Vodacom and M-Pesa: ka-ring, ka-ching?

For a long time it has been said in South African business circles that banks have the expertise and infrastructure to become telecommunications companies, and that telecoms firms, in turn, could offer banking services.

This is more than chatter. For example, FNB offers a mobile phone service, and Absa pioneered free e-mail addresses in the late 1990s.

For their part, mobile operators have also been keen to get into financial services. MTN, in partnership with Standard Bank, was the first to offer basic transactional banking services on a mobile device about 20 years ago.

Banks and telecoms companies have been trying to eat each other’s lunches, but they have found it hard to get into industries where the embedded players have a solid foothold and know how to defend their turf.

Nothing much came from MTN’s partnership with Standard Bank — MTN later launched its money transfer and payment service, MoMo — and Absa eventually shut down its free e-mail service.

Though many have dreamt that banks would start offering cut-rate telecoms services and that telecoms companies would make affordable banking products available, this fantasy seemed to have largely remained a dream when it came to full-service banking.

However, Vodacom’s latest results show the company is making notable strides in this regard.

Vodacom Group had 78.9-million financial service customers across the continent at March 2023, up 48% from the 53.3-million it had in 2020. It is not finished; it aims to increase this figure to 100-million by 2027.

The effect of this has been notable. Financial services revenue increased 32.2% to R13bn, resulting in it contributing 10.8% to the group’s overall service revenue.

“Financial services are the key driver of our new [offering] and a meaningful enabler of our purpose of connecting for a better future. This is evidenced by the 11.8% increase in financial service customers to 78.9-million, as we now process an impressive $381.2bn in annual transaction value,” Vodacom says in its results statement.

But Vodacom is not providing full-service banking. This means you might get a small loan, but not car financing or a property mortgage from the operator.

Instead, the company’s financial services model builds in part on the success of the M-Pesa platform, which was developed by Kenya-based Safaricom in 2007. The platform proved that mobile operators could offer secure money transfer services in a developing country with just basic feature phones.

Vodacom has a 35% stake in Safaricom and has been working closely with the Kenyan operator to roll out the M-Pesa service across the continent.

For example, Vodacom launched M-Pesa in Ethiopia in August 2023 and has so far signed up 4.4-million customers there. It says it plans to have 15-million to 20-million M-Pesa customers and more than 4,000 merchants in the East African country in the medium term.

M-Pesa’s importance to its financial services operation and the group as a whole can be seen in its revenue rising 21.4% to R7.9bn, contributing 26.5% to international service revenue.

The platform started out as a money transfer service but has evolved into providing more sophisticated banking services, even providing loans. Vodacom notes that M-Pesa’s “lending and savings products continue to gain traction across the portfolio, as we facilitated loans worth R16.9bn, more than doubling year on year”.

This was in large part driven by the doubling of the number of its active merchants to 395,000.

Vodacom Group CEO Shameel Joosub said on the results conference call that the merchants were key to driving the platform’s growth.

He said M-Pesa would in effect act like a till. It would enable merchants to accept payments via “tap to pay”, put in a merchant number, pay and scan a QR code. The group gets a fee for these transactions — which adds up, as it processes 100-million transactions a day.

The other way it makes money is by allowing the merchants to make loans from the group. Joosub said providing merchants with a loan facility opens up opportunities for both the merchants and Vodacom.

“You can expand that into merchant ordering, like we do in South Africa ... and in South Africa we also do invoice financing. So there’s a whole ecosystem of services that you want to [offer] the merchants and be able to provide for them.”

Aside from M-Pesa, Vodacom has further cemented its move into financial services with the launch in 2021 of its VodaPay super app, which facilitates financial services, online shopping and lifestyle tools for smartphones in South Africa.

So far, there have been 10.4-million downloads and 5.8-million registered users, reflecting an increase of 83% and 79.4% respectively.

As 92.1% of households in the country own a cellphone, it is difficult for mobile operators to expand their telecom services

The flat revenue generated by Vodacom’s traditional telecoms businesses demonstrates the importance of financial services to the company. Service revenue for its South African operation was up only 2.6%, to R61.6bn, for the period. By comparison, its South African financial services revenue was up 7.9% to R3.2bn.

With the 2022 census finding that 92.1% of households in the country own a cellphone, it is difficult for mobile operators to expand their telecoms services.

 Vodacom might not be offering car finance and home mortgages (just yet), but it has built up experience and expertise in providing basic banking services.

It has vast datasets of its clients’ and merchants’ capacity and willingness to pay for services and repay loans. This means it is in a position to offer novel banking solutions traditional banks might not even have considered.

There are already signs of this happening.

Vodacom’s Mezzanine offering, for example, not only provides ways for small-scale farmers to use technology to improve production but also connects them to agricultural inputs, financial products, logistics suppliers and markets.

It might not be too long before Vodacom offers financing for a new tractor or an expansion of a greenhouse.