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Mobile Financial Services in Tanzania

Market development and main players

Riccardo Reati

Aug 2010

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Executive Summary .............................................................................................................................. 3

Introduction: mobile money ............................................................................................................. 5

Tanzania and its mobile money market ....................................................................................... 8

Tanzania ........................................................................................................................................................ 8

The mobile money market in Tanzania: slow uptake ................................................................................... 8

Zain Zap and Vodacom M-PESA: two different approaches to market ...................................................... 10

Vodacom internal remittances and Zain cashless ecosystem ................................................................. 10

Pricing to appeal to different client segments ........................................................................................ 11

Distribution: Vodacom’s agents versus Zain’s merchants ...................................................................... 12

Two different distribution networks ....................................................................................................... 12

Marketing: the unmatched “Big Bang” effect of Safaricom ................................................................... 13

Technology: SIM Toolkit and USSD ......................................................................................................... 13

Enabling environment ....................................................................................................................... 14

Ecosystem of stakeholder and regulation .................................................................................................. 14

Socio-demographic conditions ................................................................................................................... 15

Financial inclusion ....................................................................................................................................... 17

Telecom market .......................................................................................................................................... 21

Conclusions ........................................................................................................................................... 25

References ............................................................................................................................................. 26

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Executive Summary

This paper analyzes the mobile money environment in Tanzania. It focuses on two aspects: the market

and business environment, with the aim of outlining the different approaches and strategies of the

main players, and the enabling ecosystem, with the aim of outlining the key dimensions that have

contributed to develop the market (regulation and institutional stakeholders, socio economic issues,

access to finance and telecom market). These are the main issues emerging from the analysis.

The adoption curve:

The market of mobile financial services in Tanzania has reached critical mass in terms of number

of subscriptions (ranging from 6 to 8 millions) but there is more uncertainty with regards to

amount of money transacted.

The adoption curve in Tanzania is different from the one of Kenya, with a slow initial uptake

and a later steep growth, probably propelled by the fact that players has linked their marketing

campaign to the registration of clients’ ID, required by the government.

The players:

Vodacom has replicated Kenya Safaricom’s M-PESA formula, targeting middle-low end

customers with a value proposition based on internal remittances. Zain is addressing higher

end customers with a product that is linked to their bank account.

While the initial proposal of Vodacom was still based on a cash-in, cash-out model, Zain entered

the market with the purpose of building a cashless ecosystem, puching clients to keep money in

their m-wallet rather than withdrawing, and working with merchants for a wider acceptance of

this form of e-payment.

The ecosystem:

In terms of regulation, there are no significant differences between the approach of the

Central Bank of Kenya and the one of the Central Bank of Tanzania. Both of them are working a

final regulation of mobile financial schemes and granted licenses to players on a no-objection

base. Both of them acknowledge the need of extending the access to financial services in their

countries through unconventional channels as mobile telephone.

There are three main reasons that, combined, can account for the differences in uptake of

Kenya and Tanzania:

o Geographic and demographic reasons: Tanzania land size is more than 50% larger than

Kenya’s, and has roughly the same population. In Kenya the population is more

concentrated in two main areas, while in Tanzania is widely dispersed throughout the

country. This has arguably affected the operations of the business.

o Internal remittances: the volume of internal remittances in Tanzania is likely to be

smaller than in Kenya due to historical and economic reasons. Also the routes of internal

remittances are likely to be different: while in Kenya they are focused on urban-to-rural

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corridors, in Tanzania the flows are more heterogeneous. This gives reasons to think the

“send money home” model might not have worked in Tanzania as well as it did in Kenya.

o Structure of the telecom market: with two and a half the number of clients of Vodacom

and almost three times the revenues, Safaricom was in the position of deploying a value

added service faster, to a bigger customer base and was capable to market it more

extensively.

In summary: the market in Tanzania has had a less exceptional uptake than the one in Kenya, but

there are reasons to think that volume of transaction will grow over time and that competition has

played a positive role, differentiating the services. The reason behind the different uptake can be

summarized in a different market situation: in Tanzania a company with a much smaller customer base

(than the one in Kenya) had to cover a bigger area, in a market where the need of the basic product

(internal remittances) was less acute.

For further information about this analysis please contact Riccardo Reati (riccardo.reati@duke.edu, 919-

627-2773).

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Introduction: mobile money

Mobile money has surged in 2009-2010. The international consultancy firm McKinsey & Co. in

collaboration with GSM Association, has estimated the number of unbaked people using mobile money

to be 45 millions in 2009, to grow to 360 millions in 2012, if average rates of adoption are to remain

constant (Beshouri and Gravåk). The ITU reports the market projections of the intelligence firm Berg

Insight with 55 million clients of mobile banking services, destined to grow up to more than 800 million

by 2015. Juniper research reports that in 2010 just over 200 millions phone will have used some mobile

financial functionality1. Gartner Research puts mobile transfer through SMS on top of the list of the ten

consumer mobile applications that in 2012 will have the biggest impact on consumers and industry

players2.

