Mobile money: A battle ground for payment service providers

Is it a good move, or a risky one? Whose business is it going to impact mostly? Is it the savers, banks or telecoms that have been managing mobile money services?

These are the lingering questions in the corridors, sparked off by the recent pronouncement by Bank of Uganda (BoU) Governor Emmanuel Tumusiime Mutebile that the Central Bank had commenced licensing of payment system operators, payment service providers and issuers of payment instruments.

This move, which is provided for under the National Payment System Act 2020, and guided by the National Payment System Implementing Regulations, were gazetted on March 5, 2021. 

Going forward, the e-commerce platforms of Airtel Uganda and MTN Uganda have automatically become standalone businesses from their parent companies –the telecoms.

Airtel Money will operate under Airtel Mobile Commerce Uganda while MTN will operate its e-commerce platform under MTN Mobile Money Uganda.

Apart from MTN mobile money and Airtel Money, the BoU statement also indicated that the Central Bank had licensed Wave Transfer Limited to operate under the regulatory Sandbox, which will provide a layer between banks and their innovations to facilitate collaboration between Fintechs and the banking sector. 

According to the NPS regulation, all the financial-related operations are destined to be streamlined regulatory regime and seek to support deepening of the cashless economy, which the Central Bank had about four years ago said would be achieved by 2022.

Impact

This landmark pronouncement comes with new investment opportunities that will steer competition and at the end, offer cheaper services for the customer.

The competition and investment opportunities will rotate around the 28 million money accounts held by Ugandans, a number recorded in the fourth quarterly report of Uganda Communications Commission (UCC).  

Recently, mobile money transactions hit the one billion mark translating into an average of 15 transactions per active mobile money account every month. The one billion transactions also translate into value recorded at Shs10.3 trillion.

UCC records show most Ugandans use mobile money mainly for; agent assisted deposits, mobile money-bank transfers, mobile betting and merchant payments among other transaction categories.

Indeed, Mr Peter Kawumi, the Financial Technology Service Providers Association of Uganda (FITSPA) chairman, in an interview with Prosper Magazine said: “The licensing of payment systems will now open up investment opportunities and partnerships within and beyond Uganda.”

Kawumi who is also the country general manager of Interswitch Group - one of the companies that have applied for the licence addedthat previously, it has been difficult to regulate mobile money due to the absence of an enabling law.

Regarding the implication of this pronouncement on commercial banks’ primary objectives, Ms Rashmi Pillai, the executive director Finacial Sector Deepening Uganda says it stipulates Bank of Uganda’s regularoty mandate.

 “Clarity on the operating environment and regulatory parameters should eventually encourage more investment in the space and drive healthy competition. It is also expected to encourage innovative business models and partnerships between banks, and new payment service providers to increase the reach of financial products and services to the underserved. Thus, achieving the country’s National Financial Inclusion objectives,” Ms Pillai says. 

Talking investments, besides MTN and Airtel who have commenced business, already BoU’s docket has received 12 other licence applications seeking to offer the service.

Many players come on board to offer financial services to customers, some circles are scared; this could trigger a cutthroat competition or a battle for the fittest.

However, BoU director communications Charity Mugumya says banks will not be affected by the PSP and SPOs.

“On the contrary, we expect the law to support partnerships across the payments ecosystem,” Ms Mugumya told Prosper Magazine.

BoU says the law provides clear do’s and don’ts which will support collaboration between deposit taking institutions on one hand, and the payment service providers on the other.

For instance, the payment service providers according to BoU will continue to hold trust accounts with banks and other deposit taking institutions to back up all the e-value in circulation.

“We are also likely to see an increase in direct involvement of banks in digital payments. Overall, we expect to see increased financial innovation especially around digital payments, Mugumya added.

In the same way, FITSPA’s Kawumi concurs with BoU that PSP and SPOs are not going to be a threat to the services of but instead it will provide stronger partnerships.

In the past, there have been challenges including partnerships and collaboration to develop more responsive products. This is because banks have not always understood fintechs and the reverse is true for fintechs.

Kawumi thinks that PSP and SPOs are going to provide stronger partnerships and this will create a clearer avenue for partnerships.

For customers, the new arrangement will create value as stronger partnerships offer better products.

“Some products will be cheaper while others will provide a lot more value,” he added.

A case in point, Kawumi says that banks have a lot of capital they would like to deploy. Yet fintechs are very conversant with data to develop new products.

Alternative view

Some fintech experts opine the new innovation could spark off ‘industrial cannibalism’ with smaller fintech firms being edged out of business.

According to Brian Kalule, a financial lawyer and fintech expert, the new requirements by Bank of Uganda set the minimum capital at Shs100 million as the lowest. Yet, fewer fintech firms can raise that capital.   

This requirement, according to Kalule, is a key barrier for entry for smaller fintechs. However, it remains clear that the minimum capital requirements are aimed at mitigating risk.

“We are going to see a series of mergers and acquisitions for smaller fintechs. Many fintechs if they are to survive will have to rapidly innovate at industry pace,” Kalule says.

The cost of transactions which trickles down to the base of the economy is what experts are closely observing. With many players, Ugandans expect the cost of transactions in payments to drop.

However, Kalule is skeptical of this generalised view. He argues the cost of transactions may actually rise because of the high costs of compliance, and licence fees involved. This is largely premised on the fact of a profit threshold that many payment service providers will target.

Allan Rwakatungi, the director at Xente mobile, a fintech firm, shares a similar view Kalule on the future of small fintech firms.

He says banks and other financial institutions are likely to work with licensed payment operators pushing small fintech firms to the fringes of the financial sector.

Kalule says with the new regulations, there are several opportunities with multinationals in payments service expected to acquire licences and operate within the country. 

Rwakatungi outlines key opportunities such as lending, insurance, crypto currency among other key drivers of the financial sector.

Fate of telecoms

Pulling out mobile money as an independent business makes it competitive for fintechs because it has placed them at an equal footing with payment service providers.

MTN and Airtel, which had for long enjoyed a duopolistic relationship in mobile money services, and raked in revenues, may need an adjustment to the competition. 

The move could also see the new telecoms re-adjust to new innovations in the payment systems to consolidate and stamp their positions in the market.

The most recent innovation that MTN launched was Chenosis, a new pan-African API marketplace that will enable developers and businesses to discover and subscribe to what will become the largest library of open APIs published on the continent.

“Chenosis is a separate brand and entity, and will have an arms-length relationship with MTN so that it remains open to all mobile network operators, fintech start-ups, payment service providers, mobile wallet operators, financial service providers, and more,”  said Charles Molapisi, the MTN Group chief technology and information officer.

For Airtel in particular, Mr Manoj Murali, managing director at Airtel Uganda, in an interview with Prosper magazine said the PSPs will attract more investment into payment innovation and a closer working relationship with fintechs.

  Andrew Kawera, the director, National Payments Systems is optimistic the new regulations could solve issues regarding efficiency of the payment systems, system uptime and downtime, fraud and financial risk.

Financial Inclusion

Uganda reduced financial exclusion by half between 2006 and 2018, mostly driven by mobile money (per Finscope 2018 survey). Today, 58 per cent of the adult population has access to formal financial services. Mobile money and fintechs have driven the growth of digital financial services – savings, payments, insurance and credit in the country.

However, in order for these innovations to scale and reach more people especially the underserved, Ms Rashmi Pillai, the executive directorof Finacial Sector Deepening Uganda says there should be a well-defined regulatory regime.