Why telcos will win the mobile money race in Africa

The 21st century has seen remarkable transformations in payment methods for goods and services. Electronic payments are increasingly replacing cash, while cryptocurrencies and digital currencies emerge as novel alternatives to conventional money concepts.

Africa has not only kept up with this innovation but has also, in some instances, led the charge. New investments and regulatory changes continue to shape the continent’s e-payment landscape. With over 350 million adults in Africa living cash to cash with no bank account or credit card, cash does remain dominant in Africa, but the continent is also experiencing a swift proliferation of mobile money, driven by improved technology accessibility, challenges in traditional financial services, and a rise in contactless payments. In fact, sub-Saharan Africa has over 50% of the world’s mobile money accounts, according to the World Bank.

Moreover, Africa’s domestic e-payment market is projected to experience a 20% annual revenue growth, reaching an estimated $40 billion by 2025. In comparison, payment revenues globally are predicted to grow just 7% per year in the same time frame. As mobile accounts become the de facto means of verification and access by Africa’s governments and retailers for the vast numbers of ‘unbanked’, there is an attractive opportunity for telecom businesses to grow their mobile payment services.

Innovative solution for the unbanked population

Traditionally, the region’s relatively low socio-economic development has hindered financial inclusion in sub-Saharan African countries. In 2021, nearly half of individuals aged 15 and above were unbanked. The challenges were driven by the scarcity of banking infrastructure, such as ATMs and point-of-sale (POS) machines, along with cumbersome application procedures, the requirement for official identification documents, and costly service fees.

Additionally, the region’s informal economies and prevalence of cash transactions have stifled banks’ adaptability. According to PwC’s Payments and Open Banking Survey 2022, 50% of the African population pays with cash due to the absence of alternatives or requests from a merchant. In addition, low levels of financial literacy, delayed settlements, and fraud concerns further impede the banking sector’s progress in the region.

Mobile money targets these issues extremely effectively. Supported 2G and 3G networks that cover over 80% of the population, these services offer streamlined onboarding processes and access via Unstructured Supplementary Service Data (USSD) – a text message-based mobile communication protocol that doesn’t require internet connectivity. With enhanced security, affordability, and instant transactions, mobile money services gathered widespread adoption, backed by leading telecommunication companies’ large consumer bases. In fact, 63% of mobile users already pay with their phones in-store or plan to do so in the future, and with the introduction of 4G and 5G networks, this trend will only continue to grow.

How telcos are leading the revolution of mobile payments

Mobile money is an attractive business for telcos, with more than 144 providers operating in sub-Saharan Africa. In fact, over the past decade, African telecom companies have significantly contributed to the growth of payments through mobile money by offering innovative payment solutions and value-added services to their extensive customer bases. These telecom operators depend on networks of agents, including traditional and independent traders, who provide nearby ATM services for households. Since 2018, mobile money services have further improved due to interoperability systems across different operators.

In 2018, 80% of mobile money providers reported that most of their revenues came from customer fees; this number fell to 67% in 2019. This drop signifies an essential move towards the “platform-based payments” approach and shows that the pursuit of profits is becoming more intricate. It emphasises parallel services and appreciates diverse and complementary revenue models.

Consumers have already transitioned from basic mobile money services, which primarily focused on peer-to-peer (P2P) transfers and cash-in and cash-out operations (Wallets 1.0), to a more comprehensive range of financial services such as bill payments, savings, loans, and insurance (Wallets 2.0). In 2022, the transaction values of bill payments have seen the most rapid growth, increasing by 36% to nearly $88 billion.

In addition, there are ongoing enhancements to Wallets 2.0, resulting in feature-rich wallets that go beyond core financial services to incorporate in-app shopping, access to various services, and integration with online merchants, marketplaces, and platforms as payment options (Wallets 3.0). According to the GSMA’s State of the Industry Report on Mobile Money 2023, businesses across Africa are increasingly accepting mobile money payments, with the number of monthly active merchants rising by 48% between September 2021 and June 2022.

This move is reshaping both the industry itself and the future of those who can incorporate themselves into the mobile money ecosystem through innovative APIs. It’s streamlining the relationship between customers and vendors, signifying one of the most considerable financial shifts to date. It also contributes to a more interlinked, accessible, and thriving business ecosystem globally.

The innovative approach is further driven by increased ownership and use of smartphones. The number of smartphone connections is set to rise to nearly 700 million by 2025, giving telcos a unique opportunity to tap the market.

While banking entities have sought collaborations with telecom companies, aiming to combine their licensing and lending functionalities with vast mobile networks, these telecom operators are gradually moving towards offering services like lending, insurance and savings independently, without bank partnerships. By incorporating these added services, providers enhance their value proposition and decrease their reliance on a single revenue model.

Mobile money has proven to be a transformative technology, significantly uplifting the financial conditions of individuals in developing regions. Previously marginalised by limited access to traditional banking, people can now utilise vital tools to foster economic resilience. While banks can provide a broader scope of services with fewer restrictions on transaction size or facilitate wage payments for large business clients via digital wallets, telecom providers have the upper hand in this game.

Ultimately, success will be determined by those who can attain scale and promptly introduce new products that cater to customer needs. However, with telcos already serving large numbers of unbanked individuals through their mobile networks and possessing unique data for lending purposes, they are definitely on track to win the consumer digital payments competition.