Many projects were started in 2009 2010: the GSMA Mobile Money Exchange Deployment Tracker3

reports about 70 mobile money projects for the unbanked worldwide; this number is conservative

probably in light of the fact that it doesn’t fully account for the bank-led projects. However there are

signs that both companies and investors are more comfortable with taking risks in this field. There have

been some remarkable successes in the Philippines where two leading mobile operators, Smart

Communications and Globe have started in 2003 and 2004, and in Kenya where Safaricom M-PESA in

1Differences are due to the different scope of the surveys. McKinsey estimates the number of unbanked clients

using mobile financial products, thus leaving out a significant portion of people in developing countries that have a bank account and use mobile financial services. Other surveys consider any finance related transaction through mobile, regardless of location or user. 2 Source: www.gartner.com/it/page.jsp?id=1230413

3 www.wirelessintelligence.com/mobile-money.

Box 1 - Mobile Money: what is it and why it is relevant

Mobile money is a commonly used terms that refers to services that allow mobile telephones to perform monetary transactions, which include cash-in and cash-out, money transfer, payment of bills and other fees, in contact payments (as merchant payments) and other more advanced functions. Differently from mobile banking, “mobile money” is not just a different channel to have access to a bank account. Usually (but not always) mobile money services provides an alternative to bank account in countries with low bank penetration, and therefore can play an important role in extending the financial access to unbanked or low banked people, contributing to their socio-economical development. Regulations worldwide address the concept of e-money, with a broader reference to electronic transactions. It is more correct to refer to it as mobile financial services, to include a variety to value transactions that can be done through mobile, including mobile banking. However the term mobile money has assumed a specific connotation, especially since it has been correlated with the opportunity to provide basic financial services to unbanked people. For this reason the term mobile money will be alternatively used to the one “mobile financial services” in this paper, with reference to three macro categories of services: money transfer, account management and payment.

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Kenya, launched in 2007, has reached more than 10 million subscribers. On the other side there have

been failures that would deserve attention, as in the case of South Africa, which still has a limited

market, notwithstanding a favorable regulatory environment.

This case study analyzes the market evolution in Tanzania, with a look both to the enabling

preconditions and the approach of the leading telecom operators. Tanzania has been chosen because of

its analogies with Kenya: fairly similar economies, comparable mobile customer base, similar operators

in the market (with affiliates of the Vodafone Group and of Zain Airthel being main players), and similar

collaborative approach with the Central Bank. However the adoption rate in Kenya has been much

sharper (and so far exceptional): at two year of distance from the launch of the first mobile money

service, Safaricom alone accounted for more subscribers than all the subscribers in Tanzania. While in

Fig. 01: approximate number of clients and compounded annual growth rate of

three leading mobile money projects. Source: personal elaboration.

Fig. 02: number of mobile money projects worldwide. Source: personal elaboration

based on information provided by GSMA Mobile Money Exchange Deployment

Tracker

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Kenya the adoption curve has been almost linear, in Tanzania it has followed a more typical S-curve with

an initial slow uptake, increasing after the entrance in the market of the second player.

What can explain these differences? What role did competition played in this scenario? The case study

builds its interpretations on a detailed comparison of Tanzania with Kenya, and put both of them in the

context of a wider basket of countries chosen with the following criteria:

Countries that have experiences successful telecom-led projects: Kenya, Philippines, Thailand

Countries that could potentially experience successful bank-led projects: Brazil

Countries that have been relative unsuccessful notwithstanding the early initiatives and the

potential market opportunity: South Africa and India4

Countries that have the potential to experience successful telecom-led projects: Egypt5

Several dimension including socio demographic characteristics, access to financial services, structure of

the telecom market will be considered.

4 Where in India the regulation has created barriers for non bank actors to enter the market, South Africa has had a

relatively enabling regulation 5 Egypt has been chosen also because there are opportunities for the World Bank to work with Egypt National Post

Office on this issue

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Tanzania and its mobile money market

Tanzania

Tanzania made significant economic progresses in the last two decades with a steady economic growth

around 7% since 2000, one of the best performers of Sub-Saharan Africa according to the World Bank

(World Bank, Tanzania country report), and a stable macroeconomic policy that has controlled inflation.

Tanzania has still mainly an agriculture economy, with nearly 80% of the workforce employed in this

sector; the fastest growing sectors are mining, construction, manufacturing and tourism. Sluggishness

and lack of consistency in the reform process toward privatization have led the country to fall behind in

terms of investment climate (World Bank, Tanzania country report), ranking 131 in the World Bank

Doing Business Report. This depends also on the poor condition of key infrastructures, particularly of

railways and ports.

Despite the strong achievements in economic growth, Tanzania still falls behind in development. The

UNDP classifies Tanzania at the 151st position in the Human Development Index ranking: this puts the

country at the bottom of the cluster of countries with medium human development (UNDP, Human

Development Index). With still around 34% of people living under the poverty line, Tanzania struggles to

distribute the benefits of economic growth to the poorest: this is due mainly to the slow growth of the

agriculture sector, which is the one with the highest impact on the lives of poor (World bank, country

report). Enrollment in primary and secondary education has increased, but there are still significant

challenges in the lack of teachers and in the low quality of outcome. More indicators and a comparison

with Kenya will be presented in this the paragraph assessing the socio demographic conditions, Tab 02.

The mobile money market in Tanzania: slow uptake

This paragraph focuses on describing the mobile money market in Tanzania, in terms of volumes and

business strategies of the two main players, Zain and Vodacom, and comparing the approach to the

market of Safaricom and Vodacom.

