CASE STUDY: MOBILE MONEY SERVICE
Introduction:
The government of Ghana has been concerned with the low savings culture, low financial inclusion, and high cash-based transactions in the country. In 2005, the government decided to pursue policies to grow the financial services industry (FSI) as it was indispensable for the accelerated economic growth required to make the country a middle-income nation. Key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population remained excluded from any form of financial services.
There is generally a high cost of credit in the country as banks complain of difficulty in mobilizing deposits. Ghana is said to have one of the highest lending rates globally, placing second in the latest ranking released by Trading Economics, a development identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2010 to 8.5% in 2016, respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organizations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of the mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile network operators. This allows mobile money to be operated wherever there is network coverage. It is estimated that there is 65% mobile network coverage in Ghana.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in urban centers to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, even in the most remote areas. The capital requirement for registration as a mobile money agent is GH¢4,000, and the daily transaction limit is currently GH¢5,000. On average, agents operate one network’s mobile money, while very few agents have signed up for two or more different mobile money solutions. The total number of agents has increased from about 17,467 in 2013 to 93,376 by the close of 2016, and the National Communication Authority (NCA) has projected rapid annual growth for the next three years (2017-2019).
The Environment: Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as an increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower-income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require is a registered SIM card on the network of choice and a valid national ID. With these, they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are, however, more complex due to stricter Know Your Customer (KYC) requirements by the Central Bank. Remittances through mobile money are instant at a fee of 1% of the amount remitted or received. Mobile money transactions in Ghana reached GH¢679.17 million by the end of June 2016, according to the Bank of Ghana’s Payment Systems Department, and it is expected to hit GH¢35 billion by the close of 2017. Until very recently, the income from mobile money was not taxed but the Minister of Finance, in his 2017 mid-year review, hinted at plans to impose a tax on the fees from mobile money operations.
The mobile money operations face issues of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet the cash demands of customers due to a mismatch in net remittances. This is more pervasive in rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank has tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2018. The government believes that mobile interoperability will deepen financial inclusion.
Regulation: Mobile money services have operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service requires stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal: The Board of Directors of Excellent Telephone Service Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented a five-year estimate for the new venture as:
| Year |
0 |
1 |
2 |
3 |
4 |
5 |
| GH¢’000 |
|
|
|
|
|
|
| Cost of capital asset |
(200) |
|
|
|
|
|
| Total investment in net working capital |
(20) |
(25) |
(30) |
(35) |
(35) |
|
| Gross Fees |
|
250 |
300 |
350 |
350 |
300 |
| Direct and other costs |
|
(155) |
(185) |
(215) |
(215) |
(195) |
| Depreciation |
|
(40) |
(40) |
(40) |
(40) |
(40) |
| Interest |
|
(24) |
(24) |
(24) |
(24) |
(24) |
| Profit |
|
31 |
51 |
71 |
71 |
41 |
| Net total assets |
220 |
200 |
211 |
220 |
240 |
190 |
For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per annum.
Required: a) Assess THREE environmental factors faced by Excellent Telephone Service Ltd. (6 marks)
b) Analyse the competitive environment of the mobile money segment using Porter’s Five Forces. (10 marks)
c) Identify and explain FOUR critical success factors for successful mobile money service operations. (6 marks)
d) Determine the viability of the project using the Net Present Value (NPV) technique and advise the Board of Directors whether to invest or not. (12 marks)
e) Recommend THREE strategies which the Board of Directors could implement to give Excellent Telephone Service Ltd a competitive edge. (6 marks)
