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Positive reaction to Telkom’s financial services adventure

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 03 Aug 2020

Analysts have welcomed Telkom’s move into financial services, saying it will bring the telco’s strategy more in line with the other mobile network operators’ expansion into adjacent markets.

Telkom announced yesterday it has branched into the financial services market by launching a life insurance business.

With the move, Telkom has joined other mobile operators in SA that have ventured into financial services, which has become a global strategy for many operators as they evolve into ICT-based service providers.

In SA, leading operators MTN and Vodacom have already made headway in financial services.

MTN has seen mass adoption of mobile financial services, with around 32 million 30-day active Mobile Money customers.

Similarly, Vodacom has over 40 million active financial services customers and has intensified its desire to grow its financial services unit, launching a financing product for small to medium enterprises, called VodaLend Business Advance.

Yesterday, Telkom also announced its move into the competitive space, promising to offer financial solutions to empower businesses and individuals.

The move has sparked enthusiasm among analysts.

“The mobile network operators (MNOs) have an opportunity to service certain customer segments with a range of services suited to these segments, often at a lower cost than the traditional banks. Therefore, there is an opportunity for the MNOs to participate in this market. It is a question of their go-to-market strategy,” says telecoms analyst at Africa Analysis Dobek Pater.

“This will bring Telkom’s strategy more in line with other MNOs – expansion into adjacent markets. It will allow Telkom to develop an additional revenue stream over time. This forms part of a broader MNO strategy to evolve into an ICT-based services provider beyond only telecommunications.”

According to Pater, Telkom’s wading into financial services is highly feasible, even though the sector is extremely competitive.

“Despite strong financial institutions, SA continues to have a fairly large segment of underbanked and unbanked consumers and a large informal business sector (small/micro businesses). The traditional banks have been developing products suitable to these segments to ‘formalise’ them but there is still room for the MNOs to participate. Mobile money and mobile banking services address two broad groups of customers.”

Pater says MNOs typically have two advantages over traditional banks, as they have a larger customer base to leverage and extensive infrastructure, often with population coverage in excess of 90%.

He believes telcos have the potential to become large purveyors of financial services in SA.

“As the financial services sector evolves, there will be space for players other than just the traditional banks. The banks themselves are transforming into digital financial services providers (including the digital-only banks we are seeing emerging in SA). We are also seeing an increasing prevalence of fintech companies which typically play in niche market areas and often partner with the banks.

“The MNOs are another group of service providers in this market who often focus on specific market segments (such as the unbanked and underbanked) but also partner with banks (and fintechs) in a symbiotic relationship – the MNOs provide reach through their mobile infrastructure, while the banks and fintechs provide products and applications to suit specific customer segments. The financial services ecosystem is evolving and growing, and there is place in it for a variety of players.”

Peter Takaendesa, head of equities at Mergence Investment Managers, says: “The key theme is that telcos are looking for new revenue streams to prepare for a challenging future of declining traditional voice revenues. Fixed-line operators are ahead in this trend and mobile operators are gradually approaching the decline phase in voice revenue, especially in relatively mature emerging markets.

“The approach for most telcos in finding new revenue streams has been to leverage their wide distribution networks as well as their billing platforms to enter new markets such as financial services. Insurance for telcos in South Africa is still dominated by handset or device insurance, while funeral, life and legal insurance are added as part of the offerings.”

According to Takaendesa, although “these services have the potential to reduce churn and generate some new revenues for the telcos, we believe they are unlikely to be a large contributor over the next five years given trends we have seen in other relatively mature markets. The key growth drivers for African mobile operators are likely to remain mobile data, mobile money and airtime advance services.”

However, he cautions: “A relatively mature financial services industry in South Africa has made it challenging for telcos to enter the financial services market, with services such as mobile money having failed to take off to the extent they have taken off in other African markets.

“Leading telcos in East Africa now generate 20-30% of services revenue from mobile money services. We therefore believe that Telkom can leverage its distribution network and billing platform to expand its services into the financial services sector in the same way that other leading mobile operators have done, but these new revenue streams are likely to take a long time to become a material contributor to group revenue.”