Mobile Commerce in MEA - January 2009

January 2009

The Delta Perspective

Globalization and the unprecedented growth of mobile telephony in the MEA, bring with it the chance to facilitate m-commerce activities

across new frontiers. The potential applications for

these developing economies are far and wide, with

opportunities to improve and transform the

lives of millions.

Mobile Commerce in MEA: A Current Reality

Author Javier Alvarez - partner: [email protected] Janssen - principal: [email protected] Arons - associate: [email protected] Partners Intelligence Unit

Key highlights for 2012

• Large gap between mobile and banked customers; Mobile subscribers to

exceed number of bank account holders by 200 million in the MEA region

• ConsiderablemarketpotentialofUS$1.3billionform-commerceservices

expected in the MEA region; Regional split of 58% and 42% between Africa

and Middle East respectively

• Revenuepotentialform-remittancesexpectedtotouchUS$385millionand

US$260millioninMiddleEastandAfricarespectively

• Revenuepotentialfromm-moneyactivitiestohavealargerimpactinAfrica

andestimatedatUS$480millionasagainstUS$155millioninMiddleEast.

This is due to the wider gap between the ‘unbanked’ and the ‘wirelessly

connected’, coupled with a larger population

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Derivatives of M-commerce

The rapid proliferation of mobile telephony coupled

with the speed of adoption of technologies, has led

to an unprecedented acceleration in the deployment

of m-commerce activities across the globe.

The concepts of buying goods and

services, money and airtime transfers,

payment of utility bills and various

other mobile centric transactions,

have not entirely been new features

to the wireless world.

Owing to the transaction type and

vehicle, the origins of m-commerce

are ambiguously differentiated under

broad categories. The taxonomies are

each derived based on the nature of

business and customer interactions

and also to some extent the level of

personalization.

• Remittances,oftenthemostpopular

transaction mode in emerging

economies, includes the sending and

receiving of funds, domestically and

across international borders

• Paymentsarebasedontransactions

over text based mechanisms,

Exhibit1:ClassificationofM-Commerce

between a user and retailer. For

example, purchase of items such

as train/bus ticket, general utility

and food items, airtime recharge,

prepaid top-ups through text-based

or voice enabled transactions, fall

within the paradigm of m-payments.

• Banking,ontheotherhand,canbe

said to encompass, a broader array

of mobile account management

as well as mobile financial

information needs.

Keeping the characteristics of MEA,

set in the backdrop of high migrant

population in the region, our paper

centres on the scope, benefits,

and opportunity of m-commerce

applications. Thus, we focus on the

two classifications; m-remittance

related activities with other facets

of m-commerce clubbed under

‘m-money’.

Source:DeltaPartnersAnalysis

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Assessing the opportunity for M-Commerce in MEA

For about a decade, mobile transactions have been

earmarked as a promising business opportunity, both

for mobile operators and banks.

Exhibit2:BankandMobilePenetrationsinMEA:20071

1NotethatmobilepenetrationisdefinedasthenumberofactiveSIMS/population(socanexceed100%);bank

accountpenetrationisthe%ofpeoplethathasabankaccount(socannotexceed100%);Tocompareliketolike

wehavedividedthemobilepenetrationbyafactorof‘1.3’(dualSIMeffect)


Itistruethatindevelopedmarkets,

M-commerce has not been able to

live up to its expectations in terms of

delivering the ‘Holy Grail’ in revenues.

However, in emerging markets, the

reduced presence of the conventional

branch-led retail-banking model offers

a golden opportunity for operators who

manage to get the business model right.

Inthesedevelopingcountries,large

segments of the population present

unpredictable and irregular income

patterns, as low-income urban and

rural dwellers continue to remain

under or un-banked. The large gap

between number of mobile users and

bank account holders has helped in

the creation of a lucrative potential for

provisioning of m-commerce facilities.

With mobile operators increasingly

adopting innovative business

modelstoaddressthe‘Bottom-of-

thePyramid’efficiently,thepaceof

mobile penetration will only continue

to outstrip the penetration of bank

accounts.DeltaPartnersbelievesthat

there would be an additional 200

million more mobile customers than the

traditional bank account holders in the

MEA region alone by 2012.

The advantage of developing a

market towards m-commerce is that

it continues to drive the economic

system toward a cashless transaction

environment.Severaloperators,

especially those in emerging economies

have come to realize the importance

and potential that lies captive in these

service offerings. The most successful

international cases are presented by the

operatorsinPhilippines(GlobeTelecom

andSmartCommunications),andisfast

being adopted and tailored by operators

in other parts of the world.

