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Lipa Na Mpesa As An SME Growth Engine

[vc_row][vc_column width=”2/3″][vc_column_text]A tweep (citizen of #KenyansOnTwitter county) recently drew my attention to a July 2nd 2017 Bloomberg article titled “MYbank deepens push for business banks won’t touch.” MYbank is an online lender that is 30% owned by Ant Financial, Alibaba’s financial affiliate.In case you missed it, Chinese billionaire Jack Ma’s Alibaba Group is the number one global retailer with its monolith ecommerce platform. The article quotes MYbank’s President Huang Hao, who is looking to win as many as possible of China’s 70 million to 80 million small businesses as customers, most of which have no access to bank loans as they lack collateral. “We are like capillaries reaching every part of the society. It could be a small restaurant, a breakfast stand, no other financial institution would have served them before.” By 2016 MYbank’s outstanding loan portfolio was US$ 4.9 billion with a non-performing loan ratio of about 1%. The article further quotes Huang as saying that the bank’s technology, which runs loan applications through more than 3,000 computerized risk control strategies, has kept delinquencies in check.

Huang’s description of MYbank as being like capillaries is eerily reflected by Safaricom’s Lipa Na Mpesa mobile payment platform. From large hotels to food kiosks, from barbershops to Uber taxis, from petrol stations to supermarkets, everywhere you turn, Lipa Na Mpesa (LNM) is now a viable option for payment of goods and services. The product has successfully straddled the small, medium and large business spectrum as a reliable cashless payment option with lower merchant transaction charges (in the range of 0.5% compared to 2% and above for debit/credit card services). According to Safaricom’s FY 2016 annual report, there were 43,603 LNM active 30 days+ merchants on its network. The FY2017 results announcement reflects that the number of merchants is now just over 50,000.

Cash flow is the lifeblood of a business, as any long suffering entrepreneur will tell you. LNM offers real time settlement of payments made on its platform working with 19 banks. What this means is that the business owner will receive the cash generated from revenues straight into its bank account on a real time basis which essentially makes it an attractive revenue collection tool for the entrepreneur weary of sticky fingers at the cashier’s till or even stickier encounters with gun toting customers. The game changer in the peculiar Kenyan economic space is the obvious intersection between the real time mobile payments being collected at the till and the potential to leverage on these cash flows for working capital expansion. 50,000 merchants are fairly low in a country with hundreds of thousands of businesses primarily using cash as the mode of payment. But this is where it gets interesting.

According to the FY2016 Safaricom annual report, the LNM payments in the month of March 2016 alone were Kshs 20.2 billion or an average of about Kshs 459,000 per one of the 43,603 merchants. Bear with me for a minute. Assuming these were SMEs, imagine the relief of being able to borrow from a financial institution, without any collateral, and using the real time unassailable revenue collection history from this payment platform. Imagine even further, that the repayments can simply be deducted at source and calculated as a percentage of historical daily takings.Then before the settlement of each day’s revenue collections, the financial institution collects a daily repayment, thereby reducing the loan amortization amounts into bite sized, easy to swallow chunks unlike the monthly hernia-inducing ubiquitous loan repayments.

Your generic bank will not be interested in this model. It’s simply “too much admin” to start configuring their systems to undertake daily as opposed to monthly loan amortizations and to try and guesstimate an SME’s potential risk of default on a loan without collateral using only mobile payment history as the risk variable. But a modern fintech can build the risk algorithms required to do this well. There is also the dual opportunity for Safaricom to grow its LNM merchant base into hitherto unchartered territory, using collateral free business loan products in addition to helping to formalize the large number of informal businesses operating in Kenya. The fintech space is where this innovation has already started happening here in Kenya, but it will only make economic sense if it is done on a large scale. Partnering with Safaricom will be key to this growth.

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Twitter:Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Pesalink Can Change Our Economy

[vc_row][vc_column width=”2/3″][vc_column_text]I recently ran a survey in Kenya’s 48th county, “Kenyans-on-Twitter” to see what people know about Pesalink and came to find out that most of them have heard of, but have never used the product. So I did some research and found that Pesalink is an initiative of the Kenya Bankers Association (KBA) to help Kenyans move funds from bank X to bank Y in a safe and convenient manner using their mobile phones. Assuming your bank operates in the 21st century, your phone number should be linked to your bank account. With that alone, you can use the Pesalink portal on your banking app to send money to buy your Toyota Probox (assuming it’s below Kes 999,999) to the car seller as you quaff a few drinks late Saturday night. Or send Kes 600,000 to Pastor Juma who’s selling that 100 by 50 plot in Kitengela, while you prepare your morning devotions at 4 a.m. on Sunday morning. Pesalink is also available on your internet banking app, ATM machine, banking agent and bank branch.

Straight through processing is what Pesalink is all about. It’s big brother RTGS – or real time gross settlement as it’s called – is also an initiative of KBA, and was created to allow faster settlement of large value transactions through a same day processing mechanism. Today you can’t issue a cheque for amounts over Kes 1 million as such a transaction has to go via RTGS. The direct beneficiary is the customer as the bank can no longer sit on the “float” as it waits to give the customer value for the cheque that has already cleared. The difference between RTGS and Pesalink is that the former requires you to walk into your bank branch and fill out a tedious form. The latter, however, is a few keystrokes from the comfort of your bar stool or Slumberland mattress 24-7. Both are KBA initiatives, which, when working optimally, should significantly reduce footfall as well as cash holding requirements in branches, the latter of which creates a trading opportunity cost for bank treasuries as it’s idle cash sitting in a vault.

I spoke to the team at the KBA-owned Integrated Payments Services Limited (IPSL), who operate the switch that runs Pesalink. The process is supposed to take at most 7 seconds for the transaction to go through. Since its launch in March 2017 until June 1st, the system has processed about Kes 2 billion between the 26 banks that have signed up to the system. Client ignorance on the one part and bank reluctance on the other are some of the reasons for the slow take up of the product. The bank reluctance, some say, comes from wanting to see stability in the system before launching big bang. My cheeky side wants to provoke and say the potential loss of float that banks will endure, as funds move real time, 24 hours a day, is something that would make any bank drag its feet to market this product. It also adds a new, but manageable challenge, for bank treasuries in squaring their cash positions once overnight fund movements become frequent.

Why should you consider moving funds this way? First it beats the exasperating Kes 70,000 transaction limit and Kes 140,000 daily limit on Mpesa. (Although it’s said that some banks have,counter intuitively, put in transaction limits. Why for the love of God?)Secondly, the fees have been capped at Kes 200/- no matter what amount is being sent. Thirdly, in case you missed it, the banks are running a no-Pesalink-charges campaign for the next two months to get customers onto the product. Fourthly, you can do it 24 hours a day 7 days a week. Finally there are no limits on the number of times you can send funds in a day.

The product is being launched in phases, primarily to get system stability and knock out the kinks before going full throttle. Today it’s serving Peer-to-Peer clients but the ultimate aim is for Business-to-Peer and vice versa, which would include government payments such as taxes and rates, or utility payments from businesses and individuals to KPLC and Nairobi Water. Pesalink provides one less reason to go to the bank physically and will be a key cog in the 24-hour economy wheel that we all wax lyrical about.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]