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Kenya’s cross-network money transfer plan stalls as others press on

By Frankline Sunday | September 16th 2018

Kenya’s cross-network money transfer plan stalls as rest of Africa forges ahead

Before 1978, sending and receiving money across the borders was a complicated and costly affair, and many millennials may not understand how it used to be done.

Typically, the sender was required to submit a detailed set of instructions to their bank manually, describing key verification details, including the receiving country and bank, bank branch, the currency in question and the receiver’s details.

The payment instructions would then be keyed into a teleprinter (predecessor of the fax machine) through a telex network and decoded on the receiving side for the payment to be credited or debited.

This system was cumbersome, costly and prone to human error because of the inherent differences in language, currency values and the manual input process involved.

The international financial system was also undergoing a revolution characterised by an expanding global banking system that traversed borders as well as new technology such as fax machines and computers that provided an opportunity for disruption.

These conditions brought together more than 200 banks from 15 countries to figure out a way to surmount this common problem and a simple solution was achieved.

Transaction details would be coded in a format agreed upon by members. Instead of manually keying in the details, bank tellers making transactions would only need to input the codes, for instance, BBA for Barclays Bank and KEN for Kenya, which would then be decoded on the receiving side and the transaction verified and approved.

The banks formed a neutral corporate entity to run the network and manage the code system. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was created and went live in 1977.

Less than a year later, the number of banks on SWIFT had doubled and more than 10 million messages transmitted.

Today, SWIFT is considered a backbone of international money transfers with a network of more than 11,000 financial institutions across 200 countries.

SWIFT is a case study of how interoperability between financial service providers can enhance financial inclusion and provides key indicators of where digital finance is headed next.

Mobile money transfer has been a disruptive force for the global financial ecosystem over the past 10 years. Today, the new innovation in payments fuelled by changing user behaviour and decentralisation of technological platforms and systems is ushering in the move to the next digital payments ecosystem.

Despite the runaway success of platforms like M-Pesa in facilitating real-time peer-to-peer financial transactions, the majority of transactions (90 per cent) are still made in cash.

In addition to this, more than 1.7 billion people, largely in developed countries, are still locked out of the financial system, with women and disadvantaged groups facing higher levels of exclusion.

“Mobile money has been key to achieving financial inclusion in East Africa and other regions in South America,” explains Kosta Peric, deputy director of the Bill and Melinda Gates Foundation’s Financial Services for the Poor Programme.

“Our next challenge is to scale this further to achieve full financial inclusion hopefully in our lifetime and we are advising governments and the private sector to embrace interoperability as a means of achieving this,” he explained.

Mobile money services today are costly and operate in closed loops by service providers who charge consumers extra to transact across networks.

Most mobile network operators attach strategic and commercial value to their mobile transfer services owing to the capital investment spent on building and maintaining the networks.

This has made negotiations to link the networks together and with third party service providers like banks and merchants in Kenya achieve limited success with no cost savings to consumers.

Little progress

Earlier this year, Safaricom and Airtel launched a six-month pilot on interoperability, with Telkom set to join in later. Today, nine months down the line little progress seems to have been made.

It costs M-Pesa users Sh11 to send Sh350 to other M-Pesa users, but Sh45 to send the same amount of money to Airtel Kenya users. Users get a message with a code that they present at M-Pesa agents who are often reluctant to make the transaction.

Development partners and investors like the Bill and Melinda Gates Foundation and the UK’s Department for International Development (DFID) that lent seed money to pioneers of today’s fintech revolution like M-Pesa are now putting seed money on the next big thing -- interoperability.

“So far, mobile money operations tend to be closed loops that restrict consumers to transact with only those in their own networks,” Mr Peric said.

“To achieve full financial inclusion, we need to embrace interoperability between mobile money wallets and between mobile wallets and bank accounts.” Interoperability is also expected to bring institutional and large volume payees such as utility companies, state ministries and county governments plugged into the network.

Already, several mobile network operators (MNOs), central banks and fintechs across the continent are exploring ways to facilitate this model both intra-country and regionally.

The South African Development Community (SADC) is one example where regional efforts by fintechs, MNOs and commercial banks to create a regional interoperable payments system are gaining traction and delivering early success.

In 2013, SADC countries established the SADC Integrated Regional Electronic Settlement System (SIRESS) as the foundation of the bloc’s ambition to create real-time settlement among banks and their customers across the 15 countries. 

