoing, as well, because being able to be a bit of a platform with satellites all around it, I think is something that is extremely important because, as much as we innovate, as much as we have the muscle to do research and development, it would be arrogant to think that all innovation would spring from within. In fact, most will probably spring from without.

Justin [13:08]: For Orange, this means working with and investing in the startup ecosystem.

Rama [13:11]: How do we make sure that the startups and those who are working on relevant, adjacent services that can really make life better for our customers, how do we make sure that they think of us as their partners? How do we make sure that they want to develop on our platforms? How do we make sure that they want to interconnect with us and have access to our customer base?

Justin [13:33]: And part of the answer to those questions includes investing in and helping to build the ecosystem.

Rama [13:38]: If you look at above and beyond Orange Digital Ventures, Orange Ventures period, which is an investment fund, Orange across the footprint has a vast range of initiatives, whether they fall under corporate social responsibility or they fall under a fund, that are all designed to support the ecosystems in the various countries. So there is investment really across the board in being a major player and seeing ourselves as having, potentially, a very good and positive and long term impact in shaping the future of digital. We think about being a part of, not just being a part of, but building the future of digital.

Justin [14:24]: Now, the reason why it's worth talking to mobile network operators, in the first place, is because of the distribution and scale of telcos on the continent, and the number of customers they are serving. Another category with comparable reach and opportunity from a mobile financial services perspective are the cell phone manufacturers. Last episode, we talked to Sofia Zab, the Global Head of Commercial and Marketing with the fintech PalmPay, which comes pre-installed on all Transsion cell phone brands - Tecno, Itel, and Infinix. Sofia had this to say,

Sofia [14:50]: Distribution, in my opinion, is an incredibly important piece of the puzzle. On the most basic level for every phone that comes pre-installed with PalmPay, we're saving the cost of paying for that install. It's far cheaper for us to run ads, and if we're running awareness campaigns we're really shortening the funnel. But it’s much bigger than that. As a payments company, network effects are key to our business model. That means that the bigger we become, the more useful our service can be for everyone that is part of our ecosystem. And don't forget that Transsion devices represent over 50% of the smartphones being used in Africa. So us being pre-installed at that scale was quite significant.

Justin [15:30]: And PalmPay is thinking about other integration opportunities to leverage their relationship with Transsion.

Sofia [15:35]: We're actually working with Transsion to bake PalmPay into the core user experience of every Tecno, Infinix, and Itel handset. So you could say that we're working towards powering an Apple Pay-like experience for them. We're also working on ideas like integrating into the keyboard and then also building the PalmPay QR reader into the camera. And Transsion also has a large distribution and retail network, and that’s also something that they are making available to us. We’re starting with 5,000 retail points in Nigeria that we’re going to be onboarding onto our agent and merchant networks.

Justin [16:08]: Though as Chris shared earlier - his belief that interoperability isn't a silver bullet - in spite of PalmPay's massive distribution advantage, distribution is not necessarily a silver bullet either. And for PalmPay that means putting resources towards customer acquisition and retention, as well as referrals and loyalty programs.

Sofia [16:24]: Pre-installs are just the first step, and we definitely need to go beyond pre-installs. Our approach to drive user acquisition is that rather than spending all of our money on Facebook ads or billboards, we invested into giving discounts, cashback, loyalty points, and other incentives directly to our community of users. And that's really helped us drive word of mouth and referrals. I would say that referrals is probably our single biggest user acquisition driver at the moment.

Justin [16:55]: The goal is to build strong value propositions for users on top of the pre-installation.

Sofia [16:59]: We're applying almost an ecommerce mindset to running marketing campaigns at PalmPay, so every month we have a different campaign, a different way to engage users. But while incentives are definitely part of our core value proposition and marketing strategy, ultimately the most important thing for us is to offer great product value.

Justin [17:18]: PalmPay is focused on reliability and accessibility, as well.

Sofia [17:21]: We put a lot of focus on making our platform reliable because, honestly speaking, that in itself can be a USP in many markets in Africa. For instance, in Nigeria, we’re actually integrating into over a dozen payment infrastructure partners so we can offer that reliability to our consumers and also offer them choice when it comes to channels that they can use to deposit from and transfer to. We’ve got a Mobile Money Operator license so that means that we’re interoperable with the banks, and then we’re also building out an agent network for those that are currently unbanked. Having a reliable product, that’s also convenient and easy to use is half the battle in this market, and that in itself is driving a lot of growth for us.

Justin [18:01]: To achieve that end, and similar to telcos, PalmPay is also taking an open, partnership-driven approach to the market.

