Mobile Payment Disruption in Ethiopia: Strategies for Traditional Banks and Payment Switches

By Tesfaye Mengistu

Tesfaye Mengistu is a Seasoned Business Developer with 14 years of diverse experience working with multinational firms in Technology Business Development, Technical Sales, Business Intelligence, Analytics, Contract Negotiation and Administration, International Sales and Logistics, and Product Development. Mr.Tesfaye holds a Bachelor of Science in Electrical Engineering, a Master in Business Administration and a Master of Science in Artificial Intelligence.

As M-Pesa gears up to enter Ethiopia’s digital payment services market and Telebirr vamps its efforts to remain competitive, the existing banking sector is expected to experience significant disruption. The heightened competition might lead to more innovative and affordable digital payment options, potentially increasing financial inclusion as more Ethiopians gain access to digital financial services.

However, traditional banks could face challenges due to the leaner business models of mobile money platforms, which operate with lower capital and operational costs. Banks invest heavily in fixed assets such as office spaces, IT infrastructures, as well as labor-intensive operations, all of which are significantly reduced in digital payment service provision. As a result, these services are able to offer services at reduced costs, making them more appealing and convenient than traditional banks. This difference in business models might put conventional banks at a significant disadvantage considering their current level of technological adoption; as consumers increasingly adopt digital payment services, demand for traditional services naturally declines.

To remain competitive, Ethiopian banks might need to reevaluate their business models and consider investing rigorously in digital payment solutions. They could also focus on offering value-added services that complement digital payment services rather than competing solely on price. Additionally, they might need to invest in technology and infrastructure that matches international standards to provide their own digital payment options or collaborate with existing digital payment system providers to offer a broader range of choices.

The advent of telco-led mobile money services in the digital payment industry is expected to present traditional banks with three noteworthy challenges in the future:-

  1. Reduced demand for traditional banking services: Digital payment services traditionally diminish demand for conventional banking services, leading to decreased revenue for traditional banking.
  2. Increased competition: The proliferation of mobile money in the Ethiopian market is expected to heighten competition, making it more challenging for traditional banks to compete. Banks might need to invest in technology, infrastructure or collaborate with existing digital payment providers to offer a broader range of choices.
  3. Regulatory challenges: The Ethiopian government may need to continuously update its regulatory framework to ensure a level playing field for all financial service providers. Traditional banks might have to navigate new regulations and compliance requirements as they adapt to the shifting financial services landscape.

To address these challenges, both conventional banks and the Ethiopian National Payment Switch could implement the following strategies:

  1. Embrace Innovation and R&D: By conducting research and developing innovative solutions, traditional banks can create new revenue streams and improve their overall competitiveness in the digital payment market. This approach helps banks better meet the evolving needs and preferences of their customers, ultimately improving their market position and profitability.
  2. Invest in technology and infrastructure: To develop their own payment alternatives that can effectively compete with TeleBirr and Mpesa. This includes upgrading their mobile banking applications with more use cases, implementing advanced online payment options that are fully synchronized with other banks, and creating new payment processing systems
  3. Collaborate with digital payment providers: like Telebirr and Mpesa to offer their customers a wider range of options and convenience.
  4. Advocate for regulatory changes that promote a level playing field for all financial service providers including updates that ensure traditional banks and digital payment providers are subject to the same rules and regulations.
  5. Increase financial literacy: Among banking customers by educating customers on the benefits and risks of digital payment services, utilization, and standards.
  6. Focus on customer service: Including personalized advice and support and enhanced, seamless customer experience across all services.

The recent experiences of the Bank of Abyssinia, with its mobile banking services stalling due to a systems upgrade (which has also resulted in increased wait times at physical locations compounding the bank’s woes), serves as a stark reminder of the challenges traditional banks must overcome in the face of telco-backed mobile money services.

To stay afloat in Ethiopia’s rapidly evolving financial landscape, traditional banks must embrace technological advancement, forge partnerships with established service providers, advocate for regulatory reforms, enhance financial literacy, and prioritize customer service, ensuring they adapt and thrive amid the ongoing digital payment revolution.