Bitcoin in Africa? Not yet.

I was going to write about how bitcoin could help to improve economies in Africa through its efficient and low-cost secure method of transferring money. But after doing a fair amount of research, and realising that many of the companies mentioned in the press over the past year as being the “hope” of the future have since closed down, I’ve changed my mind. Instead, I’m going to write about how hard it is for a bitcoin-based company to do business in Africa. It’s not impossible – there are some success stories. But the advantages of bitcoin at this stage are not as obvious as they might seem. The theory is excellent. But the reality is complicated.

bitcoin in africa

Photograph by Robin Hammond for National Geographic

First, let’s talk about the promise. According to the World Bank, 66% of adults in Africa do not have a bank account. They deal in cash and in barter, with considerable lack of efficiency and security, and scant possibility of escaping that hand-to-mouth cycle. With bitcoin, they could effectively have a decentralized bank account and manage their finances more carefully, with control over what comes in and what goes out. Families could start to save and even lend. Payments would become easier and cheaper, leading to significant savings in both time and money. Current mobile money payment systems are efficient, but have a high fee structure. Bitcoin’s decentralization and security could economically empower those that are traditionally at the margin of the economy.

The ease and low cost of sending bitcoin anywhere around the world makes it the potential saviour of remittance services. Approximately $53bn was sent to the region in 2015 by workers abroad, with fees averaging 12.4%. Remittances cost more in Africa than in other areas – the world average is 7.8%. There are five remittance “corridors” (flows between two countries) in the world with fees over 20%, all of them in Africa. Using bitcoin, the fees would come down drastically, with the savings going directly to the beneficiaries.

The potential is huge. But the reality is very different.

Bitcoin has limited end uses in Africa. Very few merchants accept it as payment, and it can’t yet be used to pay for utilities or public services. That will change, but slowly. Bankymoon, a South Africa-based blockchain financial services company, has developed smart electricity meters that can be topped up from anywhere with bitcoin.

To be able to buy bitcoins on an exchange, you need access to a computer or a smartphone. Relatively few Africans have that. It is true that the majority of the adult population has a mobile device, but only 15% have a smartphone. According to the International Telecommunication Union, only 37% of adult Kenyans had access to Internet in 2014. In Ethiopia, the figure is 2%. So, buying bitcoin is possible but not simple, and the number of exchanges that can trade local African currencies for bitcoin is limited. Most require an initial conversion to dollars or euros, which significantly increases the transaction costs.

So, buying bitcoins is not simple, and even if you receive bitcoins as a remittance from a family member or friend working abroad, changing it into local currency on an exchange is difficult. Those without a bank account would need to find an agent willing to exchange bitcoins for cash. They do exist, but their scarcity and the technology access required allow them to charge very high fees for the service.

And bitcoin as a remittance rail has competition. Innovative international payment methods are eroding the incumbents’ market share by offering much lower fees. In Kenya, for example, WorldRemit, Equity Direct, and even new e-cash services offered by incumbents Moneygram and Western Union can transfer money for less than 5%. Of course, the low fee structure depends on electronic transactions. Once cash is involved, the fees shoot up.

And regulation, or the lack of, is an important structural problem. Although Nigeria’s Central Bank hascalled for bitcoin regulation, no country has it in place or is even, as far as we know, working on it. Kenya’s Central Bank issued a warning in December against Bitcoin use, citing its unregulated status. Unregulated does not mean illegal, but it does create obstacles for bitcoin exchanges, wallets and payment systems.

Regional differences and market size are also a complicating factor. Kenya alone, for instance, is not a big enough market to attract the funding needed to reach profitable scale. According to IMF estimates,its GDP is roughly equivalent to Bulgaria’s, and significantly less than Luxembourg’s. Each country has its own currency and phone system, so compatibility issues are barrier to rapid continent-wide expansion.

