By Rambert Namy - Business Consulting Director - September 18, 2020
In Africa, a booming digital economy and strong smartphone adoption are driving radical innovation and disrupting mobile payment services. Point-of-sale merchant payment solutions are now being rolled out. Telecom operators are now able to interact with electronic platforms to enable payment of small salaries, insurance premiums, micro-savings, etc. Although influenced by this new dynamic, not all industry players are adopting the same approach to interoperability. We review the models used across the continent, and their impact on the mobile payment ecosystem.
Interoperability generally stems from one of two scenarios: either under the impetus of a regulator that encourages market participants to interoperate, or else spontaneously, at the initiative of mobile payment stakeholders.
According to the Director of Business Consulting at Sofrecom, this scenario has most often been observed in East Africa. Such initiatives almost always revolve around "bilateral" interoperability, based on direct integration between stakeholders, as has been the case in Madagascar, Tanzania (initially) or Kenya. Sometimes, these "industry led" models may also be based on a "hub" model, in which mobile payment stakeholders connect to an interoperability platform: this is the purpose of the Mowali project promoted by the MTN and Orange groups.
"Where projects are driven directly by industry, stakeholders have more flexibility to define technical and economic models suited to the realities of their markets and their own technical, financial and operational capabilities. We have found that these projects tend to be deployed more quickly when a bilateral approach is adopted", notes Rambert Namy.
From an economic perspective, financial stability also tends to be more successfully maintained, according to the Director: "Capital expenditure requirements are kept to moderate levels and operating expenses are minimized. Above all, participants are not required to pay processing fees to a third party", he declares.
However, these bilateral models are hampered by their lack of scalability. According to the mobile financial services specialist, including a new participant in the interoperability scheme requires it to integrate with each of the other members. Additionally, the lack of centralized supervision and joint standards can have wide-ranging impacts on dispute management, security and compliance risk management or service quality.
Rambert Namy goes on to explain that in other countries, interoperability between mobile payment services is based on initiatives managed by the authorities. In these so-called "government led" models, local decision-makers generally require mobile payment operators to connect to an infrastructure, known as a national hub, that they either manage directly or delegate to a third party. This approach has been adopted in countries such as Ghana or Morocco. At regional level, it is also the model chosen by the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC).
According to the Director, operators committing to a hub model benefit from the network effect: a single project to integrate into the interoperability platform enables interoperation with all participants in the scheme. Participants also benefit from supervision services provided by the partner in charge of the hub. Members must comply with predefined operating standards, and the entity responsible for managing the hub enforces those standards, supports participants’ integration and interoperability housekeeping activities, and manages any disputes.
Nevertheless, these services have a cost: “This cost is generally passed on to payment operators or mobile money operators in the form of processing fees. These fees can jeopardize the economic balance of payment services if they are absorbed by the operators, or render the service unattractive if they are passed on to users. Another disadvantage is that payment hub rollouts are often lengthy projects.”
Is it better to let mobile payment service providers take the lead on interoperability or should we instead regulate it by creating a national hub? In Rambert Namy’s opinion, the cornerstone of any interoperability project is industry stakeholders’ ability to implement inclusive, sustainable models.
“We have identified more than twenty countries in Africa that have either already deployed digital payment interoperability models or are in the process of doing so. The reluctance shown by some players is therefore no longer justified, as interoperability has ceased to be optional! Many regulators have even decided to make interoperability mandatory for mobile money operators. The issue for market participants is therefore to make effective preparations for this transition, by devising sustainable business models, identifying and addressing technical challenges, and define the most appropriate operational models", explains Rambert Namy.
At the same time, he encourages authorities and regulators to involve mobile payment operators in the process of defining and implementing interoperability models, in order to ensure that effective operational models are adopted.
“There are many challenges along the road, and all stakeholders have a part to play in identifying the most suitable models for each market. An approach that suits a country of five million inhabitants with a very low mobile money take-up rate is unlikely to be the best choice for a country with a population of 50 million and a mobile money industry that has already grown to scale. ”
All in all, Sofrecom’s Director of Business Consulting is convinced that interoperability represents a unique opportunity for the mobile payments sector in Africa. He explains that opening up mobile money “loops” gives operators strategic leverage to enhance their value proposition while diversifying the use case spectrum to include local POS payments, online payments and public service payments. Additionally, interoperability can also facilitate the "platformisation" of digital financial services, by building comprehensive ecosystems of mobile payment-based companion services similar to those offered by big tech companies, such as AliPay and WeChat in China, for example.
Successfully implementing interoperability implies working with fintechs. These technology-driven companies provide innovative services that cut the cost of distributing suitable products and services. Fintechs have a major role to play in establishing a robust ecosystem enabling multi-channel account-to-account transfers. Rambert Namy shares this view. For him, these companies’ capacity for innovation makes them ideal partners in the effort to design payment hubs tailored to the realities of mobile money markets. “Players such as MFS Africa, HPS and Mowali have demonstrated their ability to deliver robust, efficient and versatile solutions”, says the specialist,
adding that fintechs have decided to offer their services directly in order to ensure interoperability of digital financial services in certain countries. “They didn’t wait around for payment operators or the government to tackle the issue! ”.
He sees fintechs as also playing a fundamental role in establishing payment ecosystems. “A number of payment aggregators have developed large merchant bases. Others, such as payment gateway providers, have formed strategic partnerships with government agencies to facilitate the payment of public services. Clearly, involving fintechs in interoperability projects can give them a significant boost”, concludes Sofrecom’s Director of Business Consulting.