Seeking Fertile Grounds for Mobile Money

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Seeking Fertile Grounds for Mobile Money

    Seeking Fertile Grounds for Mobile Money

    1Amrik Heyer and Ignacio Mas

    DRAFT, 3 September 2009


    The potential of mobile phones to revolutionize access to financial services in developing

    countries is exemplified powerfully by the success of the M-Pesa mobile money service in Kenya. But the apparent difficulty of replicating M-Pesa’s success even in neighboring countries suggests that some contexts may be more receptive to such an innovation than others. In this

    paper we seek to understand the environmental dynamics affecting the uptake of mobile

    money. We demonstrate that, aside from strong strategy and good business models, the impact

    of financial services in developing countries is dependent on the extent of market penetration

    and the political environments in which they take root.

    M-PESA is a huge success… and now what?

Safaricom’s M-Pesa success story has focused the global attention on Kenya as the leading edge

    2of the mobile money revolution. M-Pesa is a mobile payments solution developed by Vodafone

    in the UK, and currently available not only in Kenya but also in Tanzania and Afghanistan. M-

    Pesa allows users to hold money in a virtual ‘stored value’ account maintained in a server by the telecoms provider and operated by users through their mobile phone. Users can deposit or

    3withdraw cash with a local M-Pesa agent. Users can then use their available balance to send money to other mobile phone users, buy airtime (for themselves or for another prepaid phone),

    or store money. In Kenya, subscribers now have the option of paying bills and premiums to a

     1 Amrik Heyer is an independent consultant in social development working with the Bill & Melinda Gates

    Foundation, and Ignacio Mas is Deputy Director at the Financial Services for the Poor team at the Bill &

    Melinda Gates Foundation. The authors wish to thank Amolo Ng’weno for her encouragement and

    support throughout this project, and for many insightful comments. We would also like to thank Claire

    Alexander, Paul Makin, Olga Morawczynski,Dr. Cosmas Ochieng and Amina Tirana for their helpful

    comments, and Daniel Laiser for his contribution to a comparative study of M-Pesa in Kenya and Tanzania,

    which provided a background to the paper. 2 Mobile money involves three elements: (i) an electronic stored-value account (akin to a sight deposit

    account) linked to each user’s mobile phone; (ii) a mobile phone application that allows users to manage their accounts and transfer value to other users; and (iii) a network of cash in/cash out outlets where

    users can exchange cash and electronic value (i.e. deposit and withdraw money from their account). 3 A deposit entails the customer handing over cash to the agent, in exchange for an equivalent electronic

    money transfer from the agent’s M-Pesa account to the customer’s account. The reverse applies for a

    withdrawal. The transfer is authorized in real time by the M-Pesa system, and the agent’s and customer’s accounts are debited and credit instantaneously. Therefore, neither transacting party bears credit or

    settlement risks.


network of nearly 100 utilities companies, insurance brokers, corporates, NGOs, microfinance

    institutions (MFIs) and others.

    M-Pesa’s success in Kenya has been driven by mobile operator Safaricom’s ability to tap into a

    large domestic remittance market through its popular slogan ‘send money home’. In just over

    two years since launch, M-Pesa has attracted 7 million subscribers (over a third of the

    population 15 years or older), and it is still growing. Users appreciate ease of access (anytime,

    anywhere), reliability and affordability compared to other channels and the flexibility

    (‘formal/informality’) of the service. More broadly, M-Pesa affords the scale and efficiencies of corporate capitalism, and the

    flexibility and contextual appropriateness of informal markets. It demonstrates the volume and

    profitability of low-income markets as expounded in Pralahad (2006). The Kenyan experience

    suggests that the ability of the mobile money industry to leverage on economies of scale largely

    depends on the provider’s capacity to leverage on the strength of the informal sector (e.g. in

    relation to its distribution networks), the labor market profile (e.g. demand for remittances

    generated by rural-urban migration), infrastructural development (including the penetration of

    the formal financial markets), and the support from the banking regulator.

