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Off the beaten track: the mobile money boom in frontier markets

Off the beaten track: the mobile money boom in frontier markets

This article first appeared on Modern Investor magazine.

Facebook, Apple Pay, Android Pay and, launched just a month ago, LG Pay. The global mobile payment market has been growing rapidly since it came into view last year, and new players are joining almost every month, eager for their slice of the pie.

But although these familiar corporate titans have only recently begun to offer mobile payment to the affluent populations of the Northern Hemisphere, customers in developing nations have had access for many years thanks to smaller, regional players.

Faced with severe infrastructure hurdles – less than one person in 100 has a fixed telephone line in Kenya – telecoms firms have leapfrogged existing technologies and shown their bigger rivals how to leverage mobile phone penetration rates.

Speaking to Modern Investor, Baring Frontier Markets fund manager Michael Levy highlights Bangladesh’s Brac Bank, one of the fund’s largest holdings, as an example of this dynamic at play.

‘In Bangladesh, 75% of the population have a mobile phone while only 25% have a bank account. So how do you increase penetration in the banking sector? It’s very costly to go out and build branches and attract clients like that.

‘So Brac Bank figured that if you can distribute a banking product on a mobile phone it would be a very good way of increasing banking penetration and financial inclusion in the economy.’

Low tech, high uptake

In 2012 Brac Bank launched a mobile money platform called Bkash, a 2G-based text messaging system allowing people to transfer money to each other using a simple mobile phone – no smartphone is necessary. And in a country like Bangladesh, this solution has proved extremely successful.

‘For instance, a family member that has moved to Dhakka and is earning money can send it back to family members in a rural community by simply sending a text message. The receiver of the text message can go to one of Bkash’s agents and withdraw money.’

Because Bkash was the first mover on the market, it has by far the largest network of agents in the country, Levy says. Although other players are now coming to the sector, Bkash has the largest network impact. This means it is difficult to displace its network, just as it is difficult for any new social media platform to displace Facebook.

‘Once you have scale you are in a very dominant position. And unless you really mess up in terms of execution, you are likely to be able to maintain that dominant position.

‘That’s exactly the type of business model we like – a company that has created significant barriers to entry and stops new competitors coming in. Certainly, some of the banks have tried to launch new mobile money platforms, but Brac Bank has, by far, the biggest money share.’

Data shows that in only three years Bkash has changed Bangladesh’s banking landscape significantly. In 2012, the year Bkash was launched, transactions in the Bangladeshi mobile banking industry stood at $850 million, or 0.7% of the country’s GDP.

Estimates for this year suggest mobile transactions have mushroomed to $21.3 billion, which is equivalent to 9.7% of Bangladesh GDP, and will grow further to $30.7 billion (12.3% of GDP) in 2016. A surge in Bkash’s revenues followed, from $5 million in 2012 to a projected $118 million in 2015.

The initiated its position in Brac Bank only last year. Since then, the bank’s value, driven mainly by the strong performance of Bkash, has doubled.

Although Brac Bank has served the fund well, overall Levy’s portfolio has still felt the turbulence that has been at play in emerging markets.

Over the past 12 months the fund has lost 12.82% in USD terms, while its Citywire benchmark, the MSCI Frontier Markets Index, lost 17.28% over the same timeframe.

Kenyan gems

Kenyan company Safaricom, the fund’s second largest position among 65 holdings, offers another example of how Levy is playing the mobile money theme.

‘Safaricom’s mobile money platform M-Pesa was launched in 2007, and it’s still growing at 30% per annum. The value of transactions on the platform stands now at 40% of Kenya’s GDP, and there’s no reason why Bkash in Bangladesh can’t follow the Kenyan example in terms of the growth profile.’

However, M-Pesa operates in a different market in terms of regulation: a telecoms firm such as Safaricom would be excluded from the mobile money industry in Bangladesh, which has embraced an exclusively bank-led model.

Breaking into B2B

So what does the future hold for the likes of Bkash and M-Pesa? Levy says that for Bkash the next leg of growth, after person-to-person transactions, is person-to-business. This will use the same technology to enable customers to pay for groceries with a mobile phone.

Safaricom, on the other hand, is trying to export M-Pesa throughout East Africa and is eyeing cross-border money transfers. It has also introduced a service for downloading and streaming TV programmes, films and music at home.

‘The service allows Safaricom to be the entry point into the home for media,’ Levy says. ‘Will it be the next Netflix in Kenya? Will it be the next Spotify?’ Either way, both companies, despite their differences, have attracted attention from overseas, not only from the likes of fund managers.

‘Funnily enough, developed market companies are trying to replicate what frontier market companies have already done: just look at Apple Pay. There are many more examples of leapfrog technologies, such as mobile telecommunications, which innovative frontier market companies can use to create a business,’ Levy says.

Regulatory Risk

The key risk in the mobile mone y industry is regulation and whether, for example, the Bangladeshi central bank will start regulating the industry in a way that is detrimental to Bkash, Levy says. The central bank has stated that the mobile money industry in Bangladesh has to be a bank-led model, not a telecommunications-led model, as is the case in Kenya. At some point the network operators may enter the market, but Levy doesn’t see a huge threat in that.

‘If anything, they might try to buy Bkash if the ownership regulation was adjusted,’ he says.

The Buyer

Andrea Federici - Managing Partner, Kallisto Partners

Andrea Federici, managing partner at Rome-based Kallisto Partners, an independent financial boutique, says now is the best time to invest in frontier markets.

‘The point of entry into frontier markets could not be better right now. We believe the next three to five years will see more and more investors switching from investing in emerging markets to frontier markets. Alongside that, we feel we will see some proper growth in the mid term in those markets. Historically, entering frontier markets has been difficult – even for institutional investors. Nowadays, though, entering these markets has become much more attractive using Ucits vehicles.’

Federici is currently accessing frontier markets using the East Capital Frontier Markets fund. Citywire + rated Emre Akcakmak, who manages the fund, says favourable demographics that help fuel the growth of the consumer sector is one reason he likes frontier markets. Another is the low correlation of frontier markets with one another and with the global economy.

‘We like the East Capital Frontier Markets fund because of its interesting overweighing in Frontier Europe, especially countries like Romania. Likewise, the East Capital fund is overweight in Saudi Arabia, a country historically hard to access from an investment perspective,’ Federici says.

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