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Safaricom faces M-Pesa break up in market dominance war

Thursday February 23 2017

Safaricom chief executive officer Bob Collymore (left) and Communication Authority (CA) director-general Francis Wangusi at an event in Nairobi on June 29, 2016.  FILE PHOTO | NATION MEDIA GROUP

Safaricom chief executive officer Bob Collymore (left) and Communication Authority (CA) director-general Francis Wangusi at an event in Nairobi on June 29, 2016. FILE PHOTO | NATION MEDIA GROUP 

By JAINDI KISERO
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Telecoms operator Safaricom could be forced to hive off its popular mobile money service M-Pesa if sector regulator, the CA, moves to implement recommendations of a market dominance report.

Separating the highly profitable mobile money service from Safaricom’s core telecoms business – commonly referred to as functional separation - is the gist of a raft of recommendations that international consultants
- Analysys Mason - have made in a yet-to be published report seen by the  Business Daily. 

“The two businesses would be required to operate in separate offices, with separate staff below board level, separate branding, separate accounting and separate business operations and support system, customer support systems and management information systems,” the report says, adding that it would however stop short of separating M-Pesa and Safaricom into different legal entities.

The Communications Authority of Kenya (CA) hired the consultants as part of it effort to find an appropriate legal framework for regulating abuse of market dominance and anti-competitive behaviour that began in 2010.

The outcome of the telecoms market study was informed by the formulation of new competition regulations in Kenya – a market of three players.

The mobile money business, dominated by Safaricom’s M-Pesa, has been of particular interest to telecommunication sector regulators – given the market concentration force it has had in the market and its runaway success as a player in the financial services market. 

Although the proposals by the consultants are still far from being implemented and will have to be discussed by stakeholders before being introduced, they are bound to raise concern in the Safaricom boardroom not only because they raise the spectre of excessive regulation, but also because the proposed regulatory regime appears to target mobile money - one of the fastest growing parts of the business.

The report found that Safaricom is able to set tariffs independent of the market forcing customers to pay higher tariffs relative to other mobile money markets across the world.

Lacks competition

It also found that the Kenyan mobile money market is also lacking competition in comparison to Tanzania, for instance.

Although it has not accused Safaricom of abuse of dominance, it notes that preferential treatment given to Safaricom partners such as the Commercial Bank of Africa (CBA) and the Kenya Commercial Bank (KCB) could be deemed uncompetitive.

To remedy the situation, the report recommends higher level of interoperability in the market by December 2017 or Safaricom be forced to hive off M-Pesa into a separate company.

Safaricom chief executive Bob Collymore said he had not seen the report, but bristled at the prospect of an external party ordering the company to break up its business.

“I am pretty hostile to the idea. We can’t have other people dictating whether we break up our company or not,” he said.

Airtel Kenya declined to comment while Telkom Kenya did respond to queries on the subject.

Hiving off M-Pesa would increase Safaricom’s operational costs as it would come with a duplication of support services. 

Mr Collymore agreed that the industry needs greater cross-platform interoperability even as he argued that the process should be driven by market forces rather than regulatory intervention.

The proposed wallet-to-wallet interoperable system would allow a consumer to keep cloud accounts across the platforms of different mobile companies, making it possible to move and shift money between accounts as one chooses.

The consultants have also recommended the establishment of an ‘agent to agent interoperability’ -- an arrangement where agents support multiple mobile money platforms using what is described in technical language as ‘a single float’.

Thus, what Anasysys Mason has proposed is an arrangement that is similar to the payments exchange platform that commercial banks recently introduced.

Fundamental changes

 Charges for mobile money transfers to international registered users (on-net). SOURCE: COMPANY REPORTS

Charges for mobile money transfers to international registered users (on-net). SOURCE: COMPANY REPORTS

Still, it remains to be seen whether the changes proposed in the regulation of mobile money are implementable, especially in the time frame proposed.

It may require fundamental changes in the national payments system - including introduction of far reaching amendments the National Payments Act.

Telcos do not have an independent central clearance and settlement counterparty that can help manage exchange of remittance instructions between them.

Commercial banks are the only approved members of the National Payments System, with the Central Bank of Kenya playing the role of the clearance and settlement counterparty.

Secondly, telcos do not have a single trust account shared by all players. Third, a deposit protection mechanism will have to be developed and introduced before some of the proposals, such as interoperability, can be implementable.

The CA declined to comment on the subject, insisting that the draft report is undergoing internal review. 

“The authority does not consider it appropriate to discuss recommendations of a draft report that is still undergoing internal review,”   it said in a statement.

Anaysys Mason found that Safaricom’s dominance in the mobile money business and in other retail mobile telecommunication services such as SMS and voice are mutually enforcing – making it difficult for other small operators to be profitable.

Kenya’s two other operators, Telkom Kenya and Airtel, “are amongst the least profitable mobile operators in emerging markets.

Analysys Mason has therefore proposed far-reaching changes in the regulation of abuse of market dominance in the retail mobile communications market.
Tower sharing

Top on the list is a proposal that Safaricom should provide 2G, 3G and 4G roaming on its network through regulated tower sharing for a period of five years.

This is to enable all players to provide service where they do not have base station coverage.

Although the consultants have not proposed that Safaricom should provide these services to its competitors for free, charges will have to be based on a prescribed formula.

The report has also recommended ‘replicability of retail tariffs’ meaning that  whenever Safaricom is deciding a promotion or a loyalty scheme -  for instance ‘Bonga points’ or ‘Storo’ -  the regulator must check and ensure that the offer is being profitably replicated by a reasonably efficient competitor.

The report adds that at least five days before launching a new tariff, loyalty scheme or promotion, Safaricom should provide justification that the proposal can be replicated by a reasonably efficient operator on the basis of certain parameters.

The dominant player should also be made to open USSD and SIM application tool kits to all licensed content providers, the report says.

New rules and prohibitions have been proposed on on-net discounts, including a suggestion that Safaricom should not be permitted to charge different rates for on-net and off-net calls or messaging to any customers’ under any circumstances’.

Additional reporting by Muthoki Mumo