Constraints of the Nigerian Mobile Money Ecosystem: A Study

What is preventing the mobile money business from growing?

Despite the increased relevance of digital financial services (DFS) in closing the financial exclusion gap, more than 40 percent of the Nigerians adult population remains excluded. In the 2016 State of the Market Report on Digital Financial Services in Nigeria, we reported that the underbanked and unbanked citizens are predominantly women and youths between the ages of 18 and 35 with minimal education and either unemployed or having low-income earning jobs.

In a complementary study in the same year, 2016, we explored the supply-side constraints limiting mobile money adoption. Existing studies on financial inclusion and DFS are based on the assumption that the supply side dynamics are adequate.
In light of the capabilities of DFS providers and the resources available to them (which we elaborated on in last week’s article), we set out to uncover the constraints (physical, regulatory, institutional and operational) inhibiting the growth and development of the DFS sector. Our study also involved interviewing experienced senior executives of selected mobile money organisations in the country.

1. Business and Regulatory Environment
A. Policy Cohesion
In 2012, the Central Bank of Nigeria (CBN) released the national financial inclusion strategy (NFIS). The initiative was meant to be a multi-stakeholder imperative, aimed at addressing financial access gaps and driven by inter-governmental agency cooperation and collaboration. Unfortunately, operators are yet to see the benefits of such institutional frameworks.
Take for example, the high outdoor advertising fees DFS operators have to contend with at agent locations. As one executive told us:

“It is still a big issue for us, the cost of paying the Lagos State Signage and Advertisement Agency (LASAA) fee. One sign is the cost of two signs. So if you take away that cost, we actually could brand more agents.”

B. DFS Regulation
Structure
The CBN leads DFS regulatory efforts through a licensing process supported by supervisory guidelines, the first of which was launched in 2011. One industry executive likened the early release of guidelines to birthing your first child prematurely.

This initial regulatory framework described three regulatory models for both bank and non-bank DFS operators and their target customer segments. Through subsequent policy amendments, two models were retained but still lacked clarity on customer segmentation thereby increasing competition between banks and non-banks.

“When we started, there was bank-led, bank-focused and non-bank-led. Now, it appears the framework has changed to let banks actually do mobile money on their own without working in consortium with independents and without focusing on their customers. We never thought we’d be competing against the bank; we thought that we would be creating value that the banks could leverage.”

Over-licensing
Aside from having over twenty licensed MMOs, the CBN has been granting super agents licenses since 2015. These super agents encompass some of the business functions of existing DFS operators and are perceived to lack solid value propositions.

“We have a little disagreement with CBN over super-agent. There are, at least, two super-agents. They have not done anything for me, but I have a guy in somewhere in the South who has a network of people. Why can’t I use him? Why does he have to be registered as a super-agent?”

Regulating DFS pricing
Despite high operational costs and low DFS demand, DFS fees and charges are regulated i.e. fixed. This presents a different kind of problem: the cost to serve remote and rural areas (where exclusion is high) far exceeds the cost to serve urban regions where the demand for mobile money is relatively low due to deeper financial systems. As one executive noted:

“Mobile money can’t thrive in the urban areas for the fact that we already have banking access. But if you get it into rural locations and you are pricing it the way they should price it in urban areas, then there is no way you are going to make any money from it.”

2. Operational
A. Consumers
Despite Nigeria’s high mobile telephone penetration, device ownership is yet to cover some of the vulnerable populations, a reality which is frustrating government-led initiatives to drive DFS adoption. For example, distribution of mobile devices was one component of the government e-wallet agriculture scheme. It was discovered that beneficiaries stopped using the DFS channels either due to their low socio-economic status or the absence of a sustainable value proposition.

“We’ve done projects in Zamfara, far north. And you begin to see that when you have government-to-person payments, people generally embrace this. But, immediately the disbursement stops, they also go apart. And the reason is simple: they feed from hand to mouth, they don’t have the money to save, so they do have a saving problem not because the technology is not available.”

B. Lack of Awareness
Another area where government support is seemingly lacking is in building nationwide awareness, especially among rural dwellers. Respondents believed the CBN was dropping the ball in their media communications and messaging. For example, the optics being used in cashless policy media campaigns appear to deemphasize (and even de-market) mobile money MMOs while recognition of licensed operators as a form of endorsement or validity is missing.

“Now, there was a time that there were adverts being done by CBN for the cashless policy. The picture in the advert contains people with cards and POS terminals and then in small print underneath was also mobile money and some other things, like bank transfer, etc. The emphasis… was more about card and POS and it should have been about mobile money…”

3. Physical
A. Locations
Financial exclusion is highest in rural and remote areas of Nigeria. In some of these areas, the nearest bank branch is a 45-minute drive away. This dearth of financial service points makes a good case for the establishment of a strong distribution network via agents. But unfortunately, our agent network is still quite weak and would require significant capital commitment. While this supports the case for participation by mobile network operators (who have built an extensive distribution network), the regulatory framework explicitly prohibits their leadership of DFS initiatives.

B. Infrastructure
The range of infrastructure constraints that impact the technology operations of DFS businesses range from power supply to telephone network quality, access and reliability across supported technology channels.

C. Financial
In the case of DFS operators with external financial sources, the investment opportunities and potential are limited by regulatory inconsistencies and guidelines. For example, the inconsistent policy statements made by different representatives of the CBN has been worrisome to operators and their investors alike:

“I think the issue has been that the regulator or the CBN Governor, at times, waver in a speech and are not firm about their regulations. And that wavering is a bad signalling to all investors. A number of times investors asked me, ‘Is the regulation going to change, is this going to happen?”

In Conclusion
Despite the varied capabilities of DFS operators, their biggest constraint remains the regulatory environment. This study reveals that DFS businesses lack the enabling environment and cross-cutting industry collaboration necessary for them to thrive.