InAfrica,eversincethesuccessful

launchofSafaricom’sM-PesainKenya

(launchedinearly‘07,hasover4.1

M-Commercesolutionsactas an alternate for uplifting the underserved population

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Exhibit3:ExamplesofM-CommerceServicesinMEAandSelectedEmergingMarkets

Exhibit4:MobileandBankAccountPenetration(%)forSelectMEACountries

* To be launched

Source:DeltaPartnersAnalysis;


million registered users with more

than 5000 partnering agents and 110

‘Pesapoint’ATMsacross46towns),

various operators in variety of sizes

have jumped on the bandwagon. As

it stands currently, operators in MEA

suchasMTN(whoalreadyintroduced

MTNBankinginSouthAfricaatan

earlierstage),Zain,Etisalat,Orascom

and Orange are rolling out their

respective solutions to capture

this opportunity.

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Exhibit5:Socio-economicEnablerstoM-Commerce


The ‘Delta Partners’ Point of View

The promising growth in m-commerce services

is strongly driven by the latent need for banking

solutions for those unaddressed by the financial

sector thus far.

Most banks have traditionally focused

on the high-end customer segment

limiting themselves to a small

proportion of the developing countries

population. Mobile operators, on

the other hand, despite entering the

same markets decades later, have

created unmatched inroads across

various levels of the socio-economic

strata and succeeded in surpassing the

banked population.

Furthermore, the factors that help

create a positive environment for

thriving m-commerce solutions are

(i)presenceofanaddressablerural

population(ii)poorinfrastructural

(transport/power)backbone(iii)high

proportion of mobile phones as the

communicationdevice(iv)presence

ofmigrantpopulation(Refer Exhibit

5).Forinstance,thepresenceof

favourable demographics and reliance

on cash for everyday subsistence by

lowincomegroupsinthePhilippines,

led to the popularity of m-commerce

servicesofbothoperators,i.e.Smart

and Globe.

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Globe Telecom introduced its services

inPhilippineswithafocusonthe

high end market and an emphasis

on postpaid services. However, the

presence of a large population in

the middle and low income tiers in

the country was difficult to ignore.

InOctober2004,GlobeTelecom

launched its first micro-payment

services,calledG-Cash,aservice

designed to convert and link a user’s

mobile phone to a bank account.

The principal transaction types were

those between a phone-to-phone

and phone-to-bank account. On

activation, the product enabled

subscribers to engage in a plethora of

mobiletransactionsrangingfrom(i)

cashdeposits/withdrawals(ii)credit

transfertoprepaidaccounts(iii)

airtimetransfers(v)cashlesspurchases

(vi)payrollcredits(vii)international

remittances.Inadditiontotheabove

services,G-Cashalsoprovidedfor

micro-finance in agreement with

the‘RuralBankersAssociationof

thePhilippines’(RBAP).Thecostsof

serviceoftheG-Cash‘suite’typically

vary with the transaction type. For

instance,SMSesforinteraccount

transfercostPHP1(US$0.02)each,

while cash deposits and withdrawals

incur a fee of 1% on the transaction

value. The success of this platform can

be proven by the number and volume

of subscribers and transactions

runningonit.Presently,over1.2

million subscribers are estimated to

be on this system. Additionally, the

transaction value is believed to be in

excessofPHP3million(US$60K)each

day, spanning 400 accredited partners

and3000outlets.

Taking into account the key learnings

fromthePhilippinessuccess,MEA

operators could achieve positive

market impact, owing to the

similarities in demographic set-up.

We feel the immediate opportunity

lies in bringing financial services to

the telephonically connected yet

unbanked population. We estimate

this market to have a considerable

potential of US$1.3billionbytheyear

2012 in the MEA region alone, with a

split of 58% and 42% between Africa

and Middle East respectively2(Refer

Exhibit 6)

Remittance flows are driven by

the degree of globalization and a

growing trend towards multi-spatial

households. As the growth of migrant

workers increases, this drives the

global demand for money transfers.

AccordingtotheWorldBank,the

globalremittancemarketin2007

wasestimatedatUS$337billion,

registeringhealthyCAGRof13%

from2003-07withay-o-ygrowthin

2007of19%.Strongnetremittance

inflows were registered especially in

the developing continents, with Africa

(US$29billion),LatinAmerica(US$49

billion)andAsia(US$62billion)

registering strong net inflows of

remittances.Inthe2007,theMiddle-

East registered a net outflow of

US$13billion(US$29billionoutflow

vs.US$16billioninflow).

