The Myth Of Nigerian Mobile Payments Monopoly

“The unbanked have been unbanked for a very long time and there is a reason why they remain that way. Banks have been around for centuries and there is a reason why they don’t have everyone as customers”

The statement above was made by a speaker at the recent Mobile Money Connected World event in Dubai. It sparked a lot of debate between bankers and non-bankers like me and it was a healthy debate where everyone gained some knowledge and insight into each other’s industry.

Tunde Lemo a Deputy Governor at the Central Bank of Nigeria (CBN) has excellent credentials and has had my respect for a long time. He was brought into the CBN at a time banking was being ruined by bureaucrats who were out of touch with the industry they were regulating.  He has done well for his primary constituency “the banking industry” and continues to do well for them by protecting them against impostors like the telcos and others.

The first time I heard that he made a definitive statement about the mobile payments framework in Nigeria was at the AITEC banking conference in Nairobi last year. He was said to have pronounced that the Kenyan model where Safaricom is dominant will NEVER be allowed in Nigeria. I found it strange at that time that such a highly respected figure was making definitive statements about an industry still in its infancy. He was not having a debate, he was making a pronouncement. I thought that maybe he was misinterpreted the first time as I was not there while he was making the statement. I however heard him again the second time loud and clear when it was widely reported in the media that he said and I quote:

 “We cannot licence telcos to be operators of mobile money because they lack the capacity to do so. What we are doing in Nigeria is to licence mobile money operators and then ask them to go and discuss with the telco who will provide them (licenced operators) with the technological platform for their business.

licencing telcos as mobile money operators would bring untold hardships to consumers as the mobile operators could hold the economy to ransom. “It is like this, they (telcos) have the technology to drive the mobile money business. What will happen if they are licenced is that they would make it extremely difficult for the other operators using their platforms optimally because they would seen as competing operators.”

"the Kenyan experience was not a good model for Nigeria. “I am sure if the Kenyan central bank had to do it again, they would do it differently because what Mpesa has done is to create one big monopoly for the country. A single operator controls 90 per cent of that country’s mobile money payment, is not really good enough for any economy.”

MPesa may have its flaws but it has been successful and has been widely praised (and hyped) globally for the way it has transformed the East African economy. One thing that has to be made very clear is that MPesa is NOT a monopoly and monopolies are impossible to achieve in mobile payments or any utility without active collaboration by the regulators or governments. The most celebrated telco monopoly was AT&T in the United States and that was before mobile phone technology became prevalent.  With current technology enabling  IP telephony, MVNO models and Mobile Number Portability, a monopoly is almost impossible to achieve in telecommunications.

What is a Monopoly?

I do not make any pretensions to being an economist as my exposure to economics is limited to 2 semesters in my MBA, arguments in my MSc class and reading several journals like this one here on "The Myth of Natural Monopolies" by Thomas J DiLorenzo

From my pedestrian knowledge of economics, a monopoly is defined as:

“The exclusive possession or control of the supply or trade in a commodity or service.

Such exclusivity can come either from business combinations by the existing players to form a single entity or mandated by the government in the case of  franchise utilities or concessions. The case for government mandated monopoly is based on the weak argument for "Natural Monopolies" which Thomas Dilorenzo insists do not really exist. One of those government created monopolies was recently enacted by the CBN - the National Central Switch. I gather that a memo was recently approved by Mr. Lemo himself instructing (not encouraging) all players to interconnect via the NCS.

I made the case for telcos in a previous post as the best organizations to help scale mobile money simply because the current experiment had not worked after one year. I also said that the infrastructure to enable mobile payments succeed in Nigeria is already in place as the telecommunications companies have put in a lot of investment to build it over the years. These same telecommunications companies are already doing a lot of micro-transactions in form of airtime transactions of immense magnitudes and that industry is currently the most competitive with winners being those who provide ubiquitous access and deliver the best service.

In Thomas DiLorenzo’s argument against so called Natural Monopolies":, he reiterated the consensus amongst economists  that:

“Large-scale, capital intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process. “

He also stated that:

“The word "process is important here. If competition is viewed as a dynamic, rivalrous process of entrepreneurship, then the fact that a single producer happens to have the lowest costs at any one point in time is of little or no consequence. The enduring forces of competition-including potential competition-will render free-market monopoly an impossibility”

He argues that regulators and governments knowingly or unwittingly create monopolies and not free markets. An example of such a monopoly being created in Nigeria is the National Central Switch. I now believe that it is a very bad idea.

Mpesa was never a monopoly but a very successful model that all others have tried to emulate in the emerging markets with varying degrees of success. The CBN as a regulator is also within its rights to make policies and provide the best framework that would improve the payments process in Nigeria but such policies should not be made out of imaginary assumptions but rather empirical evidence. The only people complaining about the success of MPesa in Kenya are the banks and not the customers. The banks have deliberately excluded a large proportion of the population from their services over the years because they could not justify the cost of infrastructure to enable micro transactions for such customers at scale. The telcos could do it and they did very well while at the same time competing with each other. A lot of economists actually argue that large-scale production and economies of scale should ideally be seen as a competitive virtue, not a monopolistic vice

What is an Oligopoly?

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists).A general lack of competition can lead to higher costs for consumers

Banking in Nigeria after multiple consolidations is becoming an Oligopoly. The same bankers control the successful switching companies as they support their own and kill others. In my opening statement I mentioned that the unbanked have remained that way for a reason and that reason is simple, they provide lower margins to the bankers as the cost of reaching them does not justify the investment in infrastructure requirements.