Box 2 – How to evaluate a successful “mobile money” initiative

How to determine whether a mobile money deployment in a given country is successful or not? Simply comparing the total number of subscribers provides an easy but limited metric. This number depends directly on the population and on he number of mobile subscribers and on other indicators that could make a country more difficult to approach than another (geographical extension, GDP per capita…). Furthermore a many subscriber are inactive users. These are the numbers that are most often cited in artricles and publications:

Adoption rate: calculated as number of subscribers as a fraction of either the population or the subscribers of mobile telephones, with the second being biased towards telecom operators,

Number of transaction: which include cash-in/out operations and any other transaction, provides an idea on how frequently the service is needed

Value transacted: total amount of money transacted within the mobile service in a given time (usually a month)

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As of July 2010, the number of total subscribers in Tanzania ranges from 6 to 8 million in 2010, 15% to

19% of the population6, with 3 to 4 million of Zain and 3 to 4 million of Vodacom7. The numbers for

Zantel are probably negligible at this point in time and the company will not be considered in this study8.

Vodacom launched M-PESA in Tanzania in April 2008 one year after Safaricom launched the same

product in Kenya. After 14 months from launch Safaricom M-PESA had 2.7 million subscribers and a

network of 3,000 agents, while Vodacom M-PESA had about 280,000 clients and 1,000 agents (Camner

and Sjoblom2009). Now Vodacom has about 4 million clients and more than 4,700 agents (Citizen, The

2010), less than half Safaricom’s. Zain launched its Zap in Tanzania one year later: GSMA reports more

than 4 million customers (Leishman 2009), while data on the distribution network are not available.

Vodacom is managing about 17 billion Shillings of monthly transaction (Citizen, The 2010): this would

outline a very modest success of the service, as Safaricom transacted the same volume when M-PESA

had around 800,000 subscribers (from Safaricom’s website). A possible explanation of the low amount of

6 Kenya adoption rate is higher than 27%

7 Numbers are conservative: subscribers of ZAP are reported by GSMA (Leishman 2009) and subscribers of M-PESA

are reported in a article of The Citizen in July (Citizen, The 2010). 8 Safaricom M-PESA recorder about 6.5 million subscribers after 2 years from launch

Revenues for the operator, a useful indicator to determine business viability, but hard to obtain from companies

Growth rate, either of subscribers, transaction or revenues. This paper will provide information both on the total number of subscribers, on the adoption rate and value transacted.

Fig 03: adoption of mobile money in Kenya and Tanzania since the launch of the first service in

each market. The curve for Tanzania is a hypothesis due to lack of consistent data. Source:

personal elaboration from data from Safaricom websites, GSMA, Valuable Bits, The Citizen.

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transaction per user depends on the fact that both companies linked the service subscription campaign

with their client ID registration plan, an activity required by the Ministry of Telecommunications of

Tanzania. While reaching out to their customer base, they have pushed the subscription to the m-wallet

beyond real needs; if this is the case, we would expect lots of inactive users for both networks. However

the value transacted per user could increase over time, proving eventually that this a marketing will pay

off. In any case it seems that both companies are far from achieving the extraordinary success of

Safaricom M-PESA.

Zain Zap and Vodacom M-PESA: two different approaches to market

Vodacom internal remittances and Zain cashless ecosystem

In terms of business strategy, there are three major differences between Vodacom and Zain:

1. Vodacom developed a service based on cash-in, cash-out, while Zain is envisioning a total cash-free

ecosystem (Leishman, 2009). While in Vodacom’s model cash was central, as the service was mainly

a tool to send and receive money, Zain pushed since the beginning electronic payments, for example

developing a partnership with OILCOM the biggest gas retailer, where customers could pay using

ZAP. Zain has also introduced the option to transfer money from any bank account to the ZAP

account, in the attempt to reduce cash-in operations and boost the average amount deposited in

the m-wallet, improving the usage. Furthermore by linking the w-wallet with a bank account Zain is

able to limit the liquidity needed by agents, reducing their risk exposure. More recently Vodacom

has integrated m-commerce functions.

2. While Vodacom conceives the service primarily at national level, Zain introduced since the beginning

the option of receiving international money transfer. Particularly Zain intends to leverage on its

extensive presence across different countries in Africa and Middle East to streamline cross border

remittances.

3. Vodacom targets the middle-low segment of the consumer market, while Zain looks for opportunities

in the business segment. Vodacom has two categories of users, registered and non-registered users:

the second can receive money on any network and at no fee but cannot perform any other

transaction. This system intends to lower the barriers to access to the service especially in rural

villages, where people are not able to use the handsets or show more resistance to adopt it. The the

idea is that urban migrants, possibly wealthier and better educated individuals, will be among early

adopters and registration will eventually spread to rural areas. Zain requires registration both for

senders and receivers.

The portfolio of services of M-PESA and ZAP as of 2010 is fairly similar; it would be interesting to have

more information about differences in the use of them. Furthermore M-PESA is providing a service for

microfinance repayments, option that is not available with ZAP.

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Pricing to appeal to different client segments

Pricing analysis suggests that, while M-PESA has a more traditional pricing scheme that appeal to

customers interested in frequent transaction of small amount, ZAP tends to foster bigger transactions

and to limit cash deposit, pushing customers to use bank transfer, consistently with its strategy to reduce

the cash circulating in its scheme.