On top of the “typical” problems that startups have to face, new businesses in Africa also have to contend with relatively poor connectivity, recruiting difficulties and electricity outages. Africa has always been a very entrepreneurial continent, but at the micro level. The cultural and logistical difficulties of setting up cross-border businesses; recruiting, training and retaining a qualified team; the general lack of political and economic stability; high interest rates; limited access to funding… These and many other factors make the launch of scalable, profitable enterprises even more challenging.

In May of last year, Disrupt Africa ran a story on “5 African Bitcoin Startups to Watch”. Of the five, one shut down, one pivoted away from bitcoin, and one has had a major payment ramp blocked. Further digging uncovers several others that have closed down, and the bitcoin sector is littered with tombstones of good ideas that came to market a bit before their time.

And yet, bitcoin’s time in Africa will come, and its effect on the continent’s economy will be significant. Some remarkable businesses are struggling hard to make this happen. The use cases are much clearer there than in Europe or the US, where credit cards are ubiquitous and mobile payments are easy. The impact it can have on people’s lives is much greater. With persistence and brave first-movers, with rationally enthusiastic public comment and constant dialogue, regulators will see the economic advantages of further encouraging financial innovation. Tech hubs are springing up all over the continent, creative entrepreneurs are attracting international interest, and a lot more than transaction fees is at stake.

(This post also appears in fintechblue.com, where I write about bitcoin and fintech.)

Sunday Seven: bubbles, progress and celebrity

There were a ton of great articles this week, so many that I had to arbitrarily choose which made it into this summary. Not an easy choice. I’ll be tweeting the rest over the next few days, so follow me on Twitter at @noelleinmadrid. (And I’m still trying to figure out WHAT is going on with the formatting here… Several posts seem to have disappeared from the feed, along with my sidebar. Working on it…).

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Secondary Shops Flooded With Unicorn Sellers – by Connie Loizos, for TechCrunch

Is that the popping of the bubble that we hear? This may be premature, but if you take the jug of cold water that this article delivers in terms of evidence that unicorn valuations are falling fast, and combine it with increasing and vocal concern about the state of the world economy, you may start to hear that much-feared (but probably inevitable) sound.

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Not Another African Tech Article – by Clinton Mutambo, for TechCrunch

image via TechCrunch

image via TechCrunch

Speaking of popping bubbles, I finally found an article that questions the tech world’s interest in Africa and points out how hard it will be for us from the “western world” to apply what we know to their circumstances. See? Even that sentence sounded a bit condescending. Clinton recommends that we stop thinking that they need our help, and just step back and watch them grow their own way.

“The lack of data and “exotic charm” of Africa makes it an easy target for baseless, heavily flawed or downright ridiculous content. This benefits no one, as it has the effect of painting a false picture about the continent and each of its 54 diverse states. Everyone from potential investors to collaborators is made more ignorant by most articles.”

As Clinton points out, “technology doesn’t operate in a silo”, and the evolution of the sector is inextricably entwined with its cultural, social and economic development. And that needs to be left up to the Africans. We should try to avoid the colonialist mistakes of the previous century.

“There shouldn’t be a tug of war this time around. Extending perceptions of such only advances exploitative tendencies that have contributed toward the challenges in Africa.”

And enough with the paternalistic articles that treat Africa as one entity. It isn’t.

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The highly profitable, deeply adorable, and emotionally fraught world of Instagram’s famous animals – by Corinne Purtill, for Quartz

hedgehogs

Ok, so I’m including this article mainly because of the adorable pictures. However, its tongue-in-cheek take on the role of social media is worth reading.

“The pet world on Instagram is as stylized and edited as the human one. Fur looks pristine. There are no litter boxes in sight. The lighting is perfect. Even animals on social media live better than you do.”

There is actually a celebrity dog management agency. Not kidding.

All this leaves me with the feeling that Instagram is replacing TV in the crazy fame stakes.

