Analysis – The New Payment Instrument Issuer Directive and The Future of Fintech in Ethiopia

NBE has issued the long-awaited directive that will regulate payment instruments issuers which includes mobile money, wallet and similar digital financial services in Ethiopia.

The new directive titled “Licensing and Authorization of Payment Instrument Issuer Directive No. ONPS/01/2020″ is poised to replace the previous Mobile and agent banking directive that paved the way for the likes of M-Birr, HelloCash, CBE-Birr, Amole, and other mobile money services to flourish.

The 2012 directive had allowed banks and microfinance to provide mobile money service via agents. With that, customers were able to sign up at an agent or branch location and be able to transact up to 6,000 birr daily and have a maximum account balance of 25,000 birr. In addition, Banks and MFIs were allowed to partner with technology service providers through either software acquisition or revenue sharing arrangements.  

What’s new?

The new directive is a game changer when compared to the former as it paves way for the creation of a new type of financial service providers beyond the usual banks and microfinance. It introduces Fintech’s or also referred to by the national bank of Ethiopia as “Digital financial service providers” or DFS providers in short.

This arrangement is taken from other countries’ experiences such as Nigeria where financial technology companies (Fintech) are licensed by the regulator to provide a limited range of financial services.

This move is partly attributed to the low performance of banks and microfinance in delivering their promise of financial inclusion and eased digital payments using mobile. Our internal research shows, Banks and microfinance in Ethiopia have rolled out a total of 18 mobile money services via partnerships with fin-techs or directly acquiring the technology and rolling out on their own.

So far, Banks and MFI’s are not able to succeed as the likes of M-Pesa did in Kenya. All mobile money platforms in Ethiopia acquired a total of around 8 million customers to date, around 20,000 agents. Their set of services are also limited to sending money and a handful of payments. However, one could argue it will not be fair to compare the success of a telecom led mobile money like Mpesa against banks led mode mobile money platforms and point that both are operating in a different context.  

Anyhow, these numbers are considered quite low for a country with a population of over 100 million people and 45 million mobile phone subscribers. The results are further dimmed down when we start analyzing beyond registered customers and focus on the number of active monthly users.

Some of the key reason for this low performance of Fintech sector includes bank-led mobile money model which was adopted by the national bank, the regulatory obstacles for service providers,  the low level of attention of the banks and Mfi’s for digital financial services and the limited capacity of service providers. The contextual limitation on the market side when it comes to digital, financial literacy and telecom coverage can be considered as well.

It seems the national bank has also understood the impact of its decision in choosing a bank-led model back in 2012 when it issued the mobile and agent banking directive. As a result, it has been forced to evaluate its policy and accommodate a hybrid model that allows not only banks and MFI’s but also fintech companies to be a service provider for mobile money and other digital payment instruments.

The Directive has also introduced the tiered KYC concept, whereby customers would have 3 levels of account type based on the level of Know your customer (KYC) procedure they go through. Accordingly, a customer with level 1 account will be able to register through referral by other customer and not required physically visit a bank branch  or agent as it was in the past and is able to hold up to 5,000 Birr and transact up to 1,000 birr daily while Level 2 and Level 3 customers are required to present a valid ID card and transact up to 5,000 and 8,000 daily and can have a balance of up to 20,000 and 30,000 birr respectively.

Another small but very critical change also includes the acceptance of electronic receipts as a mode of transaction confirmation which removes the past requirement of providing paper-based receipts for cash in and cash-out transactions.

This directive can be both an opportunity and a barrier for potential service providers who are looking to deliver digital financial services. Let’s have a look at the potential winners and losers.

The Losers

The banks and micro-finances are on the loser’s bench in this directive, whereby they now have to compete not only with each other but with the much more innovative and fast-moving fintech companies in the digital financial services front.

In addition to losing their exclusive right as a service provider, banks and MFI’s may actually lose customers and money from their conventional banking services as their market share is posed to be eroded by new types of service offered via digital platforms.

Secondly, Fintech companies who have been in the market for years either as a technology service provider to the banks and MFI’s or simply scoping the market will be in quite a shock when finding out they are not able to fulfill the criteria of being a business fully owned by Ethiopian and/or Ethiopian origin foreign nationals are also known as the “Diaspora”.

This particular requirement will alienate the locally registered fintech companies who have non-Ethiopian shareholders or raised external funding from foreigner own funds.

Global fintech players would also be scratching their heads while reading the directive since Ethiopia is considered as one of the major markets in Africa which offers big opportunities for digital payments and financial services.  

Local fintech startups can be considered as both winners and losers depending on their ability to meet the capital requirements which stand at 50 Million birr (1.5 Million USD), their capacity and appetite to go through the strict due diligence and inspection of the regulator to get the license.

Small scale startups will have a difficult time raising the capital requirements especially since they can’t raise money from and it is not easy to find local investors. Looking at the strict regulations like the need to have NBE’s approval on the assignment of directors and senior management, strict operational procedures and amount of reporting required, the directive can’t be ‘startups friendly’.

The Winners  

Local fintech is poised to be the main beneficiaries of this directive, whereby they now have a seat at the table to deliver financial services along the banks and MFI’s using digital-only platforms. This, of course, is subject to the local FinTech being able to raise enough capital to meet the regulator requirement and compete with highly liquid financial institutions

Ethiopian born foreign nationals will now have the opportunity to bring in their international experience, technical skills and capital to the fintech space. This particular segment is well positioned to raise the necessary funds and tap into their global network to deliver digital banking solutions.