Sofia [18:07]: From the very beginning we were thinking of PalmPay as more than just an app. We were thinking of it as an ecosystem, because if you really want to become part of the daily lives of consumers, you have to be available everywhere, and that's outside of the app as well. So rather than trying to do everything ourselves, our approach is that we partner with other companies. The first thing that we’re doing is that we’re building out a marketplace on the app itself, and the second thing that we’re doing is making it really easy for consumers to pay using PalmPay elsewhere. So we’re building out an online and offline merchant network where you can make payments using PalmPay QR. And we also have a partnership with Visa that enables us to offer cards to our customers so they can link those to their PalmPay wallets and use them to make payments anywhere. We’re also going to be launching an open API platform soon, and that will enable any company to integrate with us really easily and offer PalmPay as a payment method to their consumers.

Justin [19:04]: And in terms of expansion, apart from geography, PalmPay too is looking to broaden their financial services offerings on top of the payments foundation they are building.

Sofia[19:12]: In the countries where we’re already present we're thinking about how we can build out those different product lines. So generally, we start with payments propositions, but obviously, we’re also thinking about moving into different types of financial services.

Justin [19:29]: In some cases, their approach and view on partnerships is also driven from a regulatory perspective.

Sofia [19:33]: In Nigeria, we currently don't have our own license that would allow us to do investments and savings and lending, so we'll be working with partners for that, and I'm already talking to several possible partners. And yes, we do absolutely believe that to really enable people to advance their lives through the use of financial services, they have to have access to the full suite of financial products. So that includes credit, it includes investments, and insurance. So that is definitely a direction that we're moving towards.

Justin [20:15]: Now the question becomes, how do you work with big telcos or even startups like PalmPay who are leveraging the reach and distribution of Transsion. For that, I talked to two pros of the fintech space, who incidentally used to be colleagues at the Nigerian startup Migo. The first, Adia Sowho, who we heard from in episode three of this season, has sat on both sides of the table, as the Director of Digital Business at Etisalat and then as the Head of Growth at Migo.

Adia [20:38]: I think one of the things that's missing in a lot of partnering relationships is you show up and expect people's business models to just fit together. But I find that that doesn't really work when you're a startup dealing with a much larger entity, especially a telco, which is very difficult to understand from the outside.

Justin [20:57]: The other, Hayden Simmons, is currently responsible for strategy at Facebook's Novi, after prior roles at the fintechs Migo and Juvo.

Hayden [21:04]: As a startup, you want to show a telco that you can do something unique, but it's also pretty likely that you're going to have to like scale over time. And so if you're trying to work with a telco and you're telling them, in two years we're going to be worth this much, and we're going to drive this much lending volume or sell this much insurance or whatever, it's probably still peanuts to them.

Justin [21:24]: So with that prelude, what are the considerations for startups looking to partner for greater scale?

Adia [21:28]: There isn't a strong understanding of what leverage means on the startup side. I used to get a lot of startups show up and just say, well, I've got a great product, and then we just launch and nothing would happen and everybody would get frustrated and say, well, the telco does this and the telco does that, the telco charges too much for revenue share and so on and so forth. So I would tell people, look, sign the contract. It's only two years, right? And then at the end of two years, all you need to do is put me in a position where I have to adjust my commercials to respond to you. If you have traction, if you have a user base that's important to me, that is generating recurring revenue, I will adjust. And I gave examples frequently of people that had backed me into a corner. So I would invite startups to back me into said corner but that didn't necessarily happen. I think there were some people that really expected more of an overnight success and that really wasn't the case.

Justin [22:21]: Then on the other side...

Adia [22:22]: On the other side with the telcos, it's just, you know, flexibility, latitude, creating opportunities as opposed to beating fists on a table and saying, I am the telco, you will do all that I say, all the time. So I think just being able to accommodate innovation is a challenge in companies that are very old. But again, this is not a challenge that's specific to just telcos. It's a challenge that is present in companies that have a business model that has seen some success, and companies that have a certain way to make money. Telcos, sell things like voice, data, SMS.

Justin [22:57]: In Adia's experience with Migo, the work in partnerships became co-building products with their corporate partners.

Adia [23:03]: So I think these relationships tend to require a lot of time, a lot of patience and they're usually quite integrated. You know, that word is particularly important because it requires that both sides have an understanding of how each other's business runs. I first met Migo as a company when I was still at the telco and was responsible for getting the service up and running up. So the founder, walked into Etisalat at the time, with one version of how he thought the business would be built and grown and scaled, and we're like, no, in a mobile environment, that's not the way it'll work based on our experience. So it took a lot of back and forth and the product was co-created with the telco. And I think that's one of the reasons why it has achieved some scale. There has to be that openness on both sides to be responsive to the realities or the operations of the respective businesses involved in the discussion.

Justin [23:59]: And Hayden found that those competing priorities were often difficult - even in spite of the fact that mobile money or other ancillary revenues have been growing substantially, relative to a telco's core revenue streams of voice, data, and SMS.

