Winning Post – Kenya bringing down the big beasts

Regulus Partners details how the tables have turned on Kenyan sports betting incumbents, operating in a market which was formerly branded as the ‘leading example’ for further regulated African gambling jurisdictions…

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The Kenyan government has reportedly written to telcos including Safaricom, the country’s leading mobile (and therefore payments) provider, with a list of operators that have not had their licences removed, requiring that they are no longer supported with mobile money transfer services (M-Pesa Paybills and SMS shortcodes).

Safaricom has a c. 63% market share in Kenya (falling by 10ppts in two years but still dominant) and mobile money is the payments service of choice in the country, so compliance is likely to be very significantly disruptive – even potentially terminal – to many key operators in the Kenyan betting sector.

The list of banned operators ‘doing the rounds’ contains 27 companies, including the three leading operators (Sport Pesa, Betin, Betway). However, some midsized and smaller names have received approvals and continue to trade. It is hard to establish a pattern from the outside (in terms of mix of ownership or tax compliance), but the fact remains that the enforcement is partial and selective – however severe.

There is also a suggestion that suspended companies can still become compliant (though unpaid tax is likely to be a major sticking point for some). The Kenyan government therefore meant what it said when it threatened to turn the sector ‘upside down’ (i.e. disrupt it, not destroy it).

Mobile payments effectively created the mass market Kenyan betting sector (with betting becoming an unwitting beneficiary of traditional banking failure), making it the largest remote betting market in Africa by some margin. That the government has gone for both the biggest operators (as well as a large slice of the long tail) as well as the payments lifeblood that keeps them going demonstrates how serious the government was and also the vulnerability of certain sectors to key and independent elements of the supply chain.

Kenyan betting companies can fight over taxes, they can fight over advertising, but once the telcos get a call from the government there is very little they can do. And while the Kenyan telcos have done very nicely out of the betting boom (likely one of their biggest single sector revenue streams, if not the biggest), they are unlikely to side with betting over the government once the government shows its determination, to put it mildly (indeed, after some hesitation since the 1 July suspension, Safaricom is now reportedly simply telling customers that attempted payments to the suspended operators are failed and that they should contact their betting company).

The Kenyan betting sector has therefore fallen from a darling of emerging market growth and remote dynamism to a dysfunctional mess in a little over two years. However, while there is much to be alarmed about, and some hopes that the courts may yet have the final say, we would look to sustainable solutions in different areas.

Kenya’s government wants to tax betting more: given that it started at a base of 15% GGR and a very poorly understood (e.g. prizes vs. withdrawals; where the liability sat) and typically uncollected player winnings tax there was much that could have been done to find a workable solution that was not simply resistance. Equally, the huge increase in gambling over a relatively short period of time caused genuine social concerns and issues as well as a politicised furore; much more could have been done to address these with effective social responsibility policies.

It is very telling that the Kenyan government does not want to try to put the genie back in the bottle, even though disrupting 90% of supply by volume might have a very similar effect in the short/medium-term, especially on the once highly successful operators (one in particular). That also means that it is not too late for the operators which remain licensed and active to become part of the solution rather than being part of the problem.

If Kenyan politicians are forced to come up with solutions to a national problem, they will inevitably be chaotic, reactive and over-the-top. But a regulatory-political settlement need not be a ‘compromise’ – social responsibility and paying a fair share of revenue in tax needs to be at the heart of any sustainable gambling market now that mass-market participation has made a niche ‘Wild West’ approach completely inappropriate.

Kenya is simply proving that this is true of ‘emerging’ markets as much as mature ones and that when things go wrong, they can go wrong pretty spectacularly even for the largest operators.

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Content provided by Regulus Partners