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.

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

Mpesa is a key economic engine

I have a little farm on the sweeping eastern Laikipia plains that has me visiting at least once a month. The singular cause of blinding migraines for the many telephone farmers is farm worker fraud. Those fellows will find a way to skim money, farm inputs or farm outputs at any given opportunity and trust me, as soon as you plug one leak they’re ten steps ahead of you preparing for the next scam. So one has to, as a telephone farmer, accept a certain level of pilferage as part of the business-as-usual operations, or opting to move and reside permanently in the farm. Irritated and exhausted by one certain input request, I set up a system that didn’t require the farm worker’s intervention. I got a trustworthy boda boda operator in Nanyuki (where trustworthy is a fairly fluid virtue) to be purchasing the input on my behalf. But I don’t send him the cash. He goes to the outlet, sends me the “Lipa Na Mpesa” till number where I pay and he takes the goods together with an electronic receipt to the farm. I specifically chose the outlet for those two reasons: they have an mpesa till number and they issue electronic receipts. I then pay him, using mpesa, for delivery of the goods and have peace of mind, knowing full well that another scheme is likely being hatched at the farm since I blocked what had been a lucrative cash cow for the workers before.

Two things that are critical to the urban telephone farmer: a local boda boda “guy” and mpesa. While I don’t have any data on the impact that boda bodas have had on the transport economy – which must be undeniably high – more data on mpesa is readily available. In the latest published Safaricom financials for the half year ended 30th September 2016, the company had 26.6 million registered customers out of which 24.8 million or 93% were mpesa customers. However, a more accurate number is yielded by looking at the 30-day active customers which registered as 23 million, with 17.6 million active mpesa customers or 76.5% of total active customers. Safaricom made more money from mpesa at Kshs 25.9 billion than it did from mobile data, which generated Kshs 13.4 billion. Mpesa revenue was equivalent to 43.3% of the voice revenue data of Kshs 45.7 billion. In simple words, mobile money is no bread and butter; it’s the cream with a cherry on top!

What were these mpesa customers doing, you ask? Well telephone farmers like me were a piddly fraction of the mpesa volumes. Three quarters of the total Kshs 25.9 billion in revenue that Safaricom received from mpesa was from what they call “bread and butter” business, which are the person-to-person transfers and withdrawals: John sends Mary a thousand shillings, who promptly goes to an agent to withdraw the same in cash and purchase food items for the house. Telephone farmers like me are to be found in what Safaricom calls “new business” which accounts for 24% of their mpesa revenue or about Kshs 6.2 billion.
New business includes customer to business (individuals paying for services using mpesa), business to customer (businesses sending money to individuals for example Kenya Tea Development Agency paying farmers their tea bonuses), Business to Business (Distributors paying a manufacturer for goods delivered) and the rapidly expanding Lipa Na Mpesa that has saved many urban dwellers the pain of having to send cash to purchase items via fundis, rogue relatives and even more rogue workers. But mpesa revenue aside, it is the sheer transaction volumes that are simply eye watering. By September 2016, mpesa had transacted Kshs 3.2 trillion. Kenya’s Gross Domestic Product or GDP, according to World Bank figures is US $ 63.4 billion or Kshs 6.34 trillion. The mpesa volumes are virtually 50% of Kenya’s GDP. However, hang on to your hat please as there is some double counting in the mpesa transaction volumes since they include deposits, withdrawals, person-to-person transfers and the business volumes. The bigger question is whether mpesa then poses a systemic risk in the event it is out of commission for whatever reason.

Firstly, mpesa is a methodology of transferring cash virtually. The actual cash sits in various mpesa trust accounts in Kenyan commercial banks. The bigger concern is not whether one’s funds are safe if mpesa goes down, it’s how to access a system that will release those funds which are sitting safely in a bank. Central Bank data from 2014 demonstrates that while mobile money volumes are extremely high at 66.5% or two thirds of the national payment system, they only account for 6.6% of the throughput value. It’s definitely a case of more bark than bite where systemic risk proponents are concerned.

But having said that, the attraction to track the mpesa movements from a tax collection perspective goes without saying. Even though the values may be low, mpesa provides an excellent opportunity for the taxman to bring in smaller businesses into the taxpayer net as each transaction has an electronic signature and trail. Designing and applying resources to create that tracking framework may perhaps be where the challenge lies.

That mpesa has changed lives goes without saying. We live in a country where one can literally take a trip from Mombasa to Malaba carrying zero cash, zero plastic card and with just her phone be able to eat, drink and seek lodging for that entire trip. The growth of the Lipa Na Mpesa payment points was 73% year on year in the half-year 2016 Safaricom financials. This means that there is rapid uptake by commercial establishments of the mpesa payment option, which quite honestly presents a better cash flow option than credit cards as there is no lag time between customer transactions and when the funds are deposited into the business account (typically 2-3 days in the case of credit cards).

Mpesa’s metamorphosis is not inclined to stop here and a banking licence may end up being required at the rate mpesa is transforming.