The infrastructure problem

Telcos and Banks can never fairly compete for access to the unbanked because while both industries have their own infrastructure, the telcos have indeed deployed the infrastructure to reach these people at the bottom of the pyramid while the bankers have concentrated on the higher layers. Telecommunications enjoys the benefits of economies of scale while banking thrives on protectionist policies and exploitation.

Telecommunications itself is a capital intensive industry and the single most effective barrier to entry by competitors had been infrastructure costs. That model is also rapidly evolving as the regulator encourages shared services and puts in place measures like number portability to ensure that customers are not boxed in. Telecommunications is dynamic and evolving, the real question should be why is banking not evolving the same way? Why is the regulator not actively encouraging shared services and infrastructure? It seems the regulator’s policies protect a few players at the detriment of the general public. Free market policies will actually help change the face of banking and ensure that bankers themselves realize the need for investment in infrastructure.

The telecommunications industry itself was a victim of the flawed banking model in Nigeria. I remember when the licenses for GSM operators were being issued, the local banks were lukewarm players as they did not take an active role in the investment process. The decision was justified at that time because telco funding requirements dwarfed the capitalization of most Nigerian banks around then. They also felt it was a risky and unproven terrain and made tepid attempts at syndicating capital.

I remember how difficult it was to raise a loan of 7 Million Naira for the operating offices of Econet Wireless Nigeria when I was involved in the startup stage of that project. I had to get members of the board to provide guarantees of exclusivity for collections from dealers to get simple loans from a local bank. It then made sense for the companies to seek investment from outside Nigeria. When the telecommunications companies became successful, there was a rush by the banks to handle their cash. The real fight between telcos and banks in payments is about cash and float, it is not about service or market share.

The way forward

It can be argued that the CBN’s directive to banks to divest from other non-core activities would raise professionalism in the industry, it has however put more pressure on the banks to control what they seem is their turf from others. It should however be made clear that payments is not banking, it is a service that can be offered by the banks in conjunction with others. All successful payments initiatives have the backing of the banks but are actually not led by them. Visa or MasterCard are not owned by any bank but are service companies.

I do not believe that the ex-post attempt at the rationalization of CBN’s decisions based on the fear of monopoly can be justified in any way because the telecommunications industry in Nigeria has a strong regulator who prevents such practices. Nigeria is not America where the regulator granted AT&T monopoly status. One telco appears dominant because the investors have put in a bit more resources. Granted that Telcos are not interested in payments for totally altruistic reasons, the competitive dynamics already at play in mobile payments will actually be in favor of the smaller telcos than the larger ones as they continue the process of scrambling for market share. The smaller telcos would actually have more at stake as they bring new innovations to the market and try to tip the balance. This is a dynamic process.

It would be in the interest of both regulators to work together to draw up an all-inclusive framework that is not based of the fear of the unknown but deterministic expected outcomes. The framework for mobile payments in Nigeria should concentrate on service and not players. Licensing and regulation should not become a vindictive exercise for the banks to try to get back at the telecommunications companies or protect turf; it should be an exercise that takes into consideration the actual needs of the common man in the street. I respectfully disagree with the monopoly argument by Mr Lemo and the CBN and I think the framework needs a review. 

*Thomas J. DiLorenzo is professor of economics at the Sellinger School of Business and Management, Loyola College.

His text quoted liberally in this post was published in

The Review of Austrian Economics Vol. 9,No. 2 (1996): 43-58

ISSN 0889-3047

2 responses
Good to see another one of your excellent articles. Tunde Lemo (I hope he reads this) unfortunately is the proverbial one eyed king in the CBN land of the blind. His pronouncement speaks more about his blind and loyal sentiment to banking colleagues and to a Nigerian system of exclusive banking than to any real understanding about mobile banking or even the whole concept of financial inclusion. In short he sounds just like David Mark who once said cell phones were not for the poor!

Truth is that if mobile banking should work anywhere it should work right here in Nigeria because you are basically dealing with an environment with lots of people who want to make lots of little transactions.

The Nigerian banking model of an airconditioned building on a main street with 3 or 4 well-paid tellers wearing suits and ties is nice if you are mimicking a street in London or the US and wish to attract Nigerians with nice fat bank balances but it has its limits in serving millions of traders, students, artisans who all want to withdraw, deposit and transfer sums less than 5,000 naira.

The banks with their existing setup know this. But they like to pretend that technology will solve this. So, they talk about e-business and POS and ATM and the skallywags amongst them use it all as an opportunity to enrich themselves through back--door contracts.

But the POS has limits in the informal setting of Nigeria as the last cashless policy rollout quickly showed. The ATM zero fee has no relevance to people who are dealing in a few naira notes (i.e. 2555) here and there or who basically dont know how to operate one. Then what about deposits? Can you deposit money in most ATMs or POS's in Nigeria? Can you transfer money to someone else with an ATM or POS?

Thats why mobile banking became a hit in Kenya. It made it easy for someone with a few shillings to keep balances on their phone with their trusted operator. They can make deposits easily into their m-account. They can make transfers to friends and relatives easily. And best of all they dont have to travel great distances at a great cost to do it at a banking hall. Thanks to Safaricom and the DFID. .

But trust Nigerian bankers like Tunde Lemo to ape the London banking system and then create bizzare legislation in order to act superior when it comes to innovation from another African country. He criticizes the Kenyan regulator but maybe he needs to travel to Kenya to fundamentally understand the importance of letting markets grow before coming out with regulation. Kenya took the same wait and see attitude that is behind technological innovation and success in general.

He should certainly visit Kenya and learn a few things. Like James Mwangi's Equity Bank which unlike Nigerian banks happens to know how to serve the poor properly and profitably including giving them loans.

Interesting post, the bit I don't get is where the banks fit in, because the way I see it, the banks don't have a say...or is it a case of CBN protecting their own?