Needless to say the measure of market

potential operators can largely achieve

will depend on a combination of

market skill and intrinsic will of all the

stakeholders involved.

(a) Available Strategic Options

Inordertoexecutem-commerce

offerings successfully, operators will

first need to gauge and understand

the direct benefits of potential

revenues and indirect benefits

of improved customer retention

and loyalty. Having said that, the

successful launch is linked to an

operator’s long-term vision and

marketing strategy.

2Assumptions:•Mobilepenetrationgrowthratesdeclinefrom41%between2002-07to9%uptill2012 in Africa

•Mobilepenetrationgrowthratesdeclinefrom28%between2002-07to10%uptill2012in Middle East

•Penetrationofm-commerceservicestoreach25% of total mobile users by end of 2012 in MEA

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Exhibit7:Operator’sStrategicChoices


Exhibit6:M-CommerceMarketPotentialforMEARegionin2012(US$)


Inordertodecideuponthebest

way forward, these benefits need

to be assessed against investment

requirements in the near-term and

thelong-termfuture.Basedonthe

operator’s overall strategy alignment,

the initiative can be classified into

(i)Core(ii)Add-onoriii)Limited

involvement.(Refer Exhibit 7)

(i) Core -Underthisstrategy,mobile

operators(potentiallyafterasoft

launch)offeranexhaustiveportfolio

of m-commerce services, whereby

the portfolio of m-commerce services

becomes a core element of the

operator’s value proposition. Hereby

the operator adopts a dominant

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position in the overall value chain.

One such example of a successful case

isthelaunchofM-Pesaserviceby

Safaricominearly2007.(Refer

Exhibit 8)

(ii) Add-on-Inthisset-up,

mobile operators would consider

m-commerce as a driver for ‘Value

AddedServices(VAS)’anddevelop

partnerships with banks, retailers,

and utilities in order to leverage

the competencies required. An

example of this would be the mobile

micro payment service launched

by Vodafone in partnership with

HSBC.Theserviceisamethodfor

money transfer by which subscribers

can transfer money, by depositing

moneyintotheirVodafoneCash

accounts and withdraw money from

it from designated ATMs. While, the

VodafoneCashaccountdiffersfrom

the bank account, services can be

availed of at all the Vodafone and

HSBCbranchesinEgypt.Typically,the

costoftheserviceisEGP0.30/call,i.e.

US$0.0054/callforbalanceenquiries

and transfers while withdrawal incurs a

fee of 2% on the transaction amount.

(iii) Limited involvement - This

strategy would result in operators

reaping the benefits from increased

data traffic or wholesale activities such

ashostingof3rdpartyoperators,

MVNOs or banks. Though this

option has the lowest risk profile,

the financial returns are likely to

belimited.TierIIoperatorsmaybe

interested in such options as these

help ride on the twin benefits of

low risk exposure and idle network

capacity.Forinstance,in2006,an

MVNOcalledmBankmobilewas

launchedinPoland.WhilemBankwas

responsible for performing payments

and providing for payment related

information,Polkomtel

soldairtime.Additionally,Dutch

Rabobank bank launched an MVNO

for m-commerce services.

(b) Aiming towards the Best Fit: Which

Model should an Operator Adopt?

Basedontheoperator’sstrategic

Exhibit8:CaseStudy(M-Pesa)


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Exhibit9:FourPossibleBusinessModelsinM-Commerce


choice out of the above three options,

the four business models that exist

are:MobileOperatordominated,Bank

dominated,HybridandIndependent

thirdparty(Refer Exhibit 9).

Inouropinion,themobileoperator

dominated model has in it various

advantages over the bank dominated

ones, especially in developing markets.

Additionally, the full control of

m-commerce interface, which allows

operators to provide fully secured

transactions, also has in it the ability

to appeal to consumers at large. Thus,

the mobile operators can leverage

upon their existing strengths of:

• Robustnationalinfrastructure

• Significantexperienceinmanaging

expansive distribution network

• Experienceinrunninghighvolume/

low value transactions

However, banks do have a slight

advantage when it comes to customer

trust in such financial solutions. Hence,

market assessment is crucial before

deciding on a certain model while

success is never solely decided by

the model chosen but the operator’s

implementation.Inthehigh-growth

economies of MEA, we believe that

operators with a strong brand name

and wide distribution network should

capitalize on the head-start they

enjoy vis-à-vis the banks and adopt

the mobile operator dominated

model. This would enable them to

acquireasizablechunkoftheUS$1.3

billion m-commerce opportunity by

2012, while also strengthening the

companies’ overall positioning

in the market.

