Little Known Facts About The Safaricom Cash Machine

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Anybody who is interested in studying business management and strategy will do well to take a close look at Kenya's two cell phone companies namely Safaricom and Celltel (formerly Kencell).

There are many mistakes that Kencell made right from inception the main one being the controversial per second versus per minute billing, but for the purposes of this article I would like to focus on a simple strategy that has worked for decades and for many businesses all over the world, which Safaricom is successfully pursuing.

Let us start in India, shall we. About 3 decades ago everybody in India knew that detergents were for the affluent and the mass-market preferred bar soap. A company called Nirma came along and challenged this long held belief and started manufacturing detergents targeted at the low end of the market. They made a fortune.

Let's come back to Kenya in the 90s. Banks were making easy-no-risk profits from government treasury bills, which at one point yielded returns of up to a staggering 80 per cent. So some shortsighted bankers who believed that the party would never end felt that the low end of the market was unviable to serve and a nuisance. Minimum balances required to maintain saving accounts were steeply hiked and thousands of accounts were closed (many Kenyans could not afford to run current accounts with the steep charges of those days and so everybody used a savings account like a current one). The bankers justified it all with the return on investment calculation per customer. After all TBs as they fondly came to be known were bringing in 80 per cent guaranteed no risk returns. Shareholders enjoying record windfall profits (thanks to the TBs and stupendous bank charges) did not question the long-term wisdom of this strategy.

For a time most Kenyans felt totally frustrated. Smaller banks tried to go for this market but recent bank failures of local banks were still fresh on the minds of many, so it just couldn't fly. Along came a small new unknown bank called Equity Building Society. They carefully targeted customers who required a bank to receive their salaries and then also aggressively went into the financing business for the mass market. The "nuisance clients" that the big banks had chosen to throw out of their banking halls. Within a very short time Equity (which had hurriedly been renamed Equity Bank) had gained the full confidence of the masses. After all people who were able to loan money so easily would surely not collapse, was the feeling amongst the public.

Today you know Equity Bank as the fastest growing bank in the region. But there is a new kid on the block and he's not even a bank.

Investigations by this writer indicate that the new M-Pesa money transfer service by Safaricom is rapidly becoming the most profitable business for the mobile phone provider. But M-Pesa is more than just a money transfer service. You can save money and keep balances in your account without the annoying monthly ledger fees that banks are fond of charging. And there's more; emerging evidence suggests that many Kenyans wary of the insecurity countrywide are now carrying their cash in safaricom sim cards. So even if your cell phone gets stolen, when you arrive where you are going, all you need to do is borrow a cell phone and you can then easily access your M-Pesa account the minute you insert your sim card into it.

For those who understand banking well, you will know that a major challenge for banks has been the question of maintaining branches which has tended to eat up profits tremendously. The situation has not been helped by the poor road networks and the mounting insecurity in the country, which makes every branch outside Nairobi a very high risk preposition. With Safaricom's M-Pesa, the company has a branch in every small retailer in every small town who carries the M-Pesa sign.

My teenage son has this expression which he uses to mean that somebody is so way ahead that nobody can ever catch up. He says, "It's all over." Actually for Safaricom versus the competition, it is all over. Not only is the cell phone company a very profitable communications concern, but now it is also a fully-fledged bank as well, serving a huge mass market.

What this means is that the Safaricom finance department has started doing what banks do. That is customer balances not required immediately are invested elsewhere for hefty returns. How about being in the market for overnight lending to banks and financial institutions?

When the Safaricom IPO finally happens, don't even waste your time looking at the prospectus and pretending to analyze this cash machine.

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