M-Pesa vs CBDC? Safaricom Faces Digital Currency Headache

The Central Bank of Kenya (CBK) has identified lower transaction costs as a key plank of the proposed Central Bank Digital Currency (CBDC) – which would operate much like Safaricom’s billion-dollar mobile money service M-Pesa.

The two are, of course, entirely different, but the introduction of a digital currency issued by the Central Bank would undoubtedly have a ripple effect on how money works in Kenya. Notably, the policy-makers at CBK have noted that the digital currency will be easily transferrable and will also enable Kenyans to easily make payments – two things most Kenyans associate primarily with M-Pesa.

In the six months to September 2021, the value of M-Pesa transactions grew by 51.5 per cent to Ksh13.7 trillion or about 13% of Kenya’s Gross Domestic Product (GDP) in 2020. The figure will expectedly be higher when the telco announces its full-year results in March this year.

Kenya is recognized as a global pioneer and leader in mobile money largely thanks to M-Pesa. CBK in a discussion paper on the digital currency identified key challenges with money transfer services in Kenya as opportunities for the CBDC to offer solutions.

High transaction costs have long been identified by critics of M-Pesa as one of its disadvantages. Transferring cash between mobile money services operated by different telcos is also expensive, as are cross-border payments.

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“The trend in Kenya’s domestic payments indicate the existence of a digital currency (e-money) that is robust, inclusive and highly active. Therefore, the consideration to introducing a CBDC in the payments system in Kenya could target cost reduction, interoperability and enhancing cross-border payments.”

“Assuming the Central Bank charges no fees for CBDC, it would facilitate small-value online transactions given relatively low (or no) associated fees compared to the current payment charges,” the CBK paper reads in part.

Safaricom rival Telkom Kenya in November 2021 sought regulatory orders through Parliament to compel Safaricom to cut the M-Pesa fees charged for cash transfers to rival platforms.

It can cost up to more than four times the fees to transfer cash from M-Pesa to one of the smaller mobile money services’ customers – described as “unregistered users”, compared to transfers among Safaricom customers. The proposal by Telkom was one of many as they lobbied for a tighter regulatory leash on the market leader.

It therefore comes as no surprise that the CBK identified interoperability and costs as central to the idea of a CBDC.

“Though the industry moved to enable interoperability of mobile wallets in 2018, this is limited to only P2P payments and is yet to be expanded to both merchant and agent interoperability and even to work seamlessly for P2P. CBDC may offer promise for this interoperability,” CBK noted.

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