Other considerations regarding pricing are:

Zap has a much simpler pricing structure, with three main tiers of fees for cash-in and cash-out and

fixed prices for any other transaction. Vodacom has a different pricing strategy for registered and

unregistered users, with 7 different fees for withdrawals (cash-out). Initially they also had variable

fee structure for sending money. Researchers have shown that there is usually confusion about the

fee structure of branchless banking services and this raises frustration among consumers (Cohen

and Hopkins and Lee, 2008). This might have slowed early uptake for Vodafone.

Zap have sought an opportunity in more sophisticated clients, with the link to the bank account and

the ability to perform more complex transaction, as transferring money from their bank account to

Vodacon M-PESA Zain ZAP

Money transfer

- P2P transfer - Donations to charities and sports club

- P2P transfer - International money transfer

Account management

- Deposit and withdraw money - Account management - Loan repayment for MFI

- Deposit and withdraw money - Account management - Tranfer funds from bank account

Payment - Prepaid Vodacom airtime and post paid Vodacom bills, - Energy, water and sewerage bills, - TV subscriptions, - Pay the examination fee to the National Examination Council - Insurance fee payment - Pay for transportation tickets

- Buy prepaid airtime - Energy, water and sewerage bills, - TV subscriptions, - Insurance fee payment - Pay transportation tickets - Gas (OILCOM)

Tab 01: portfolio of services provided by M-PESA and Zap to the consumer market.

Source: companies’ websites

Tab 02: pricing structure of M-PESA and ZAP. Source: companies’ websites

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their m-wallet. Furthermore, by charging a high fixed fee for transferring money from bank account

(1,000 Tanzanian Shillings), they have identified an opportunity to extract rents from this segment9.

Distribution: Vodacom’s agents versus Zain’s merchants

In terms of management of the distribution network Zain and Vodacom differ on two main points

(Leishman 2009):

Zain has substituted agents with merchants: if agents are exclusively aimed at performing cash-in

and cash-out activities (other than helping clients with technical issues), a ZAP merchant is a retailer

or a wholesaler that would perform cash-in and cash-out, but that would eventually adopt e-float for

its business transactions, both to receive payments from its clients and to make payments to

suppliers. This is consistent with Zain vision to create a cashless ecosystem. Ultimately it will be

interesting to see whether merchants will become distributors/users of more than one mobile

money service and how interoperability will be played.

ZAP agents are paid commissions directly by the clients, in cash, while M-PESA agents are paid

electronically, in a lump sum in arrears by the operators at the end of the month. This gives more

flexibility to ZAP agents to levy a discretionary fee when customers do cash-out: therefore they can

adjust tariffs to the costs of managing liquidity, which differ from urban to rural context (as it mainly

depends on the distance of the agent/merchant from the nearest bank office). The settlement

process also results more transparent and understandable to agents.

Differences between Vodacom and Safaricom M-PESA

Two different distribution networks

According to the analysis carried out by GSMA both Safaricom and Vodacom started to build their M-

PESA distribution network from the existing airtime distribution. However there are two differences in

the way they managed the process (Camner, Sjoblor, Pulver,2009):

Different dimension of the distribution network: at the launch of M-PESA Safaricom had about 1,000

airtime retailers with multiple outlets, 300 of which joined as M-PESA agents. Vodacon was

distributing airtime only through six major retailers, whom in turn sold airtime along to their

partners. To overcome the limits imposed by this system, Vodacom has reached out to end retailers,

with the scope of building its own distribution network for M-PESA. Today 80% of Vodacom M-PESA

agents are independent businesses, with direct relation with Vodacom.

Different organization of the distribution network: Safaricom adopted immediately the aggregator

model, with master agents managing smaller network of agents. This had three benefits: a) allowed

Safaricom to recruit a high number of agents quickly, b) improved the operations, as the company

9 This is also an interesting model of bank-telecom synergy. Similarly to the M-KESHO account developed by

Safaricom and Equity Bank in Kenya, clients can move money from the real account to the virtual one. However while M-KESHO stems from a unilateral partnership between a bank and a telecom, ZAP allows any bank account to the connected. It will be interesting to see which of the two models will achieve more success.

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didn’t have to deal with thousands of small retailers and c) made liquidity management more

efficient: aggregators directly balance agents in surplus (typically those performing mainly cash-in)

with agent in deficit within their sub-networks and provide for liquidity shortage. Vodacom has

started much later to implement the aggregator model.

Marketing: the unmatched “Big Bang” effect of Safaricom

Part of Safaricom M-PESA success can be attributed to the branding and marketing. More than 70% of

Kenyans users of M-PESA heard of the service through above-the-line advertising (TV/Radio and

billboard) with the rest knowing from word-of-mouth (Financial Sector Deepening Trust 2009). This Big

Bang effect (Ignacio Mas, telephone interview of paymentsystem.com) can explain the anomalous

adoption curve, linear instead of s-shaped, of M-PESA. There is another critical dimension of advertising:

companies not only need to mass advertise to subscribe early clients. They need to engage with agents

in a way that they will perceive there is a good market for the service: a major problem is that the sale of

e-float can cannibalize the business of selling airtime, as consumers can purchase airtime using e-float

(therefore not from airtime resellers). In light of this and of the higher margins of airtime sale, some

agents have refused to undertake the new business. Convincing them that there is a good revenue

opportunity is an challenge for the service provider. An argument is that with about one third of the

revenues of Safaricom, Vodacom didn’t have the resources (financial and organizational) to set up such

a campaign. Furthermore Vodacom underestimated the need of investing in training consumers, while

Safaricom recognized this component since the early pilot project (Huges, 2007). A field study in Tanzania

in March-May 2009 showed that most of the users had a high level of brand recognition of M-PESA but

many more had difficulties in recognizing what the service was about and what they had to provide to

activate the service (Camner, Sjoblom 2009). Jacque Voogt, head of M-PESA at Vodacon, admitted that,

in May 2009, they had not yet started the educational phase of the marketing campaign: an earlier

implementation of education activities would have probably generated better results.