Hayden [24:10]: I think that they're trying to figure out what is the right means to interact with fintechs or other startups or innovators in the space. Is it through APIs or is it more through direct partnerships? Or do you want like an intermediary layer to kind of manage all of the external fintechs for you? Or do you take it all in house and do it yourself, because you're a monopoly and you don't really need a whole lot of assistance. Historically they've been able to do whatever they want and they have that power. And even if it takes them two years, it's not like they're competing and they're not venture-backed, they don't have that same ticking clock, and they have a very different risk appetite. And so one of the biggest challenges of selling into a telco is that your biggest competitor is their in house team.

Justin [24:55]: But that being said, as Chris and Rama have demonstrated earlier in this episode, the telcos are without a doubt interested in trying to figure out the best path forward, to the benefit of both telcos and the startups they do choose to partner with.

Hayden [25:06]: But when you do get those deals, you get pretty unrivaled access to data, to users, to distribution, to all the kinds of checkboxes that you need to make financial services work. With all the OTT stuff coming in eating into the voice revenue and then SMS revenue and now, you know, data revenue, they have to figure out new ancillary services to basically, you know, monetize what they really have, which is really strong agent networks, probably really strong cash collection, if they're doing it directly or maybe that's a third party, and then just a huge amount of data and users.

Justin [25:45]: As always my b-mic Sayo Folawiyo and I sat down for a conversation on this topic, and in particular, we were interested in the differences between a telco-led approach - that which is employed by M-Pesa and Orange Money - and a hardware-led approach like what PalmPay is employing through its strategic partnership with Transsion. Take a listen.

Justin [26:05]: So we explored two similar but different models - one is the telco-led model and one is the hardware-led model, and what's interesting is that the hardware-led model started in a market where there is no mobile money, that being Nigeria. So if you had to bet, if you had to make a bet on one of those models, in terms of who has the leverage and who has the ability to pull off the future of mobile financial services, as we wish to see them, do you have one bet over another? Or do you think like in the next 5, 10, 20 years, there's still going to be some degree of fragmentation because of the different angles with which a variety of different players are approaching trying to capture the opportunity?

Sayo [26:54]: So my feeling is that the real infrastructure, or the most important infrastructure in this equation, is connectivity. And so I think that the telcos will forever be at the center of all this.

Justin [27:09]: Why is that the most important infrastructure?

Sayo [27:11]: It's the only thing that if you take it away that everything falls apart.

Justin [27:15]: So you're saying because there are other mobile phones besides Transsion.

Sayo [27:18]: Yeah, and I can just go make a mobile phone like, well, I can't, but you know what I mean?

Justin [27:23]: Yeah. But you can't just go spin up a telco.

Sayo [27:26]: Yeah. So I suspect they will always be the center of it. I don't think they will be able to take advantage of the opportunity in the same way that the hardware guys will be able to, but I think they're more important just cause you can't take them away. And then the last thing is that the infrastructure around, you know, agent networks, et cetera, et cetera, there's a lot of people building that for their own particular use cases, so, invariably, you're going to have to share, cause it will be stupid to have like one for microfinance, one for betting, one for mobile money, one for retail just all beside each other. Obviously you have to have some sort of consolidation and so the people who know how to manage that infrastructure the best will probably end up kind of providing that management as a service, but that'll also, I guess, eat away at the margin of it. So my point is just that I think that connectivity piece remains the more important piece and everything else is going to be a hell of a lot of work to own in the same way that telcos can own that connectivity piece.

Justin [28:35]: You said that you didn't think that telcos would be able to take advantage as well as hardware companies - why do you think that?

Sayo [28:42]: If you look at the DNA, right, it's that hardware, software, tech, innovation-y culture that they have to spin out shit quickly, raise lots of money, it's a culture of doing exactly this. Scale super quickly, that's the DNA. Whereas telco’s DNA maybe looks more like infrastructure builds, you know?

Justin [29:04]: But that's why M-Pesa was spun out of Vodafone. And I'm gonna not say correctly what the new organizational structure is, but the M-Pesa brand is a separate thing owned by Vodacom and Safaricom, and the intention is to raise money for the M-Pesa business, in particular, because it's a completely different, opex versus capex type of business compared to the telcos. And so I wonder if, to that point, M-Pesa understands that, or Safaricom and Vodacom understand that it needs to be a separate thing for that very reason that you just said.

Sayo [29:29]: Yeah, probably. It sounds like it.

Justin [29:41]: And would that then make you feel more comfortable with...

Sayo [29:43]: Well that becomes a different company, right? That's not, we're now in a different category.

Justin [29:47]: Yeah, absolutely.

VO [29:53]: That's it for this week's episode of The Flip. Last week, we explored the relationship between the tech industries in China and Africa. Next week, we go to Japan, and hear from one of the most active early-stage VCs on the continent, on the strategies Japanese corporates and investors are employing on the continent. So be sure to hit subscribe on your favorite podcast app or follow us on social media @theflipafrica for updates straight to your feed. You can also subscribe to our newsletter on our website theflip.africa, where in addition to podcast updates, you'll receive a weekly essay sent every Sunday. Thanks as always for listening, and we'll see you next week.