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The financialization of news is dimming the lights of the local press – by Ken Doctor, for NiemanLab

An in-depth and penetrating macro, big-picture article on the news industry and the decline of print publishing. Ken starts by painting a relatively apocalyptic picture of the world economy:

“The data points have been coming at us increasingly rapidly. What had been just a long downward slide is now getting wacky. Erratic behavior on one side of the country is quickly trumped by weirder happenings on the other, until even more befuddling news makes us forget the oddities of last month. These are all signs of a deeper reckoning than all the reckonings we’ve so far seen. And as bad as it the U.S. right now, also consider the deepening plight of our northern neighbors in Canada and the tinderbox that Europe is becoming.”

… and continues with the demise of local and print news:

“Print is dying, and that’s not news — it’s just news that the news industry itself shies away from publishing, believing the nonsense that publishing the truth is a main cause of the decline. It’s not news reading that’s going away, though: that’s grown by leaps and bounds. It’s still the great digital disruption of local newspapers’ monopoly businesses that has caused the major impacts — impacts greatly exacerbated, sadly, by publishers’ own inability to reinvent themselves for the new age.”

The “financialization” of the press – the running of media companies on a profit basis – is inevitable in this disruptive, fail fast, media-as-an-investment cycle. But it is also gutting the spirit of reporting, and commoditizing our attention even further.

“Yes, money matters, but it’s that beating heart of the business — creating news that local citizens need to run their governments and better their lives — that still has to be an antidote to the single-minded financial view of local news. (If “the market” won’t support local news, many have said to me, than maybe it isn’t needed. I ask them: If the same were true of education, the arts, or even roads, where would our struggling democracy be?)”

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A Declaration of the Independence of Cyberspace – by John Perry Barlow

This is absolutely not from the past week, it’s from 1996, but it should be taken out, dusted and re-read every now and then. It may sound a bit dated, but it’s surprising how still relevant it is, and it’s fascinating to see how far the internet world has veered from its initial libertarian motivation of sharing information.

“Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.

We have no elected government, nor are we likely to have one, so I address you with no greater authority than that with which liberty itself always speaks.”

Apart from the sentiment which will make your heart beat just a little bit faster, the declaration contains stunning (if at times grandiloquent) language:

“You are terrified of your own children, since they are natives in a world where you will always be immigrants. Because you fear them, you entrust your bureaucracies with the parental responsibilities you are too cowardly to confront yourselves… In our world, all the sentiments and expressions of humanity, from the debasing to the angelic, are parts of a seamless whole, the global conversation of bits. We cannot separate the air that chokes from the air upon which wings beat.”

While awakening the debate about regulation/safety vs. decentralization/freedom (reminiscent of the debates around bitcoin), Barlow does point out that the Internet exists in and because of the physical world, that it is not completely separate.

“Cyberspace consists of transactions, relationships, and thought itself, arrayed like a standing wave in the web of our communications. Ours is a world that is both everywhere and nowhere, but it is not where bodies live.”

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The chips are down for Moore’s law – by M. Mitchell Waldrop for Nature

Moore’s Law is reaching its natural end? Now what?

“Every time the scale is halved, manufacturers need a whole new generation of ever more precise photolithography machines. Building a new fab line today requires an investment typically measured in many billions of dollars — something only a handful of companies can afford. And the fragmentation of the market triggered by mobile devices is making it harder to recoup that money.“ As soon as the cost per transistor at the next node exceeds the existing cost,” says Bottoms, “the scaling stops.””

So, this is where ingenuity and innovation take over.

“At least some industry insiders, including Shekhar Borkar, head of Intel’s advanced microprocessor research, are optimists. Yes, he says, Moore’s law is coming to an end in a literal sense, because the exponential growth in transistor count cannot continue. But from the consumer perspective, “Moore’s law simply states that user value doubles every two years”. And in that form, the law will continue as long as the industry can keep stuffing its devices with new functionality.

The ideas are out there, says Borkar. “Our job is to engineer them.””

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What will the bank of the future look like? – by Taavet Hinrikus, via the World Economic Forum

Maybe I’m obsessing a bit too much over banks this week, but there are some interesting ideas worth thinking about. Banks are changing, that’s obvious. As they should, that’s pretty obvious, too. Or is it? And what do we want them to change into?