Technology: SIM Toolkit and USSD

In Kenya M-PESA is delivered using the SIM Toolkit (STK) technology, in Tanzania through USSD

technology. Both are part of GSM standards. As with STK the user has an application on the SIM card

accessed through the menu on the phone. The downside is that the SIM card has to be swapped by an

agent. With USSD the user has to dial a short number to activate the menu: each input of data is sent to

the server and the new menu with updated information is sent back to the mobile and leaded on the

telephone. This process can be time consuming. A research on the field has proved that users were not

dissatisfied with the interface or expressed that there were problems in learning how to use it (Camner,

Sjoblom 2009)10.

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However it would have been interesting to test non users on this issue

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Enabling environment

The second part of this analysis will focus enabling conditions in Tanzania: regulation, socio-

demographic conditions, financial inclusion and financial literacy, and the structure of the telecom

market. The objective is to identify peculiar conditions that might have affected the development of the

market; in doing so Tanzania will be compared to the benchmark of Kenya.

Ecosystem of stakeholder and regulation

Institutional actors, as the Ministry of Telecommunications and the Central Bank, service providers, as

banks or financial services providers, telecoms and third parties, either independent companies or spin

off of telecoms or banks, technological providers and consumers build he ecosystem of stakeholders of

mobile financial services. This ecosystem varies across countries: in Tanzania the main actors have been

the telecoms and the Payment System Unit of the Central Bank.

The Central bank of Tanzania is currently drafting a regulation framework of mobile payment schemes,

which includes a mobile payment regulation. So far the field has been regulated through the Electronic

Payment Schemes Guidelines, which contain directives for payment schemes but not for mobile money

transfer of mobile banking, and payment. Telecoms have been subjected to a no-objections approval

policy: they, as any other financial and non-financial entity, had to submit an application to the Central

Bank to introduce a new electronic payment scheme: according to article 8.1.2 any non-financial

institution that intends to develop payment schemes that have money transfer and deposit taking

function must submit its application through a financial institution. In absence of specific regulations,

the approach of the Central Bank of Tanzania to the issue has been similar to what the Central Bank of

Kenya did, with collaboration between the Central Banks and the telecoms. Two specifications:

Companies cannot accrue interest on the pooled account in which they deposit money nor can

redistribute them to the clients,

There is a upward limit of monthly transaction of 500,000 shillings per subscriber (in Tanzania)

The process of application has been smooth, probably in the light of the previous experience of Kenya.

The Central Bank acknowledges the benefits that innovation in payment and money transfer can bring,

“does encourage market players to implement such schemes for the benefit of the economy” (NSP

Newsletter 2007) and acknowledge the role of telecom in reaching unbanked areas. Overall it seems

that the regulatory environment is uncertain - because not definitive - but favorable to the deveopment

of a mobile financial market and open to telecoms.

Another institutional aspect that might have affected uptake, not connected to telecom or banking

regulation, is the lack of official ID system in Tanzania. This could have limited the number of people

able to subscribe, especially among lower segment of the population.

When comparing Tanzania to Kenya, it must be pointed out Kenya has received an exceptional interest

from different stakeholders in developing he ecosystem. First of all Kenya was the first country where

Vodafone Group decided to deploy mobile financial services, with Nick Huges, head of the payment

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system unit at Vodafone UK, directly involved in developing the concept, negotiating with stakeholders,

and deploying the service initially. Furthermore the Central Bank in Kenya put exceptional interest in

developing alternative system to expand access to finance. Finally the UK Department For International

Development (DFID) made available a grant of £1 million to finance innovative project to increase the

access to finance. Vodafone UK won the grant and this helped significantly to speed up the process

(Huges and Lonie, 2007).

Socio-demographic conditions

Kenya and Tanzania share some demographic features such as a low population density and a low

urbanization ratio, increasing at a fast rate.

In Africa the high rate of urbanization is characterized by internal migratory patterns, with young

workers leaving their families to move to the city: these workers keep strong ties with their families and

internal remittances are a channel to do so. This system, often referred to as dual system, has been

mentioned as one of the enabling factors of mobile money in Kenya (Morawckynski 2008).

Fig 05: population density and urbanization. Countries in the lower left areas might have

higher potential of mobile money with money transaction services. Source CIA World

Factbook 2010

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If on the big picture, Kenya and Tanzania, look so similar, then are there significant differences that

might concern the mobile money market? Tanzania is 50% bigger than Kenya and the population is more

equally dispersed throughout the country (see figures 06). From a mobile money perspective these

conditions require a wider and more penetrating distribution network.

