Snapshot 10: “What makes a successful commercial partnership?” addresses one of the key questions of FiDA’s Learning Theme 10. Each Learning Theme addresses a range of topics within the digital finance space. The FiDA Partnership synthesizes the digital finance community’s knowledge of these learning themes as “Snapshots” that cover topics at the client, institution, ecosystem, and impact levels to present “what we (in the digital finance community) know” about the topic in question, highlight “notable new learning,” and call attention to “implications” for future research and investment.
In 2016, Paypal, a US based online payments system, partnered with two of the largest global credit card networks, Mastercard and Visa, and concurrently invested in a FinTech platform, Acorn. In doing so, Paypal became a bridge between traditional financial institutions and emerging FinTechs. Collaboration may extend the value of Paypal’s services to more people, expedite innovation, and future-proof Paypal in this era of rapid mobile-based innovation and the rise of large internet players.
On the other side of the Atlantic, digital finance players appear to have an increasing appetite for collaboration. For example, Safaricom’s M-Pesa, the Kenyan mobile money giant, and the Commercial Bank of Africa (CBA) in Kenya, partnered to deliver the savings and microloan product M-Shwari. Leveraging Safaricom’s dominant position in the marketplace allowed the product to successfully scale: as of 2016, M-Shwari accounted for approximately 15% of CBA's total revenue. The partnership has succeeded because each partner has a clear understanding of their respective roles and how the product benefits the interests of each. CBA, a corporate bank that targets higher net worth individuals, benefits from the large pool of savings without diving into the operational challenges. Further, CBA does not necessarily want to brand within M-Shwari’s target market, and thus only Safaricom brands the product. In turn, Safaricom benefits from the banking infrastructure of CBA without which it would not be able to provide loan services.
These and other examples suggest that there is a business case for dominant players in financial services markets to collaborate at the ecosystem level. However, a number of factors determine whether a digital finance provider will collaborate in a financial services market as Snapshot 10, “What makes a successful commercial partnership?” explores in detail.
What influences players to collaborate?
In essence, power dynamics in a financial services market influence how digital finance players engage with each other. Market conditions, such as a fiercely competitive market or a quasi monopoly environment, determine players’ actions. In some markets it may be neither necessary nor fruitful for players to collaborate. Providers who have highly dominant positions—such as b-Kash in Bangladesh which accounted for about half of the market presence in digital finance in 2016—may be reluctant to share scale advantage with smaller competitors. They may prefer instead to forego the advantages of interoperability — which provides interconnection, payments aggregation, and infrastructure sharing — to lock in their market position.
However, in fragmented markets where competition is greater, digital finance providers stand to benefit from working together to pool their customers into one interoperable network in order to enable interconnection and payments aggregation. For instance, mobile money providers in Cote D’Ivoire collaborated to provide a universal and accessible digital school registration and fees payment solution along with a streamlined user experience. The program worked because its services were attractive to each of the stakeholders: the MNOs benefited from increased revenue flows and the government benefited from the cost savings and reduction in lost payments.
Moreover, the increasing success of mobile insurance services and the tangible benefit it brings to all stakeholders justifies collaboration between specialist providers and digital finance providers. In 2014, 64% of mobile insurance services were launched by MNOs in partnership with specialist solution providers. An MNO might use such a partnership strategically by offering the insurance product under its own brand. Or, in a purely transactional partnership, the MNO might only provide the platform. For new launches in 2015, 57% of services collected premiums through airtime deduction;the remaining 43% relied on mobile money as the primary payment option.
New players will bring new business models
Digital finance providers are looking to the future. The imminent threat of large internet players is driving partnerships between new types of players in the digital finance space, such as that of M-Kopa, a pay as you go solar energy provider, and Safaricom. These types of collaboration can facilitate cross-network mobile payments which encourage a larger population to use digital financial services, and, in turn, help digital finance achieve its social and commercial potential. Snapshot 10 discusses the necessary ingredients of a successful partnership: such as a long-term vision of the partnership and each partner working from the position of their strengths and competitive advantages. Successful partnerships have demonstrated — such as in the case of the Kenyan savings and loan product, M-Shwari — that they have the potential to reach a large number of unbanked but mobile enabled customers and thus extend financial inclusion.
Read Snapshot 10 to learn more about what it takes to successfully collaborate, the new types of partnerships that are evolving, and the top 10 must reads in this space this year.