SIRESS is a shared settlement platform operated by the South African Reserve Bank on behalf of member states, with payments settled in the rand, the most utilised currency among SADC member states.  

“The shared settlement platform serves to create a common denominator - the rand among the countries and reduces risk by simultaneously settling cross-border credit and debit obligations between banks,” explained Elizabeth McQuerry and Cici Northup, partners at economic think tank Glenbrook Partners in a study on SIRESS.

“The roles and responsibilities of all the participants are described in a common reference manual, which also outlines the different operational processes, including wholesale payments as well as other payment streams,” said the economists. Each member-country created domestic policies and benchmarks to ensure their systems passed the security and user-friendly yardsticks agreed upon by SIRESS members.

Today, SIRESS is widely used by 83 financial institutions across 14 countries, including central banks. As of April last year, a total of 733,597 transactions valued at $244.74 billion (Sh25 trillion) were settled through SIRESS.

Another successful deployment of interoperability is in the Economic Community of West African States (ECOWAS).

ECOWAS-member states, including Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, formed the West African Economic and Monetary Union (Waemu) sub-regional bloc.

Waemu provides member states with the platform to fast-track financial interoperability among financial institutions in the region alongside an ambitious project to create a free-trade area.

The World Bank is supporting the project through a Sh12 billion grant meant to help member states develop and strengthen unified identification systems such as birth certificates, unique identification numbers and online personal ID systems.

These will form the basis of a database where Waemu member states can verify users’ transactions.

“Roughly, 53 per cent of the population of the ECOWAS region (196 million people) are unregistered and do not have proof of identification,” said the World Bank in a project appraisal document on Waemu published earlier this year.

The movement of peoples within ECOWAS is seven times that of any other SSA sub-region and 70 per cent of all ECOWAS migrants travel within the region. At the same time, the ECOWAS region is host to large populations of displaced and stateless persons due to historic and ongoing fragility, with approximately 2.7 million internally displaced persons and 300,000 refugees. 

This presents an opportunity for platform-agnostic payment and transfer systems to level the playing field and achieve full financial inclusion among ECOWAS countries. Ismail Ahmed, founder and chief executive of money transfer service World Remit, said adopting full interoperability would provide benefits for both service providers and their users.

“The cost of domestic money transfers is quite high,” he explained. “The model we have now as World Remit is we have to make individual connections between our platform and service providers in each country we operate,” he said.

Other ways

Mr Ahmed said interoperability would connect transactions to a central hub and cut a lot of costs associated with running individual networks that run parallel to each other.

“Interoperability would grow the number of customers to operators’ platform and there is a case for domestic transfers to be free and operators can find other ways of monetising this traffic,” he explained.

Aside from providing financing for interoperable systems, development partners are backing technological solutions that offer answers to some of the concerns of service providers.

“We have noticed projects to develop interoperability platforms take time to roll out,” said Bill and Melinda Gates Foundation’s Mr Peric. “Service providers hire developers who have to put together a solution from scratch that pass several commercial and security metrics.”

This becomes expensive owing to costly development fees and the need to accommodate MNOs’ commercial demands. Because of this, most commercial solutions only allow partial interoperability that leave the retail costs to consumers more or less the same or higher when transacting cross-network.

Through the Financial Services for the Poor (FSP), the Bill and Melinda Gates Foundation has developed the Mojaloop solution - a free and open-source software published on Github that facilitates large-scale deployment of interoperable financial transactions.

Made public

“Mojaloop facilitates interoperability for tens of thousands of transactions of very small amounts per second,” explained Mr Peric. In contrast, at its peak during the busy season of December last year, M-Pesa recorded 529 transactions per second.

“We have at least five projects today globally that are running Mojaloop on a pilot nation-wide or regional scale and the first project will be made public by the end of this year,” he said.

Mr Peric, however, said a robust regulatory oversight is a key to ensuring a shared platform between commercial providers and central banks to guarantee the payment platform works to serve the poor.

“Interoperability grows the market and the pie becomes bigger and all MNOs benefit the same way SWIFT broadened the market for international payments 20 years ago,” explained Mr Peric who worked as head of innovations at SWIFT.

Following the wide-scale adoption of SWIFT, average messaging volumes increased by 380 per cent while unit costs have fallen by more than 90 per cent over a 15-year period.  

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