Different internal remittances flows might have affected uptake. Kenya and Tanzania differ both in total

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Only data from 2010 are available on the CIA World Factbook. The World Bank Data website provides different numbers for the percentage of people living in biggest urban conglomerate: 28.5% in Tanzania and 37.8% in Kenya. 12

Literacy rate: percentage of the population over 15 that can read and write

Kenya (2007)

Tanzania (2008) Population 36,913,721 40,213,160

Urbanization (2010)11 22% 25% Pop. Density 65 people

per Km/sq

45 people

per Km/sq GDP real growth rate 5.5% 7.4% GDP per capita (PPP) $1,200 $1,300 Below poverty line (2010) 50% 36% Gini Index 44.5 34.6 Literacy rate12 85.1% 69.4% Territory (Km/sq) 569,140 886,037

Fig. 06: population density distribution in Tanzania and Kenya. Source: bestcountryreports.com

Tab 02: characteristics of Kenya and Tanzania. Figures from 2007 are reported for Kenya,

from 2008 for Tanzania, as these data should depict the characteristics of the two countries

at the launch of mobile money projects. Source: CIA World Factbook

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volume of transactions and in the direction of the flow of money. Deshinkhar and Grimm (2004), quoting

a Deagrarianisation and Rural Employment study in Tanzania argue that internal remittances in Tanzania

and South Africa have been traditionally small, but don’t offer direct comparison with Kenya. A survey

done by an African ICT research organization, reports that the share of household sending money to

other households in Kenya is 28.2% while in Tanzania is 13% (Comminos, Esselaar, Ndiwalana, Stork,

2008)13. Hypotheses can be done with regards to the differences in distribution of wealth between

Kenya and Tanzania: with a higher Gini coefficient and significantly more people living under the poverty

line, but higher GDP per capita, it is reasonable to think that Kenya has more opportunities to use

internal remittance as a channel to redistribute wealth. This means that the latent demand of efficient

channels to transfer money in Kenya was stronger than in Tanzania. On the other side Camner and

Sjoblom report that the urban to rural corridor in Kenya is very strong, while in Tanzania there are

different corridors, urban-to-rural, rural-to-rural and rural-to-urban (Camner and Sjoblom, 2009). This

analysis, if confirmed, has two direct implications on mobile money:

The management of agents’ liquidity needs to be different14: in the urban-to-rural scenario, with

money flowing mostly from cities to villages, rural agents, performing mainly cash-out, need to

be very liquid to provide for clients’ requests, while urban agents don’t. In the other scenario

the system needs to be more balanced: this is more complex and requires more refined

transactions forecasts.

The branding and advertising need to be tailored to the one or the other scenario. The “send

money home” message of Safaricom M-PESA, which had clear references to sending money to

the village in the countryside, might have not been as effective in Tanzania.

The hypothesis drawn is that Vodacom, by replicating Safaricom’s formula, might have missed the

different dynamics of internal remittances, which have been the key enabler factor for Safaricom.

Financial inclusion

This paragraph addresses both the role of mobile money in expanding the financial inclusion and the

different dimensions of access to finance in Tanzania. A main conclusion is that, as mobile financial

services develop initially among consumers who already have access to finance, Kenya happened to have

a bigger customer base, with a population more educated to the use of financial instruments.

The World Bank states that “access to financial services—financial inclusion—implies an absence of

obstacles to the use of these services, whether the obstacles are price or non-price barriers to finance”

and furthermore, by acknowledging that a wide number of services, such as deposit, credit, payment

and insurance are included in the definition, recommends that “services need to be available when and

13

Please note that this refers to remittances sent between households and therefore misses to catch intra-household remittances, providing therefore only a proxy to interpret different volumes of internal remittances 14

Agents clear their balances at the nearest bank branch on a daily base. However they need to balance between having enough cash to disburse to clients but not too much to prevent possible security risks.

18

where desired, and products need to be tailored to specific needs. Services need to be affordable, taking

into account the indirect costs incurred by the user, such as having to travel a long distance to a bank

branch” (World Bank, 2008). The same World Bank report acknowledges that there are three major

barriers of access to financial services: physical access, documentation to be provided to open accounts

and costs and fees of financial services. Mobile money provides a valuable alternative to traditional

financial service under all the three perspectives: however the most compelling value, as perceived by

consumers is the availability of instruments to make financial transactions. The value proposition varies

across countries, but consumers seem to have in relatively low consideration the opportunity to save or

store money, while favoring the money transfer (Kenya) or payment functions (Thailand)15.

Surveys report that a significant percentage of mobile money users have a bank account. In its analysis of

the Philippine market, CGAP has found that one-half of mobile money users were unbanked (Pickens

2009). A Financial Sector Deepening Trust survey on the use of M-PESA in Kenya reports than most of

the users were literate and had a bank account. It is therefore more appropriate to evaluate mobile

money within the context of the penetration of banking outlets (ATM and bank branches) rather that in

terms of current accounts per capita. Another financial enabling dimension is international remittances,

both in inflow and outflow: SMART in the Philippines built his success partially on international

remittances.

With 0.23 bank branches per 1,000 km sq., 0.57 branches per 100,000 people and 0.07 ATM per 1,000

Km sq., 0.17 ATM per 100,000 people, Tanzania is among countries with lowest reach.

15

Please note that the two researches use different analysis criteria and, therefore, cannot be directly comparable.