“The most important result will be the true democratisation of finance. The nature of the current “bundled” model of banking is fundamentally unfair. The costs of the system and the profits of the banks are overwhelmingly accrued from fees and charges that hit the poorest hardest.”

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2 things I really enjoyed this week:

· A classic from the Ink Spots, circa 1940 – “Whispering Grass”. Just listen to the words. It’s not often you hear a crooning song about “babbling trees”.

· A hypnotic and truly inspiring book: Humans of New York. If you don’t follow the account on Tumblr, you should. The book is a collection of some of the more interesting anecdotes (although how he can choose is beyond me, they’re all really interesting), each one showing the incredible variety and creativity of the human spirit. I plan to look at this again and again and again.

humans of new york

humans of new york 1

Monopolies, innovation and Kenya’s mobile payments success

Imagine needing to send part of your wages home to your parents, and not having time to take it to them yourself since they live five hours away. So you hand the envelope of cash to the driver of the bus that runs that route, and ask him to hand it over for you. Imagine needing to pay your electricity bill, and walking for an hour just to get to the office. Then you stand in line for two hours before being able to hand over the necessary amount of cash. Before 2007, Kenya’s financial payments infrastructure was dependent on low-level cash transactions, the liquidity-strapped post office and personal favours. Increasing urbanisation intensified the need for a secure and efficient way to send money back to families in rural areas, and it took a telephone operator to come up with a solution.

image via CoinTelegraph

image via CoinTelegraph

Kenya does not strike the casual visitor as being in the forefront of financial technology, nor a world leader in mobile innovation. With a population of 47 million, 45% of which lives on less than $1.50 a day, and with GDP per capita 157th in the world ranking, it is too easy to label the country an “emerging economy”, and condescendingly assume that corruption and lack of infrastructure will make true technological progress difficult. Which is why its breakout success in the complicated field of payments is both inspirational and humbling, and gives us insight into why mobile payments innovation does not work so well elsewhere.

M-Pesa is the world’s most successful mobile payments story. Launched by Kenyan telecom company Safaricom in 2007, it now has over 20 million accounts, and is used by 76% of the adult population. Approximately 66% of Kenya’s national payments volume passed through M-Pesa in 2014. In other words, it’s a very big part of the country’s economic infrastructure, and its success has inspired similar attempts in the developing and in the developed world.

Yet nowhere does it work as well as in Kenya. The GMSA mobile money tracker estimates that there are approximately 260 similar experiments going on, with another 100 in the pipeline, in 72 developing countries. In almost all cases, stricter regulation, more evenly distributed competition and relatively efficient alternatives – present in virtually all developed economies and with at least one factor present in most developing ones – are hampering growth. To put Kenya’s success into perspective, Japan has the highest mobile money use in the developed world, but still nowhere near that of Kenya in absolute terms, even though its GDP is 45 times larger. Half of all global mobile transactions take place in Kenya.

How does it work?

M-Pesa accounts can be set up by any one of Safaricom’s 85,000 agents around the country. All the agent needs to see for verification is an identity document, which makes it much easier to open than a bank account. Once the account is open, the customer can hand the agent cash, in exchange for which Safaricom issues electronic tokens in the same denomination as the national currency (the shilling).  These e-shillings can be wholly or partially transferred to other M-Pesa account holders via SMS to make payments, or can be sold back to Safaricom in exchange for cash. There are no charges for deposits, but a scaled fee is charged on withdrawals and a flat fee on transfers.

The beauty of this system is its simplicity. It can be used on even the most basic of mobile phones. The ability to make payments across the country by pushing a few buttons has not only made remittances much more efficient, but has also made paying bills easier, which reduces costs, increases transactions and improves the circulation of money. Those without a bank account have a reliable place to store money, which encourages savings. Rural families are finding it more worthwhile to invest in education, since graduates can now successfully work in the city and easily send money home. And for the first time women can manage their own money, investing it in their businesses, educating their children… One study found that in rural Kenyan households that adopted M-Pesa, incomes increased by 5-30%.

image via IT Web Africa

image via IT Web Africa

How did it get so big so fast?