It is important to mention that this directive only allows a single individual or companies to own up to 20% of the entity which provides DFS and a minimum requirement of 10 shareholders. Even though this might seem small for investors and entrepreneurs , it is a diversion from the conventional limit of maximum 5% ownership by a single individual in other financial institutions like Bank and MFI’s. However, the above restrictions are not applied for entities owned by the government.

Is it time for Ethio Telecom to Shine?

Ethio Telecom, one of the biggest in Africa and the monopoly telecom service provider in Ethiopia has long been expected to be a disruptive player if it enters the fitech space. As it stands, Ethio telecom is the backbone for each and every technology related service in Ethiopia as it provides the telecom infrastructure for all banks, fintech and government institutions.  

Ethio Telecom has shown an interest in launching mobile money which until now has not been able to as the space was open only for Banks and MFIs. You think about it , Ethio Telecom has already ventured into microcredit, crowdfunding and a limited range of payment services using Airtime. Matching this with its vast network of agents, 44 million subscribers with a complete KYC database and a highly prominent brand, gives Ethio Telecom unparalleled edge to be a dominant player.

Ethio telecom would definitely benefit from this directive and is able to launch mobile money while we will need to see further on how this will work out in line with the government plans to partially privatize the telecom giant. A subsequent entry of foreign shareholders in the company will disqualify it from providing digital financial services as a foreign-owned company can’t get a payment license according to the directive.

This also applies to new telecom players expected to join the Ethiopian market following the liberalization policy which aims to issue two telecom licenses in 2020 for global telecom operators which might include players like MTN, Safaricom and Orange.

Also, worth to mention that Ethio telecom and other existing companies who want to become a DFS provider would need to establish a subsidiary company that specializes in financial service.

What is Next?

Going forward we will have three types of DFS providers offering a range of electronic payment instruments including mobile money, online payment, card banking and payment aggregators using mainly mobile apps, USSD, and internet mediums. There will also be a few who would use smart cards, QR codes, and biometrics.

New DFS players would bring a new dimension to the market where they are expected to move more aggressively in their deployment and launch an innovative product and service when compared to banks and MFIs.

Banks and MFI’s will continue to provide their own DFS products while a new generation of Fintech will apply for this new license. EthioTelecom will most likely establish a subsidiary and get into the game as well as the likes of Hidasse Telecom and Postal services which have a vast distribution network in the country.

There will be a potential synergy between Banks and fintech companies where they will be able to come together with avail service that utilizes both the customer base, liquidity and vast coverage of banks and MFI with the more agile technology, speed of deployment and innovative business model from fintech players.

Existing major Fintech players would try re-negotiate their contracts with banks and MFI’s and prefer to proceed as a Technology service provider for the time being, assuming, they are still allowed by the regulator to continue using revenue sharing modality ( which is unclear at the moment).  Some banks may also take the opportunity to establish a subsidiary fintech company that will specialize in digital banking solutions.

Considering that existing mobile money service providers are given a transitory period of 6 months to comply with this directive and the amount of the time required to establish new fintech, no significant change will occur in the coming 6 months. A new wave of DFS products might hit the market by the last quarter of 2020.

At the same time, there remains regulatory clarity to be made regarding the fate of foreign-owned telecom companies ( which could eventually include EthioTelecom) whether mobile money could be regarded as a telecom service or a banking service governed by this directive and restricted to Ethiopian owned businesses. 

As seen in other emerging markets, Payment is the first use case to grow. But the next wave of products to flourish will include remittances, saving, lending, investtech and insurtech mainly using the distributive advantage of matured payment infrastructure. The new directive provides a regulatory channel for this second wave of products to evolve as it allows payment instrument issuers to develop micro-saving, miro-credit, micro-insurance and pension products through outsourcing agreements with licensed financial providers or pension funds.

As we conclude, we find that the new payment instrument issuer directive of NBE will definitely accelerate the digital financial services and play a major positive role in moving the country to the digital economy through financial inclusion, easier digital payment and as an enabler for the growth of E-commerce and electronic based on government services.

The directive will also allow existing and potential service providers to enter the banking sector and establish a digital-first approach to banking which will add convenience and alternative ways of doing banking to clients.

Ethio Telecom can now expand its business into mobile money as long as it is able to successfully pass the potential obstacles it will face once it proceeds with the privatization process. The directive also serves as a wakeup call to banks and micro-finance who have been slow to move from their traditional brick and mortar approach to the digital front as they will now have technology-focused fintech layers who can be a competitor or strategic partners as they enter the digital banking era.

It will also be important to note that the directive only serves as a regulatory framework for digital financial service in Ethiopia and it doesn’t guarantee success on its own. All stakeholders would need to use the directive as a foundation to design and deploy products and services that aim to achieve the financial inclusion and digital payment strategy of the country while ensuring their business goals.

Similarly, the directive would only set the stage for the players and the actual losers and winners are only to be determined at the finish line when they enter the market to launch their products/services  that will convince a sufficient number of  customers and achieve the critical amount of the 100 million-plus market.

By Tewodros Tassew

Tewodros is a FinTech Consultant specializing in Digital Financial Services and Payments. He can be reached via email on teddytassew@gmail.com