Fig 08: M-PESA percentages of number of

transactions by typology. Source: Financial Sector

Deepening Trust 2008

Fig 07: Percentages of consumers using specific

mobile money functions in the Philippines.

Source CGAP 2009

19

Of 27 financial institutions, eight major banks, five international banks and three local ones, dominate,

with about 90% of the market. There are four main categories of bank: local private banks focused on

servicing locally small to medium size business and retail banking, regional banks also servicing small to

medium and retail banking business, but on national scale. International banks mainly with a regional

network play an intermediate role in cross border business flows. The multinational banks are mainly

dedicated to medium and large corporation and to donor intermediation (TanzaniaInvest).

Notwithstanding the growth of the banking sector after the reforms in 1992, which led to an increase of

60% of total assets handled, from $,1.7 billion in 1999 to $2.7 billion in 2004 (TanzaniaInvest), the total

domestic credit is still low, at 17% of GDP, compared to an average of 65.5% of sub-Saharan Africa

(World Bank, 2008). Tanzania has a well developed microfinance market with 5 organizations with more

than 10,000 clients. Pride TZ, BRAC TZ, FINCA TZ and the National Microfinance Bank are the biggest

organizations operating in the country (mixmarket.org).

On a bigger scenario Tanzania seems to share with other southern African countries, and in particular

with Kenya, low bank coverage and a relatively small international remittances flow.

.

Bank branches

per 1,000 Km Sq.

Bank branch per

100,000 people

ATM per 1,000

Km sq.

ATM per 100,000

people

Botswana 0.11 3.77 0.27 9

Kenya 0.77 1.38 0.56 0.99

Madagascar 0.19 0.66 0.07 0.22

South Africa 2.22 5.99 6.49 17.5

Tanzania 0.23 0.57 0.07 0.17

Uganda 0.67 0.53 0.9 0.7

Zambia 0.21 1.52 0.09 0.65

Zimbabwe 1.11 3.27 1.15 3.38

Fig 09: access to financial outlets (ATM and bank branches). The highest value of the two categories

is taken, in the consideration that this is the best proxy of physical access to finance. The bubbles

represent the sum of inflow and outflow of remittances in USD dollar, nominal value. Source: World

Bank 20009

Tab. 03: penetration of financial outlets in a selected basket of southern and eastern African

countries. Each column is ranked with a color based system from lower penetration (red) to higher

penetration (green). Tanzania shows low values for all the indicators. Source: World Bank

20

Given the similar preconditions, what financial indicators can contribute to explain the relative difference

in the mobile market development in the two countries? The different level of financial literacy between

Kenyans and Tanzanians provides a possible explanation. The 2006 Financial Sector Deepening Trust

surveys in Kenya and Tanzania, shows that the number of people that have no access to financial

systems is significantly higher in Tanzania than in Kenya.

If the need of mobile money were proportional to the lack of access to financial services, we would have

expected more rapid growth in Tanzania than in Kenya. One hypothesis is that due to a smaller

penetration of financial services, Tanzanians are less acquainted with financial terminology and tools

such as balance and transactions. The Financial Sector Deepening Trust addresses lack of financial

education as “one of the major barriers to accessing financial services in Tanzania: lack of education in

general and financial literacy in particular. More than half the total population has never heard of a

debit card, an ATM machine or even a current account. Improved access will require improved levels of

education right across the country” (Financial Sector Deepening Trust 2006). As early adopters of mobile

money seem to be mostly banked people, the situation depicted in fig 10, suggests that the initial

customer base in Tanzania is smaller than in Kenya. The effects of lack of financial education compound

with the different literacy levels (31% of Tanzanians cannot read or write, while in Kenya only 14%).

Another possible argument is that an insufficient penetration of banks inhibits the possibility of

extending the agent network. As already mentioned agents need to be in the proximity of bank branches

Fig 10: access to financial system in Kenya and Tanzania in 2006. “Formal financial institutions are those supervised by a financial services regulator now, or (in the case of pension funds) likely to be soon. This category includes banks and insurers. Semi-formal financial institutions are those with

some formal supervision, but not from a financial savings regulator. This category includes the SACCOs and larger MFIs. The informal segment includes small, usually community-based

organizations such as ROSCAs, Village Community Banks, upatu and money-lenders.” (FinScope). Source: FinAccess and FinScope 2006

21

as the fixed costs of reaching a branch on a periodical base (usually daily) should be proportionate to the

revenues over that same period. Paucity of branches or non homogeneous distribution of them over the

territory lead to higher costs of liquidity management and can make the business unsustainable. By this

view it is arguable that countries with more potential to develop mobile financial services fall under a

range determined by a bank coverage that is not too high (otherwise there would be no market

opportunity) and not too low. However there is no supporting evidence to determine that this

interpretation affects the differences between Kenya and Tanzania.

Telecom market

This paragraph will: 1) describe briefly the telecom market in Tanzania 2) provide a possible explanation

of the differences between Tanzania and Kenya starting from the different concentration of the market

and 3) address the impact of mobile money on the business of MNOs in the two countries. A major

conclusion is that a strong concentration of the telecom market creates favorable conditions for the

deployment of a new mobile application at mass scale, especially in countries where companies need to

approach mass-market strategies to reach critical revenues (for niche strategies the situation can be

different).

