#34 Will we be Wave-ing Goodbye to Telco Led Mobile Money?
Analysing Wave's execution and why what they're building is exciting
Hi all - This is the 34th edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀
Introduction
I had to write this post in an airport lounge as well as on the plane. It’s been a bit of a hectic week, but I’m firmly on the mission to #52. Earlier on in September, Wave raised US$ 200 million in a Series A funding round at a valuation of US$ 1.7 billion. It was great news for the African Fintech space and particularly for the growing band of people who are frustrated with Mobile Money (MoMo).
Since the founding of M-Pesa over 15 years ago now, Mobile Money has grown particularly in East Africa and Ghana where regulatory attitudes have been more forgiving. Despite this growth, the adoption of Mobile Money hasn’t been consistent across the continent. The graph below from McKinsey with some editing by Everett Randle shows the differing outcomes on MoMo adoption.
Source: McKinsey and Everett Randle
In East Africa, where MoMo adoption has been widespread, financial inclusion metrics have been trending upwards year on year. In fact, according to some studies, M-Pesa alone has lifted over 2% of households out of poverty. The revenues have followed, M-Pesa is on track to achieve US$ 1 billion in annual revenues most likely by 2023 and MTN, Airtel and Orange Money make combined revenues of US$ 2.1 billion.
Despite their success, there is an uneasy tension and energy where competitors both banks and fintechs seek to dethrone them. The main reasons for this are;
They are still considered to be expensive with average P2P rates of approximately 2%;
A walled garden approach to integration;
A culture of killing any innovation that grows on their platforms. This is contrasted with Tencent which has a corporate VC strategy of nurturing and acquiring anything that is growing on their platform.
The tweets below summarise the energy;
It is no surprise then that the recent announcement by Wave created excitement amongst the disillusioned class of founders who have run up against Mobile Money. In this article, I do a short introduction to Wave as well as giving context on the MoMo space given my experience of competing against that sheds light on why Wave is executing so well.
Wave
Founders Drew Durbin and Lincoln Quirk started their entrepreneurial journey in the big leagues with Sendwave. Drew ran an NGO in Tanzania and he got fed up with the experience of sending money from the US to Tanzania. Together with Lincoln, they founded Sendwave back in 2014. Sendwave was a simple user-friendly app that enabled people in remittance source markets to send money back home. Funds could terminate in either a bank account or a mobile wallet. In the back end, Sendwave integrated in each market to a bank that would enable payouts as well as sell local currency to Sendwave.
Nonetheless, they realised that the beneficiary wallets were just as broken as the global remittance system. Both bank accounts and mobile wallets were expensive and sometimes unreliable. This led them to pilot Wave back in 2016 before fully launching a year later. They sold Sendwave to WorldRemit in February this year for US$ 500 million and turned all their attention to Wave. They figured that to make a deeper impact, they’d have to build full stack mobile wallets in Africa from the core systems all the way to the Cash In Cash Out (CICO) networks. They started off with Senegal because as in Drew’s words;
“Senegal is a big enough market that we would have to work really hard to potentially win the market. But also a small enough market that if we were doing well, we could win the market quicker than if we were in a giant country. And so that combination of those two things made it seem like a good place to start,”
Wave has grown to over 5 million active users in Senegal and is significantly more affordable than Mobile Money. Wave is estimated to be 70% cheaper than existing solutions with free deposits and withdrawals and a 1% fee levied for P2P transfers.
The following links give a useful overview of Wave;
This overview by Emeka Ajene on Afridigest - If you haven’t subscribed to this newsletter, I suggest you do.
Drew and Lincoln have proven experience in building world class tech from their work with Sendwave and it’s no surprise that they have taken Wave to where it is. Lincoln from his website seems to share a lot in common with Stripe founder Patrick Collison, key amongst them an incredible intellectual curiosity. In his website, you can read his musings on a variety of topics such as “Process Orientation and how we should evaluate technical work” to “how to select a bicycle” and even “How ambitious people can raise kids”.The team is super capable and has the right hires to execute.
It’s no surprise then that recently, Wave joined the growing list of African Unicorns.
Source: Afridigest
The tweet below by Stone Atwine captures what this funding does to the financial services ecosystem in Africa;
Building Digital Financial Services in Africa
I have experience of building a mobile banking solution that includes a nationwide agency banking network. Anyone who has done this appreciates the work already done by Wave and sees the potential that Wave has in a Mobile Money world.
For any financial service provider looking at Africa, it is evident that you need different distribution to enable widespread financial service delivery. Mobile Money is thus best suited to the delivery of financial service in Africa using the agency model. The key reasons are;
Existing experience in serving the mass market through the telecom business with deep FMCG expertise;
The SIM card and its ability to both offer services and be a form of identity;
The nature of payments as communication and thus an SMS as a form of payment;
An agency network built on similar principles to the Telecom SIM card distribution network;
The costs and poor economics of traditional branch and ATM infrastructure;
These amongst others were the key ingredients that enabled MoMo to take off in the continent. The lack of widespread broadband services when MoMo took off as well as the limited distribution of smartphones was another factor that gave MoMo an exclusive license to dominate mobile based digital financial services in Africa.