    M-Pesa is not the first sustainable mobile money deployment that honor falls to Smart Money

    in the Philippines which launched in 2001but the extent and speed of take-up of M-Pesa has been unprecedented. The M-Pesa story has instigated a wave of interest in mobile money, with

    new entrants rushing to replicate its achievement all over the world: CGAP counts 120 mobile

    money deployments, and Edgar, Dunn & Co forecasts that there will be 615M mobile wallets in

    use by 2011.

    Yet, two years on, we remain uncertain as to where the next big mobile money success will

    emerge. Operators across the globe are struggling to capture the mass market for payments,

    and are now coming to grips with the operational complexity and marketing challenges

    associated with new payment systems. One hears more and more industry insiders asking: Was

    Kenya a fluke? What is the natural rate of development of a mobile money system? Where is it more likely to work?

    One thing we are fairly sure of by now: we should look in developing countries for that mobile

    money garden of Eden. That was not the general presumption prior to M-Pesa: why start in

    places with a less wealthy, less technologically experienced population? Many schemes had

    been tried in developed countries, but, with the exception of debit cards, they routinely failed to

    4open up enough space within a crowded set of payment options for customers and merchants.

    M-Pesa has shown the value of convenient electronic payments to people who have few

    alternatives to cash.

     4 This is true especially true in Europe and North America. Korea and Japan have seen more success with

    mobile payments. For an account of experiences in developed countries, see Mas and Rotman (2009).


    The apparent difficulty of replicating M-Pesa’s success even in neighboring developing countries indicates that some contexts may be more receptive to mobile money offers than others. But it

    also speaks to the sheer difficulty of ‘pulling off’ a fairly sophisticated business model. As we

    investigated successes and failures with mobile money schemes in various countries, it became

    essential to try to disentangle country-level or market factors from the specific business choices

    5and capacities of the mobile money scheme providers. That is not always so straight-forward: for instance, being in an unfavorable market situation may cause the provider to underinvest in

    capacity development, or to take bigger gambles with bold pricing strategies.

    In this paper we ask the question: ‘what would be the most fertile grounds for the next mobile

    money success story?’ The focus is on the pre-existing or enabling country conditions, not the

    6business model or service design aspects which are less likely to be country specific. The paper

    provides insights into whether Kenya’s experience is likely to be unique, and indeed into how

    inevitable was the success of M-Pesa itself. More broadly, it may help commercial players and

    donors to target those markets which are a priori more conducive to the success of mobile money.

    The need for scale

To appreciate what might be the grounds for the next mobile money success story, we need to

    understand some basic characteristics of the mobile money business. First, the model depends

    on volume: being able to capture a large number of relatively small transactions. Fixed costs at

    the platform and branding level create significant economies of scale. Moreover, customers are

    not likely to want to pay commissions exceeding a few percentage points on most transactions,

    which caps the gross margins that can be secured. Low transaction sizes, fixed costs and low

    margins need to be balanced by substantial volume in order to close the business case.

    Second, the mobile money model requires speed: being able to generate momentum and trigger simultaneous interest among users and merchants. Fast growth creates a special buzz which can

    help overcome people’s natural resistance to try out a technologically-enabled service they do

    not quite understand. Knowledge of the service can spread by word-of-mouth, which cuts down

    on required marketing expenditures. And if there is sufficient density of take-up in specific

    communities, more experienced and sophisticated users are available to offer ‘delegated’ sales and customer care support to newer or less experienced customers.

