I am an optimist with strong convictions about the future. I embody the kind of
definite optimism which believes that innovations will give us better, more
prosperous, freer & longer lives. Am actively working on a better future. I
refuse to accept that an innovation-driven future is a childish illusion.
With this, let me highlight three beliefs:
- Dissatisfaction is important: Not the pessimistic kind, but the constructive one. Accepting what we have around us is OK but it can better & improved.
- Imaginative people are not a scarce resource, but courage is. People always have some idea to a problem, but for the majority entrepreneurship is risky.
- There is no formula for innovation & there never will be. They benefit largely from randomness.
Perspectives are important and their influences have a big impact on people &
society. In this case, I would like to explore why Mpesa is a wrong perspective
to think about innovation.
In Kenya, the success of M-Pesa is hard to
ignore. It has transformed lives and the impact is unquestionable. This post is
going to highlight why Mpesa is a terrible example to benchmark and influence an
ecosystem. This is part one of a series where I share my perspective & notes on
innovations.
NB: All currency here are denoted in Dollars ($), and there is a huge
oversimplification of reality.
Revenues & Debt
In January 2019, Safaricom launched Fuliza. An overdraft credit service. Recent half-year numbers are really impressive:
- ~$10M in daily loans.
- 395.2% annual interest rate. 1.083% daily rate.
- 1.8% default rate.
At 600 days old (Jan 2019 - Jun 2020), they are on track to give upwards of
$3B in loans by end of the year. Double of what all local banks gave in
personal loans last year ($1.76B). Rough calculations of revenue from
Fuliza, assuming averagely people pay the loans in a week, 3*0.07 =
$0.21B = $210M.
Assuming $800M revenue from Mpesa doesn’t drop, they
are on track to rake
$1B in annual revenue!
Also worth noting, Ant group which operates Alipay is going public with a valuation of >$200B,
credit accounts for 40% of their revenues. Mpesa has taken the personal loans
market from banks and up is the direction for Fuliza numbers.
Valuation
So what’s Mpesa valued at? Benchmarking from other Fintech
companies which are valued at 13x - 22x of their revenues, Mpesa market cap
might worth over
$10B i.e 13 X 800M = $10.4B.
From my previous post, I highlighted that Safaricom, the parent company of Mpesa, the market cap is at $10B,
but I think this might be grossly undervalued by 1/3 - 1/2.
Mpesa accounts
for 1/3 of Safaricom’s revenue.
Happy to get a divergent opinion on this.
Missed 1 Trillion Dollar Opportunity
10B valuation is big for a
50M person local market but a fraction on a global scale. In contrast, their
competitor’s valuations are way bigger. Market cap for Visa is at $401.373B
& Paypal at $231.46B.
Posit a world where the 2.5B unbanked people
are served with Mpesa. What would be the value of such a global product? Mpesa
annually makes ~$30 per user
($1000M (revenue)/33.1M (active users)). Assuming all factors constant, the total global annual revenue would be 2.5 * 30 = $75B.
Sticking with our 13x revenue, Mpesa valuation would be $975.2B.
2010 - 2020 has been a lost decade for Mpesa and it begs the question of what
went/is going wrong? I beg to propose several theories.
Theories on missed opportunity
1. Government Interventionism
35% of the Safaricom is
government-owned. Governments are weird. My favorite dislike is how we assume it
should be structured. We often refer to the government as an engine, static, and
Newtonian like a rule in physics, say gravity. But this is wrong. Governments
should be a living thing, ever-evolving, dynamic & more Darwinian. With this
thinking, what are the implications in the governance of Safaricom?
Politics starts playing a bigger role & innovation takes a back seat. Individual
incentives look better than the organization’s incentives. Politeness is often
prioritized over success. It’s tough to expect the political junkies to think
outside the window or anything beyond the present.
‘You’ve got local
territory why expand? It’s daring, risky, tiresome, and unpredictable, let’s
just be comfortable. We don’t want to threaten our main tax contributor.’
This is not unique, you look around and all government ran industries are less
profitable, less efficient, and less innovative. From transport, energy,
agriculture, the list goes on.
2. Product Vision
When using Mpesa, if you swap the smartphone with a
feature phone, you will be forgiven to think the world hasn’t changed in 10
years or the internet doesn’t exist. The evolution of the Mpesa product is
questionable. The cost of service has gone up but the quality of the product has
remained subpar. Am not pessimistic. I still don’t get why you need a sim card
to use it.
The magic stops once you step out of the Kenyan border or worse
anywhere without a proper Safaricom network coverage.
3. Third Word Product
A far fetched theory, maybe Mpesa has failed to
scale globally because there is a prejudice against products that don’t come
from Western, Educated, Industrialized, Rich, and Democratic countries. However,
internet companies (e.g TikTok) have proved this wrong. Good products +
underserved markets win. Finance is such a market.
Final Thoughts
There is a huge difference in how innovation was brought to the market 100 years
ago and currently. The internet broke the barriers that existed previously. It
is faster to build and iterate.
M-Pesa has received all the incentives
from the government, it doesn’t get any better than this. They are a clear
unregulated monopoly despite refuting this. They are a bank but are treated like
a software product, so no bank like fees. But they are still at $10B. The
deathmatch in Fintech that Africa & the world is experiencing is a revolution
that Mpesa brought but has failed to capture maximum value.
Therefore it
is terrible narrative to use Mpesa as a go-to idea on how government can help
nurture innovation. Governments are inimical to innovation. At best they tend to
maintain a comfortable low-innovation equilibrium.
Interventionism is a
Faustian bargain, short term gains, long term pains. They give us the idea that
the government should solve our problems but in retrospect, the government is
the problem. In this case, Mpesa lost sight of what matters in terms of product,
market and impact.
Thank you for reading.
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