When building non-telco digital financial services in Africa, the following is the thought process based on my prior experience.
Customer Access Layer
It is assumed that you already have a core ledger system that can maintain customer account balances and transaction records. You need to think about how customers will access your services. Of course, everyone has a phone and thus it's intuitive that your service should be based on the mobile phone. You only have two options based on a mobile based service. You can either offer a USSD service or an app. For the USSD, you basically enter the realm of the Telco and you’re fully at their mercy. You play by their rules.
To obtain a USSD, you typically have to go to the regulator and get a USSD code or you can work with a USSD aggregator such as Africa’s Talking. In the early 2000s, this was quite straightforward and affordable but of late, it’s becoming ever more difficult to obtain a USSD at an affordable rate. Once you get the USSD, usually the Telcos are meant to host them on their USSD gateways. Telcos have their own policies about how they price this service but they’re typically based on a fixed and variable fee model. The variable component is typically charged per USSD call.
Telcos have a bag of tricks when it comes to access to USSD services as well as SMS services.
Even if you do manage to host your USSD service without any hustle, USSDs have high failure rates and what is more, I find them to be blackholes when it comes to data. My biggest frustration was that I could never know if a customer attempted to access my service but failed to do so. The bank only gets data once the USSD call is successful. In my view, this was the biggest drawback given that this stat “failed USSD calls” is very useful when trying to figure out the popularity of your service as well as improving your customer experience.
It is no surprise that no USSD based mobile banking service has never really shaken the dominance of MoMo. The first iteration of Nala as well as Hover were built on the principle of improving the USSD UX by creating an app based access layer that enabled clients to access USSD services. This blog shows some of the difficulties that arise from such an endeavour.
It then becomes evident that from a mobile perspective, you have to have an app. However, you cannot achieve widespread use based on apps given the limited smartphone penetration in the continent. You have to have an off-line based customer access system. This is where cards come in. There are numerous card types from chip and pin, magnetic stripe, QR code and NFC. Whilst solving for cards, there’s a lot to consider
Usage - Given the costs to set up an ATM network, cards need to be built to interface non-ATM systems. These could be POS machines or mobile phones;
Cost - to minimise costs which would eventually have to be passed on to clients, it’s advisable to stay away from the network cards such as Visa and Mastercard. At the same time, it’s also advisable to choose a card system that you can control from printing to storage to issuance. This automatically lends itself to QR or NFC based cards which can interface to POS machines as well as smartphones. They can usually be imported from China quite cheap whilst you do printing, storage and issuance;
Other considerations include;
Security - how easy is it to make unauthorised transactions? (low income people are super sensitive to fraud);
Durability - how durable are the cards, to keep costs down and reduce the logistical nightmares, it’s important to issue cards that can last for minimum 5 years - my worry for QR codes is whether the code will fade given African conditions such constant exposure to the sun and dust;
Issuance - It’s best if these cards can be activated and issued by the agent;
Cash in Cash Out (CICO) Network;
Africa is predominantly a cash economy. Even in countries such as Kenya with such widespread M-Pesa usage, cash is still king. If you don’t have a working on and off-ramp to cash then you’re not in the game. Building an agent network nonetheless is super hard. You need to make some considerations too;
Agent Recruitment System - The first iteration of MoMo had Safaricom recruiting agents directly through field staff. They slowly realised that this is sub-optimal and introduced a multi-tiered system where you had “Super-Agents” who were bigger, more liquid agents charged with recruiting and handling float management for sub-agents. They’d be incentivised through a commission share for all the sub-agents transactions. Ideally, agents should be recruited through a self-serve mechanism where there are online portals for agent recruitment with AI driven fraud detection mechanisms that automatically issue transactional limits on a graduated scale;
Float Management - float is the lifeblood of an agency system. If there’s no float there’s no business. At the first level, float is used to enable cash-in’s or deposit. However, at a second level, agents also have to have an incentive for accepting cash-outs given that they receive float from this. Float management should include not only the ability to serve depositors, but should include the ability to convert float back into cash or any other valuable form. It's also valuable to have automated float credit based on transactional history. So for instance, if a customer comes to do a deposit and the agent doesn’t have float, he should be able to complete the transaction with a contextual “overdraft” facility for that specific transaction. A “Fuliza” for agents;
Technology - SIM cards are great, they are cheap and easily distributable, but they are also quite primitive. MoMo agency networks exploded because they could work on a cheap feature phone with all the relevant logic and information stored in the SIM card. Nonetheless, anyone building in this space knows that there’s so much more you can offer on an app vis-a-vis the sim card. We launched an android based agency banking system that initially ran on a cheap Tecno phone but later upgraded to an Android POS from NexGo technologies. On an app, the agent is able to do much more from a commercial perspective including selling additional services. Apps are just much more intuitive than USSD or STK interfaces. In the back-end, a modern cloud native system that runs on microservices can enable even richer functionality. Check out what Eko has been able to achieve in India. This should be the end-state for agency services in Africa;
