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The Delta Perspective January 2009

Mobile Commerce in MEA: A Current Reality Author

Javier Alvarez - partner: jav@deltapartnersgroup.com Bart Janssen - principal: bj@deltapartnersgroup.com Guido Arons - associate: ga@deltapartnersgroup.com Delta Partners Intelligence Unit

Globalization and the unprecedented growth of mobile telephony in the MEA, bring with it the chance to facilitate m-commerce activities across new frontiers. The potential applications for these developing economies are far and wide, with opportunities to improve and transform the lives of millions.

Key highlights for 2012 • Large gap between mobile and banked customers; Mobile subscribers to

exceed number of bank account holders by 200 million in the MEA region • Considerable market potential of US$1.3 billion for m-commerce services expected in the MEA region; Regional split of 58% and 42% between Africa and Middle East respectively • Revenue potential for m-remittances expected to touch US$385 million and US$260 million in Middle East and Africa respectively • Revenue potential from m-money activities to have a larger impact in Africa and estimated at US$480 million as against US$155 million in Middle East. This is due to the wider gap between the ‘unbanked’ and the ‘wirelessly connected’, coupled with a larger population


Derivatives of M-commerce The rapid proliferation of mobile telephony coupled with the speed of adoption of technologies, has led to an unprecedented acceleration in the deployment of m-commerce activities across the globe. The concepts of buying goods and services, money and airtime transfers, payment of utility bills and various other mobile centric transactions, have not entirely been new features to the wireless world. Owing to the transaction type and vehicle, the origins of m-commerce are ambiguously differentiated under broad categories. The taxonomies are each derived based on the nature of business and customer interactions and also to some extent the level of personalization. • Remittances, often the most popular transaction mode in emerging economies, includes the sending and receiving of funds, domestically and across international borders • Payments are based on transactions over text based mechanisms,

Exhibit 1: Classification of M-Commerce

Source: Delta Partners Analysis 2

between a user and retailer. For example, purchase of items such as train/bus ticket, general utility and food items, airtime recharge, prepaid top-ups through text-based or voice enabled transactions, fall within the paradigm of m-payments. • Banking, on the other hand, can be said to encompass, a broader array of mobile account management as well as mobile financial information needs. Keeping the characteristics of MEA, set in the backdrop of high migrant population in the region, our paper centres on the scope, benefits, and opportunity of m-commerce applications. Thus, we focus on the two classifications; m-remittance related activities with other facets of m-commerce clubbed under ‘m-money’.


Assessing the opportunity for M-Commerce in MEA For about a decade, mobile transactions have been earmarked as a promising business opportunity, both for mobile operators and banks. M-Commerce solutions act as an alternate for uplifting the underserved population

It is true that in developed markets, M-commerce has not been able to live up to its expectations in terms of delivering the ‘Holy Grail’ in revenues. However, in emerging markets, the reduced presence of the conventional branch-led retail-banking model offers a golden opportunity for operators who manage to get the business model right. In these developing countries, large segments of the population present unpredictable and irregular income patterns, as low-income urban and rural dwellers continue to remain under or un-banked. The large gap between number of mobile users and bank account holders has helped in the creation of a lucrative potential for provisioning of m-commerce facilities. With mobile operators increasingly adopting innovative business models to address the ‘Bottom-ofthe Pyramid’ efficiently, the pace of mobile penetration will only continue

to outstrip the penetration of bank accounts. Delta Partners believes that there would be an additional 200 million more mobile customers than the traditional bank account holders in the MEA region alone by 2012. The advantage of developing a market towards m-commerce is that it continues to drive the economic system toward a cashless transaction environment. Several operators, especially those in emerging economies have come to realize the importance and potential that lies captive in these service offerings. The most successful international cases are presented by the operators in Philippines (Globe Telecom and Smart Communications), and is fast being adopted and tailored by operators in other parts of the world. In Africa, ever since the successful launch of Safaricom’s M-Pesa in Kenya (launched in early ‘07, has over 4.1

Exhibit 2: Bank and Mobile Penetrations in MEA: 20071

Note that mobile penetration is defined as the number of active SIMS/population (so can exceed 100%); bank account penetration is the % of people that has a bank account (so cannot exceed 100%); To compare like to like we have divided the mobile penetration by a factor of ‘1.3’ (dual SIM effect) Source: Delta Partners Analysis 1

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million registered users with more than 5000 partnering agents and 110 ‘Pesapoint’ ATMs across 46 towns), various operators in variety of sizes have jumped on the bandwagon. As it stands currently, operators in MEA

such as MTN (who already introduced MTN Banking in South Africa at an earlier stage), Zain, Etisalat, Orascom and Orange are rolling out their respective solutions to capture this opportunity.

Exhibit 3: Examples of M-Commerce Services in MEA and Selected Emerging Markets

*

To be launched

Source: Delta Partners Analysis;

Exhibit 4: Mobile and Bank Account Penetration (%) for Select MEA Countries

Source: Delta Partners Analysis 4


The ‘Delta Partners’ Point of View The promising growth in m-commerce services is strongly driven by the latent need for banking solutions for those unaddressed by the financial sector thus far.