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3KYC:Duediligenceandbankregulation,which financial institutions and other

regulated companies must perform to identify their clients and ascertain relevant

information pertinent to doing financial business with them.

(c) Managing Stakeholder Interest

The evolutionary roadmap of

m-commerce activities is expected to

bring with it advances in technology,

improved security systems and a wider

rangeofserviceofferings.Despite

all the changes, the crucial factor

for the success of an operator driven

m-commerce initiative, would be the

roles played by the remaining key

stakeholders of the ecosystem, i.e. the

consumer, the distribution network

andtheregulatorybody(Refer

Exhibit 10).

(i) Consumers - The most important

group of stakeholders to be actively

managed. Affordability, accessibility

of services and convenience of use are

the leading two criteria in ensuring a

good consumer experience.

(ii) Distribution Network - The

active management of the distribution

network is a necessity in achieving

sufficient traction for service take

off and post-launch acceleration.

Sincethesedistributorsarethefinal

Exhibit10:ChallengestoOvercomewithKeyStakeholders


interface to the end-consumer, they

need to be adequately incentivized

for them to consider pushing

m-commerce products and services

more effectively. Low-start up costs,

attractive commission structure,

simplicity of execution, reliable and

hassle-free processes all add to

improving the overall comfort level of

this group.

(iii) Regulators-Compliancewith

the regulatory climate in each country

is a necessity. The two key aspects

in m-commerce service provisioning

are to ascertain legality of financial

transactions coupled with professional

management of the ‘funds in float’.

Someeffectivewaysingoverningthe

above can be:

• Complyingwithofficial‘KnowYour

Customer(KYC)3 procedures

• Developingrobustprocessesand

protocols in co-operation with

financial systems, in order to ensure

highest levels of security and risk

management tools.

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Conclusion

The most important and widespread advantage of

m-commerce solutions for an operator in emerging

markets is to capture the unofficial cash flow in

the system.

For the consumers, it eliminates the need to carry physical cash, minimizes

money-laundering opportunities, improves savings and eases money transfers.

Additionally, the system brings with it long-term tangible benefits for the

government as well. A larger segment of banked and connected population

leads to decrease in poverty levels, improved quality of life, increased tax

collectionsandenhancedconsumptionandGDPlevels.

The largest beneficiaries in this regime, especially in an operator dominated

model,areindeedthemobileoperatorsthemselves.Inouropinion,

m-commerce enables them to increase penetration rates and total revenues,

strengthen and broaden their overall value proposition, maximize network

utilization,improveARPUs,introducenewVASrevenuestreamsand

reduce churn.

DeltaPartnersbelievesthatleadingoperatorsintheemergingmarketsof

MEA are best positioned to leverage upon all the benefits of m-commerce,

and would do well to act fast and create a competitive edge for themselves.

However, the success of this endeavor rests upon striking the right balance

between operator commitment and collaboration by other entities of the

value chain.

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Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT)sectorinhighgrowthmarkets,withmorethan100professionalsoperatingacrosstheMiddleEastandAfricafromitsoffices

inDubaiandJohannesburg,andthroughitsthreehighlysynergeticbusinesslines:

Advisory:DeltaPartners,asthelargestadvisoryteamspecializedintelecomsintheMiddleEastandAfrica,operatesinmorethan

25marketsintheregion,partneringwithC-Levelexecutivesintelecomoperators,vendorsandotherTMTplayerstohelpthem

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity:Asafundmanager,DeltaPartnersmanagesan$80Mprivateequityfund,targetinginvestmentopportunitiesinthe

TMTspaceintheMiddleEastandNorthAfrica.DeltaPartnersprivateequitybusinessunitleveragestheGroup’suniqueTMTindustry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: DeltaPartnersprovidescorporatefinanceservicesandhasbeeninvolvedinseveraltelecomtransactionsinthe

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

eithertothesellerorbuyersideofthetransaction.DeltaPartnersactivelyleveragesitscloselinktoDeltaPartners’privateequityarm

to access the investor community as well as top-level financial talent.

AtDeltaPartnerswedelivertangibleresultstoclientsandinvestorsthroughanexclusivesectorfocus,andauniqueapproachto

services, combining strategic advice and hands-on pragmatic approach.

Documents

Mobile Commerce in MEA - January 2009