Team and Execution - Once all the tech is sorted out you need solid FMCG skills to execute agent network expansion and management. Most of us are used to seeing our favourite brands such as Coca Cola or your favourite beer at a store or a supermarket. Very few realise just how much day to day work goes behind the scenes. African mass market retail is like Jurassic Park, it’s all about survival of the fittest. On the ground, you’re not competing for attention with other Telcos but with all other brands trying to sell goods. It’s therefore a daily exercise to ensure that your agents are well branded, trained and executing properly. Some key considerations from my experience;’
Learn FMCG language - you must be comfortable with terms such as “SFE” (Sales Force Effectiveness), “PICOS” (Picture of Success) and one of the more important ones “RED” (Right Execution Daily). Your ground teams should have military-esque precision and execution. This includes checking whether the transaction register is being properly filled, that agent branding is well placed according to your PICOS standards and that agents are trained on all transactions, customer service as well as any new element that they need training on;
Data and Mapping - When managing a sales staff and agents, you need copious amounts of data. Some key information could include, whether an agent is improving or declining based on specific metrics such as number of transactions, average float levels, location, a rating if possible of how “good” that agent is based on multiple factors and many other data points. The original vintage of MoMo didn’t have this and here is where companies like MarketForce 360 come in. Nonetheless, they tend to solve for one side of the problem, salesforce management without always solving for agent management. The two have to speak to one another. Your systems need to show you which agents need visiting, which ones need further incentivisation and which ones should be left alone for now. Additionally it should map agents to sales staff so that you can run incentives with accurate data. A number of MoMos have built capabilities around this;
The Back-End
The earlier vintage of Mobile Money systems were built by either Comviva or Huawei. They were robust systems based on client-server architecture and many are still in use today with API’s awkwardly cobbled together out of them. A number of Telcos have upgraded to more modern systems. One issue I’ve seen in a number of deployments is that given the tech is purchased from a vendor and API’s were not built from scratch, feature release is an awkward and expensive process where vendors get paid to issue APIs that can perform a specific functionality.
If you’re building for today, you will likely have a base payments and settlement system from which you build a modern micro-service and cloud native based system that can power both analytics and multiple use-cases exposed via intuitive APIs. It’s always interesting to notice that mobile money platforms are super reliable on their native platforms be it USSD or STK whilst being wobbly at times on an app. Sometimes in Kenya you get the refrain from a merchant or an agent “usitumie app” (don’t use the app) because it may not go through. The architecture should enable the seamless integration of third party functionality to power new user cases as well as personalisation. For instance, analytics should enable a client to know which agents around him are capable of accepting big deposits. This would drive customer satisfaction given that this lack of information drives customers to make conclusions about all agents based on the experience with one agent.
Tying it all together
The tweet below by Benjamin Fernandes, one of the most thoughtful builders in the global Fintech space snapily summarises the discussion above.
When you analyse all the above factors, it’s clear to see why there’s so much excitement brought about by Wave. They cleverly figured out a market in which they thought they could compete and then went about executing perfectly. The next step is a thoughtful expansion across the continent. However, given their platform strategy which is well articulated in this article by Everett Randle, there is much more horizontal growth within their existing markets that’s to be had.
Source: Everett Randle
Source: Everett Randle
Wave seems like it will be a mix of Alipay with the platform, M-Pesa with the African distribution as well as Stripe with local payments acceptance in the markets. There’s so much more growth to be had and the current valuation may seem like peanuts down the line if they execute well. Some key use cases emerge;
API based card issuance for Wave cards that can be provisioned for corporate expenses, per diem and petty cash for African SME’s;
A lending marketplace where lenders bid for loans - this is the most intuitive way of driving affordable credit in Africa;
API based integration to banks for Access Initiation so that customers can manage their financial lives on Wave;
Bulk Disbursements with a kind of self-service mechanisms for companies or organisations looking to disburse funds - The cards are particularly useful in Africa for one-off farmer payments that occur seasonally. Additionally this would be much cheaper than any payments done on Mastercard or Visa cards;
Agent lending - An active agent typically has standard commissions based on his location, activity levels etc. Usually it’s easy to predict how much agents can earn on a given month. Agent commissions are thus very salary-like. With financial primitives such as those built by Wave, one can easily structure term loans for agents that can help agents borrow for Capex or for personal reasons. This should be part of a lending marketplace where lenders bid for loans;
The funding has been raised, the brand is being built and now it will be interesting to see how the next few years play out for Wave.
As always thanks for reading and drop the comments below and let’s drive this conversation.
If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io
Your article that I read is thought provoking. I believe strongly that you are doing the excellent job.
Cheers!
I love you thought process. Is is deep and can be deeper still. I will love to open a conversation with you ASAP.
My name is Kehinde Obisanya.
Thanks.