After launching in March 2007, M-Pesa signed up 20,000 customers its first month, 2 million by the end of its first year, and within three years was servicing almost 50% of the country’s adult population. That percentage has now increased to almost 80%.

This explosive growth took even Safaricom by surprise. Although in retrospect, the cumbersome difficulty of making payments pointed to a definite need. Also, the infrastructure was in place. Setting up cell towers was more economical and practical than laying land lines in such a disperse and rugged terrain, so the telephone operators focussed on mobile communication coverage. In 2007 when M-Pesa launched, 33% of adult Kenyans had a mobile phone, while only 3% of households in Kenya have a landline connection. At mid- 2014, approximately 80% of Kenyan adults had a mobile phone.

Safaricom also had the intelligence to rapidly cultivate a network of agents trained to help people set up their M-Pesa accounts, and to load it up with money in exchange for cash. It now has over 85,000 agents, or 1 for every 500 Kenyans. This may seem like a high fixed-cost base, but the limited regulation of the agents enabled profitability – they were viewed as intermediaries rather than banking service providers. And pretty much anyone could become an agent: Safaricom airtime dealers, bank branches, gas stations, supermarket chains, dry cleaners, couriers…

Safaricom’s strong market position – it currently holds approximately 70% of mobile phone contracts – also helped the expansion of the M-Pesa program. Mobile payments business suffer from what is known as a “network effect” problem. The value of a payments system to the customer depends on the number of people actively using it. The more people on the network, the more useful it becomes, but how do you get people on the network until it’s useful? Unless you can send a payment to just about anyone you need to send a payment to, it’s probably not worth your while. Few will bother to open two mobile payment accounts just because some of the people or businesses you transact with are on another one, especially if it means extracting your SIM card and inserting a new one each time you want to switch networks.

The government’s relatively relaxed attitude to monopolies and its awareness of the need to increase the financial inclusion of the population led it to choose to not regulate Safaricom as a financial services provider. This kept costs down and gave the company considerable latitude in keeping the sign-up procedure simple. It also enabled speed. M-Pesa evolved from concept to country-wide launch in 4 years, and achieved scale less than 3 years later. M-Pesa has since launched in India and South Africa, but overzealous regulation has constrained growth and forced fundamental changes to the business model.

Innovation: sell more people more products

Once people are using M-Pesa, getting them to add other financial services is not that difficult. In November 2012 Safaricom teamed up with the Commercial Bank of Africa to launch M-Shwari, M-Pesa’s savings and loans cousin. M-Pesa users can get loans without even having a bank account, simply by filling out a form. Commercial Bank uses customers’ phone records as a credit history. Since launch M-Shwari has opened over 10 million accounts, and grants about 50,000 loans every day. One third of active M-Pesa accounts are also M-Shwari users.

In March of this year, Safaricom and Kenya Commercial Bank launched KCB M-Pesa, also offering mobile money loans but with higher limits, longer terms, and different rates and repayment structures. By June, it had managed to sign on 1.8 million users, and by October, the number had reached 3 million.

One of the limitations of the M-Pesa system has been its limited geographical reach, which will slow down its growth as market saturation approaches. Unless, of course, regional telecoms can find a way to work together. Earlier this month the leading Rwandan telecom operator and Safaricom announced a “corridor” that will allow mobile money transfers between the two services, boosting regional remittances and cross-border trade. We can assume that other similar agreements are in the pipeline.

Competition: friend or foe?

Yet few success stories go unregulated and with little competition for long.

Last year Safaricom’s competitor Airtel, which holds approximately 22% of the Kenyan mobile market (but only 3% of the mobile money market), filed an official complaint against Safaricom’s mobile money, demanding that M-Pesa’s agents also be allowed to set up competing mobile money accounts. The Communication Authority of Kenya ruled in its favour, and the over 85,000 M-Pesa agents can now also offer competing services.