Most banks have traditionally focused on the high-end customer segment limiting themselves to a small

thriving m-commerce solutions are (i) presence of an addressable rural population (ii) poor infrastructural

proportion of the developing countries population. Mobile operators, on the other hand, despite entering the same markets decades later, have created unmatched inroads across various levels of the socio-economic strata and succeeded in surpassing the banked population.

(transport/power) backbone (iii) high proportion of mobile phones as the communication device (iv) presence of migrant population (Refer Exhibit 5). For instance, the presence of favourable demographics and reliance on cash for everyday subsistence by low income groups in the Philippines, led to the popularity of m-commerce services of both operators, i.e. Smart and Globe.

Furthermore, the factors that help create a positive environment for

Exhibit 5: Socio-economic Enablers to M-Commerce

Source: Delta Partners Analysis 5


Globe Telecom introduced its services in Philippines with a focus on the high end market and an emphasis on postpaid services. However, the presence of a large population in the middle and low income tiers in the country was difficult to ignore. In October 2004, Globe Telecom launched its first micro-payment services, called G-Cash, a service designed to convert and link a user’s mobile phone to a bank account. The principal transaction types were those between a phone-to-phone and phone-to-bank account. On activation, the product enabled subscribers to engage in a plethora of

Assumptions: • Mobile penetration growth rates decline from 41% between 2002-07 to 9% up till 2012 in Africa • Mobile penetration growth rates decline from 28% between 2002-07 to 10% up till 2012 in Middle East • Penetration of m-commerce services to reach 25% of total mobile users by end of 2012 in MEA 2

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mobile transactions ranging from (i) cash deposits/withdrawals (ii) credit transfer to prepaid accounts (iii) airtime transfers (v) cashless purchases (vi) payroll credits (vii) international remittances. In addition to the above services, G-Cash also provided for micro-finance in agreement with the ‘Rural Bankers Association of the Philippines’ (RBAP). The costs of service of the G-Cash ‘suite’ typically vary with the transaction type. For instance, SMSes for inter account transfer cost PHP 1 (US$0.02) each, while cash deposits and withdrawals incur a fee of 1% on the transaction value. The success of this platform can be proven by the number and volume of subscribers and transactions running on it. Presently, over 1.2 million subscribers are estimated to be on this system. Additionally, the transaction value is believed to be in excess of PHP 3 million (US$60K) each day, spanning 400 accredited partners and 3000 outlets. Taking into account the key learnings from the Philippines success, MEA operators could achieve positive market impact, owing to the similarities in demographic set-up.

We feel the immediate opportunity lies in bringing financial services to the telephonically connected yet unbanked population. We estimate this market to have a considerable potential of US$1.3 billion by the year 2012 in the MEA region alone, with a split of 58% and 42% between Africa and Middle East respectively2 (Refer Exhibit 6) Remittance flows are driven by the degree of globalization and a growing trend towards multi-spatial households. As the growth of migrant workers increases, this drives the global demand for money transfers. According to the World Bank, the global remittance market in 2007 was estimated at US$337 billion, registering healthy CAGR of 13% from 2003-07 with a y-o-y growth in 2007 of 19%. Strong net remittance inflows were registered especially in the developing continents, with Africa (US$29 billion), Latin America (US$49 billion) and Asia (US$62 billion) registering strong net inflows of remittances. In the 2007, the MiddleEast registered a net outflow of US$13 billion (US$29 billion outflow vs. US$16 billion inflow). Needless to say the measure of market potential operators can largely achieve will depend on a combination of market skill and intrinsic will of all the stakeholders involved. (a) Available Strategic Options In order to execute m-commerce offerings successfully, operators will first need to gauge and understand the direct benefits of potential revenues and indirect benefits of improved customer retention and loyalty. Having said that, the successful launch is linked to an operator’s long-term vision and marketing strategy.


Exhibit 6: M-Commerce Market Potential for MEA Region in 2012 (US$)

Source: Delta Partners Analysis

In order to decide upon the best way forward, these benefits need to be assessed against investment requirements in the near-term and the long-term future. Based on the operator’s overall strategy alignment, the initiative can be classified into (i) Core (ii) Add-on or iii) Limited involvement. (Refer Exhibit 7)

(i) Core - Under this strategy, mobile operators (potentially after a soft launch) offer an exhaustive portfolio of m-commerce services, whereby the portfolio of m-commerce services becomes a core element of the operator’s value proposition. Hereby the operator adopts a dominant

Exhibit 7: Operator’s Strategic Choices

Source: Delta Partners Analysis

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Exhibit 8: Case Study (M-Pesa)