With more than 16 millions subscribers, more than one third of the population, and a growth rate at

30%, the telecommunications market in Tanzania has been experiencing in the last years a tremendous

growth. The market enjoys a good level of competition with a Herfindahl-Hirschman Index of 2872. The

biggest player is Vodacom, which was awarder the license in 1999 and now has 36.2% of the market

share, followed by Zain at 29% and MIC Tanzania (Tigo) at 25%. These are also the fastest growing

players, while Zamtel Tanzania and the mobile arm of the national telephone company have been losing

clients. In February 2007 Vodacom started to offer services over 3G followed, one year later, by Zain:

now also Zain and TTLC are in this space. The latest newcomer in the market is Excellentcom, (HiTS

Tanzania), which announced in August 2010 that is ready to launch its service.

From a mobile money perspective, three characteristics that makes a strong dominant player more

suitable to launch an application at mass scale: financial strength, needed for the initial investments to

set up the structure to manage the agents and to market the service, big and more penetrating retail

distribution and a high brand awareness, essential to gain the trust of the population. On the other side

a strong initial player can have positive externalities on the market by raising awareness on the service

and providing literacy needed for adoption. Safaricom had two and a half the number of clients of

Vodacom, revenues almost three times higher and strong brand awareness among Kenyans (a fairly

unique condition). Vodacom had a far less dominant position and had to cover a territory that was

almost double the one of Kenya and a population that is more equally distributed: this combination of

characteristics can have affected the deployment of the service and the capacity to reach scale.

22

Another perspective that would deserve more analysis is related to potential differences of technological

literacy among the population, with Kenyans being more confident at using mobile technology. It seems

that the Kenyan wireless market is more mature, as the growth rate has started to decline in the last

year faster than in Tanzania (fig 12). More people having been using a mobile phone for more time

could be a proxy of higher confidence in handling a telephone. However, if analyses on this issue have

been carried out in Kenya and the Philippines with interesting results (Cohen, Hopkins and Lee, 2008),

there are no evidences for Tanzania.

It is also interesting to evaluate the impact of M-PESA and ZAP on the two markets, to figure out what

role has mobile money played in the business strategies of the companies. It is clear that Safaricom and

Vodacom have introduced this service when the respective market growth was starting to decline

(fig.12): the decline coupled with new entrants pushed major players to look for value added services to

reduce churn.

Fig 11: concentration of telecom market among different countries in 2010. Source: personal

elaboration, data from telegeography.com

23

However mobile money didn’t lead to higher customer acquisition nor, surprisingly, to significant

increase in ARPU, which has been decreasing constantly over time for both Safaricom and Vodacom16.

M-PESA has helped Safaricom reducing churn, at least for a couple of years, while it didn’t significantly

helped Vodacom.

The situation of the two markets is clear in the following figures. In Kenya, M-PESA has allowed

Safaricom to increase market share in a time in which new incumbents were entering the market, at the

expenses of Zain.

16

Data for Zain are not available. Other players have not been surveyed.

Fig 12: Subscribers and annual growth of the wireless telecom market in

Kenya and Tanzania. Source: telegeography.com

Fig 13: market share of the telecom sector in Kenya. Source: wirelessintelligence.com

24

The same cannot be said of Tanzania, where Vodacom has lost market share, while Zain has maintained

its position.

Several variables might affect these dynamics: for example people might have two accounts with two

SIM cards, one for the m-wallet and one for the mobile network (the policy of Vodacom that doesn’t

require users to subscribe to the service to receive money allows for this configuration). If these data

prove to be consistent over time and in other countries, telecoms might start to wonder whether this is

an attractive business.

Fig 14: market share of the telecom sector in Tanzania. Source: wirelessintelligence.com

25

Conclusions

Central to this analysis is the answer to the following questions: in country where the regulators are

open to explore ways to extend financial access using ICT and flexible to engage in a dialog with all

stakeholders, including telecoms, what characteristics can affect the uptake? Assuming that regulation

has a major impact, the paper suggests to look into the following:

Geographic extension of the country and distribution of the population, two characteristics that

directly affect the dimension of the agent network

Dynamic of internal and international remittances, particularly significant for countries where

money transfer would be the main application. Flows and volume of remittances affects the

latent demand for the service and the management of liquidity

Organization of the bank sector and, mostly, of the telecom market: due to lack of

interoperability between different services, markets with high level of concentration and a

strong dominant player, are more likely to have a fast initial growth, as the major player is able

to scale faster the network.

This paper also suggests that the uptake in Tanzania has been initially slower than in Kenya but has

speeded up with Zain offering a service. Tanzania might be looked as a worldwide benchmark in terms

of number of subscribers, but in terms of volume of transaction, Vodacom (main player in Tanzania) is

way below Safaricom. This would lead us to think that in Tanzania either the demand of money transfer

is lower or there are a lot of non-active subscribers.

Zain is trying to develop a cashless ecosystem, reducing the cash in and out operations, by linking the m-

wallet to the bank account and by extending the possibility to pay using virtual money. On the other side

Vodacom is very focused on money transfer and cash-in and out.

Finally the impact that mobile money has on the business of the operators is not clear. Developed

initially with the promise of reducing churn and increasing ARPU, the mobile service has helped

Safaricom for some years, while its role with the players in Tanzania is more uncertain. This is probably

due to the elevated competition in Tanzania.

26

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