In July of this year, Kenya’s Equity Bank launched Equitel, a mobile payment and banking platform. It hit almost 1 million subscribers almost instantly, by issuing free SIM cards to its 8.7 million bank account holders. Equitel also issues “thin SIMs” that can be used in conjunction with Safaricom SIMs, which allows users to switch between operators whenever they want. Safaricom has tried to block this innovation in the courts, citing data security risks.

In August a consortium of banks announced the impending launch of Switch, an interoperability service aimed at recovering some of the lost money transfer revenue.

Safaricom still has a dominant position, but the fight is just beginning.

So, will increased competition in mobile payments be good for the market and the economy as a whole? The question is more complicated than it seems. As we saw earlier, mobile payments platforms suffer from the “network effect”, in which without mass adoption, it’s not worth using, so you won’t get mass adoption. A monopolistic position helps. And the profitability that a monopoly guarantees encourages infrastructure investment, which spreads use even further.

But, monopolies tend to stifle innovation, not encourage it. High prices maintain networks, at the cost of the user. And eventually, a monopoly will reach market saturation, with users eager for better and cheaper alternatives.

Interestingly, the Competition Authority of Kenya has ruled that “market dominance does not a monopoly make”.

This fundamental conflict raises even more very important questions.

Is it possible to maintain simplicity while diversifying services? One of the main reasons for M-Pesa’s success has been its simplicity. An easy sign-up and loading process and an uncomplicated interface encouraged even the most technologically reticent to give it a try. The extra “user experience” barrier of having to choose between different mobile payment networks would almost certainly have put a speed bump in front of the rapid expansion. Network-switching, a cluttered menu and complicated fee structures for complex services could counteract the positive impact of broadening reach. Starting with one monopolistic provider encouraged a wider use than had several players tried to enter the market at the same time. Yet once the cultural barriers to initial adoption have been overcome, customers will look for better alternatives. And advances in technology and the use of data to identify needs and patterns make it ever more possible to design simple systems that offer complex solutions. It’s not easy, but it’s possible.

Is it possible to achieve profitability without the network effect? Safaricom deserves to profit from its backing of this life-changing development. It has invested heavily in expanding its infrastructure, building cell towers in remote areas, increasing speed and improving the connectivity of the population as a whole. And let’s face it, it came up with a great idea, and executed it successfully. Yet the fees are relatively high, and 45% of Kenyans live below the poverty line. Without going into the social debate, that obviously leaves the field wide open to lower-priced competition. The cultural barriers to technology adoption are lower than just a few years ago. And technological advances bring costs down, and make interaction even easier. So, while 8 years ago the answer would most likely have been no, that’s not the case today.

And M-Pesa has indeed been profitable. M-Pesa accounted for 20% of Safaricom revenues and helped total profit jump 38% to 31m Kenyan shillings in the financial year 2014/2015. It achieved revenue growth of 23%. That growth is likely to slow down as competition enters the market, but as the economy as a whole has benefitted and will continue to benefit from enhanced efficiency, higher savings and improved circulation of money, it is safe to assume that telephone usage across the board will grow. More open competition will most likely foster even more innovation, both in technology and in business models.

Meanwhile, the success of M-Pesa will continue to serve as a useful case study of brilliant innovation, good management and luck. Eight years ago it would have been virtually impossible to reach such market penetration so fast without a dominant market position, low regulation and inefficient alternatives. Today the situation is different. Technology, infrastructure and customer needs have advanced. A large part of that advance is due to what M-Pesa achieved. Their profit margins on mobile money will almost certainly shrink as they lower prices to stay in the market. And innovative competitors will offer new services that customers will switch to. This will continue to benefit not only Safaricom and its competitors, but also Kenyan businesses and the economy as a whole. The ripple effects of the success of the M-Pesa launch will most likely be felt for a long time to come.