Why Equity Bank Felt It Had to Become a Telco – Reluctantly

In April 2014, the Communications Commission of Kenya licensed three companies with Mobile Virtual Network Operator (MVNO) licenses. MVNOs ride on the communications infrastructure of existing mobile network operators to provide services to end users. Equity Bank, the largest bank in Kenya, has received one of these licenses and will be using SIM overlay technology to allow additional functionality to operate independently of the SIM itself. In this blog, Ignacio Mas and John Staley explain Equity Bank's decision to become an MVNO.


Photo Credit: Jay Bendixen

If you are an African gadget manufacturer, you do not want to have to produce your own electricity to run your machines. But if your local electricity company's service is unreliable, you take matters into your own hands: you buy a generator or solar panels. Now you are in the electricity generation business, and you may even sell some back to the grid. Would this be a case of gadget-electricity convergence? Would that be a case of you wanting to eat the electricity company's lunch? No: you did it because you wanted to retain control over your business. Total dependence on a single electricity supplier would have simply become unacceptable.

Something like that is happening to banks in Kenya. Clearly, money is tending to go digital, and digital content is tending to go mobile. So just like the gadget factory needs to secure reliable electricity, banks need to secure reliable access to the mobile channel through which so much of their service is increasingly served up to their customers. And in Kenya, the mobile telecoms scene is dominated by one player.
There are three reasons why Equity Bank determined it would be risky to invest heavily on a new mobile banking business that relied on that operator. First, without access to the secure elements (or encryption keys) embedded in the chip in the SIM card, Equity Bank could not guarantee the security of transactions as they travelled over the operator's network. That's hard for a bank to accept.
Second, you must remember that this dominant mobile operator is also a keen competitor of banks in the basic money transfer and microfinance business. So a key competitor was deciding at which price banks could buy access to the mobile channel through which they had to offer their service. This problem is aggravated by the fact that the specific mobile channel banks need (USSD, for security reasons), is not very extensively used commercially by anyone other than banks. So it becomes too easy for the operator to offer very expensive USSD service – and just impact their bank clients with that.
Third, without access to the mobile phone menu, which is controlled by an application in the SIM card, banks have to send their service menu options back and forth over the air each time a customer enters a piece of information about the transaction they wish to do (e.g. what type of transaction do you wish to do, enter amount, enter PIN, etc...). All this over a USSD channel whose quality has been highly variable – again, only impacting banks and practically none of the rest of the operator's business. Thus, the speed of banking transactions, and hence the quality of the customer experience, has been erratic and transactions often time out.
So these are the three elements of mobile channel control that Equity Bank felt it needed to take back: full security, reliable speed and fair price. By becoming a mobile virtual operator, Equity Bank can take control of its customers' SIM cards, and through that of the secure elements and banking menu on their phone. It has also secured favorable pricing on substantial volumes of mobile connectivity across all channels. 
Equity Bank's only purpose in becoming a Mobile Virtual Network Operator (MVNO) is to gain more direct control over the experience that its customers will have when they access Equity's mobile banking services. To the extent that Equity customers use the telecommunications services that come along with their new SIM card, that will help to pay for costs associated with the roll out of the MVNO. But Equity does not see it necessary to fight the operator in its core business: all it needs is to break-even on the telecoms part.
As an MVNO, Equity will run all the services that mobile operators typically offer, but without managing the network infrastructure or owning the radio spectrum over which they run. All that is outsourced to the MVNO host: the mobile network – in this case, Airtel – from which Equity has negotiated a basic connectivity service off-take agreement.
Banks shouldn't have to become telcos in order to deepen their mobile banking offer. But if banking, telecoms and competition authorities do not address the fact that increasingly telcos are an essential-component supplier as well as a competitor to banks – a clear conflict –, the choice for banks will be stark: sit out the mobile money revolution until such time that everyone has smartphones, or else join the telco club and get on with the job of financially including people.
--- Ignacio Mas is an independent consultant and Senior Fellow at the Fletcher School at Tufts University, as well as at the Saïd Business School at Oxford University. John Staley is Director of Finance, Technology and Innovation at Equity Bank.


20 June 2014 Submitted by Mike Makwani (not verified)

About Time:

Equity bank provides one of the three thrust necessary to release the grip of the MNO on the Kenyan market; The other two data and voice, equity is going after VAS:-if apart from delivering its own services it provides an available and affordable VAS platform, then we might see a 100B $ global company from Kenya in the near future:

Then equity itself needs to be countered otherwise it might fall pray to its own success.

01 September 2014 Submitted by Perry Myers (not verified)

I think that the route Equity have taken is interesting but the article implies that the Telco's should be regulated against for banking type services. I am not sure I agree. Firstly I don't think M-Pesa would have been successful if the regulator had been too onerous in the beginning - we can see the impacts of heavy regulation in other countries and it stifles uptake. Secondly you should look at the example of Mpesa's M-Shwari savings and loans product - this is a partnership with CBA bank. CBA have gone from being a fairly small player in the Kenyan retail banking sector to being number 2 in just 12 months. This is a happy example of Bank and Telco partnering for mutual benefit. In my view Equity simply want to own all the financial transaction (if they make some money out of the telco bit that's great too). - they want the velocity of money in their system and not the Telco's - its simple. You say that want end to end control of the customer experience - but this only relates to the SIM based Menu - they are still dependant on the Airtel SMS or USSD network to transmit the transactions. Don't get me wrong, I think it's a bold move by Equity but really the only move they could make where they have lost the competitive advantage - but lack of regulation around telco's and mobile money is not to blame.

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