Source: Delta Partners Analysis

position in the overall value chain. One such example of a successful case is the launch of M-Pesa service by Safaricom in early 2007. (Refer Exhibit 8) (ii) Add-on - In this set-up, mobile operators would consider m-commerce as a driver for ‘Value Added Services (VAS)’ and develop partnerships with banks, retailers, and utilities in order to leverage the competencies required. An example of this would be the mobile micro payment service launched by Vodafone in partnership with HSBC. The service is a method for money transfer by which subscribers can transfer money, by depositing money into their Vodafone Cash accounts and withdraw money from it from designated ATMs. While, the Vodafone Cash account differs from the bank account, services can be availed of at all the Vodafone and HSBC branches in Egypt. Typically, the cost of the service is EGP 0.30/call, i.e. US$0.0054/call for balance enquiries 8

and transfers while withdrawal incurs a fee of 2% on the transaction amount. (iii) Limited involvement - This strategy would result in operators reaping the benefits from increased data traffic or wholesale activities such as hosting of 3rd party operators, MVNOs or banks. Though this option has the lowest risk profile, the financial returns are likely to be limited. Tier II operators may be interested in such options as these help ride on the twin benefits of low risk exposure and idle network capacity. For instance, in 2006, an MVNO called mBank mobile was launched in Poland. While mBank was responsible for performing payments and providing for payment related information, Polkomtel sold airtime. Additionally, Dutch Rabobank bank launched an MVNO for m-commerce services. (b) Aiming towards the Best Fit: Which Model should an Operator Adopt? Based on the operator’s strategic


choice out of the above three options, the four business models that exist are: Mobile Operator dominated, Bank dominated, Hybrid and Independent third party (Refer Exhibit 9). In our opinion, the mobile operator dominated model has in it various advantages over the bank dominated ones, especially in developing markets. Additionally, the full control of m-commerce interface, which allows operators to provide fully secured transactions, also has in it the ability to appeal to consumers at large. Thus, the mobile operators can leverage upon their existing strengths of: • Robust national infrastructure • Significant experience in managing expansive distribution network • Experience in running high volume/ low value transactions

However, banks do have a slight advantage when it comes to customer trust in such financial solutions. Hence, market assessment is crucial before deciding on a certain model while success is never solely decided by the model chosen but the operator’s implementation. In the high-growth economies of MEA, we believe that operators with a strong brand name and wide distribution network should capitalize on the head-start they enjoy vis-à-vis the banks and adopt the mobile operator dominated model. This would enable them to acquire a sizable chunk of the US$1.3 billion m-commerce opportunity by 2012, while also strengthening the companies’ overall positioning in the market.

Exhibit 9: Four Possible Business Models in M-Commerce

Source: Delta Partners Analysis 9


(c) Managing Stakeholder Interest The evolutionary roadmap of m-commerce activities is expected to bring with it advances in technology, improved security systems and a wider range of service offerings. Despite all the changes, the crucial factor for the success of an operator driven m-commerce initiative, would be the roles played by the remaining key stakeholders of the ecosystem, i.e. the consumer, the distribution network and the regulatory body (Refer Exhibit 10). (i) Consumers - The most important group of stakeholders to be actively managed. Affordability, accessibility of services and convenience of use are the leading two criteria in ensuring a good consumer experience.

KYC: Due diligence and bank regulation, which financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. 3

(ii) Distribution Network - The active management of the distribution network is a necessity in achieving sufficient traction for service take off and post-launch acceleration. Since these distributors are the final

Exhibit 10: Challenges to Overcome with Key Stakeholders

Source: Delta Partners Analysis 10

interface to the end-consumer, they need to be adequately incentivized for them to consider pushing m-commerce products and services more effectively. Low-start up costs, attractive commission structure, simplicity of execution, reliable and hassle-free processes all add to improving the overall comfort level of this group. (iii) Regulators - Compliance with the regulatory climate in each country is a necessity. The two key aspects in m-commerce service provisioning are to ascertain legality of financial transactions coupled with professional management of the ‘funds in float’. Some effective ways in governing the above can be: • Complying with official ‘Know Your Customer (KYC)3 procedures • Developing robust processes and protocols in co-operation with financial systems, in order to ensure highest levels of security and risk management tools.


Conclusion The most important and widespread advantage of m-commerce solutions for an operator in emerging markets is to capture the unofficial cash flow in the system. For the consumers, it eliminates the need to carry physical cash, minimizes money-laundering opportunities, improves savings and eases money transfers. Additionally, the system brings with it long-term tangible benefits for the government as well. A larger segment of banked and connected population leads to decrease in poverty levels, improved quality of life, increased tax collections and enhanced consumption and GDP levels. The largest beneficiaries in this regime, especially in an operator dominated model, are indeed the mobile operators themselves. In our opinion, m-commerce enables them to increase penetration rates and total revenues, strengthen and broaden their overall value proposition, maximize network utilization, improve ARPUs, introduce new VAS revenue streams and reduce churn. Delta Partners believes that leading operators in the emerging markets of MEA are best positioned to leverage upon all the benefits of m-commerce, and would do well to act fast and create a competitive edge for themselves. However, the success of this endeavor rests upon striking the right balance between operator commitment and collaboration by other entities of the value chain.

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Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology (TMT) sector in high growth markets, with more than 100 professionals operating across the Middle East and Africa from its offices in Dubai and Johannesburg, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than 25 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages an $80M private equity fund, targeting investment opportunities in the TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis, and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region, either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to services, combining strategic advice and hands-on pragmatic approach.

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Mobile Commerce in MEA - January 2009