    Momentum is also necessary to defeat the natural chicken-and-egg problem between agents

    and customers: why would stores want to sign up as agents while there are few customers, but

     5 Two specific market comparisons the authors have undertaken are G-Cash in the Philippines and M-Pesa

    in Tanzania, both against M-Pesa in Kenya. These are documented in Mas (2008) and Heyer (2009);

    Camner and Sjöblom (2009) also compare the Kenyan and Tanzanian experience. 6 For an analysis of the service design factors that allowed M-Pesa to exploit the market opportunity so

    effectively, see Mas and Morawczynski (2009). For discussion of design factors in other developing

    country success stories, see Pralahad (2006)


then why would people be interested to become customers while there are few agents? The

    longer this impasse is allowed to stand, the more difficult it is to overcome. Early market buzz

    can prompt both customers and stores to sign up sooner and to try it out for longer than they

    would otherwise consider.

    Third, the mobile money model requires coverage: being able to use it anytime, wherever one

    happens to be, and to send money to anyone, anywhere. Proximity and ubiquity: this after all is

    the disruptive innovation that allows mobile money to penetrate a new payments market. But

    that requires coordinated roll-out across the entire country.

    These three features of the mobile money business the need for volume, speed and

    7coverage together suggest that the business model needs to be highly scalable. Momentum

    will build up as customers start to bring other customers into the system simply by sending

    them money (inducing them to come into the shop and register); agents will start seeking to

    sign up and add new tills and generally the system can grow very fast for at least some period,

    creating a ‘viral effect’.

    The Kenyan market presented a large enough opportunity, and Safaricom went about exploiting

    it in a sufficiently scalable fashion. In fact, the growth of M-Pesa has surprised even Safaricom

    since the first few months and continues to grow at a strong pace even as more than half of

    Safaricom subscribers have already signed up for the service. How replicable is this? Some

    markets may present too small an opportunity in the light of established competing services.

    And piece-meal deployments may not work at all.

    In the rest of this paper we consider five factors that determine the potential for scale of the

    money market opportunity in a given market. Namely: latent demand, the quality of existing

    alternative services, the regulatory environment, and the market landscape for both retail

    channels and cellular services. To repeat, we focus here on the environmental factors which

    determine how scalable a mobile money proposition may be, not on the business design and

    operational management factors which would need to be brought to bear to exploit it.

    Extent of Latent Demand for Transactions

Demand-side metrics underpin the scalability of a mobile money solution. Do the volumes and

    profile of transactions and savings among the general population indicate a scalable opportunity?

    Any payment and store-of-value system ultimately serves a number of purposes for its users,

    but identifying a principal product application with strong mass market appeal is the

    cornerstone for a mobile money launch. A ready market of ‘early adopters’ through which to

    kick-start the product and gain momentum is also significant to propel the service towards a

    viral effect.

     7 For a fuller explanation of the economics of branchless banking systems, including mobile banking, see

    Mas (2009).


Safaricom based the initial launch of its M-Pesa service on the ‘send money home’ proposition,

    even though it also allows the user to buy and send airtime, store value and, more recently, to

    pay bills. Remittance services are primarily targeted to the urban migrant population who seek better employment options and send money regularly to rural kin. The opportunity will be larger

    where migration results in splitting of families, with the bread-winner heading to urban centers

    and the rest of the family staying back home. This is the case in Kenya and Tanzania, where 17

    and 28 percent (respectively) of households depend on remittances as their primary income

    source (FSD-Kenya [2006] and FSD-Tanzania [2006]).

    Where entire nuclear families move, remittances will be stronger where there is cultural

    pressure to retain connection with one’s ancestral village. In Kenya, migrants’ ties with rural

    homes are reinforced by an ethnically-based rendition of citizenship and the need to hedge

    insecure livelihood options. These links are expressed among other things through burial,

    inheritance and cross-generational ties, even in cases where migrants reside more or less

    8permanently in the cities. In other settings, a greater emphasis on national as opposed to local identity may have diminished the significance of the rural ‘home’.

    In her study of M-Pesa, Ratan (2008) suggests that the potential market size for domestic

    remittances is related to urbanization ratios. More propitious markets will be those where the

    process of rural-urban migration is sufficiently rooted to produce large migration flows, but not

    so advanced that rural communities are hollowed out and lose socioeconomic significance.

    Countries with mid-range urbanization ratios, especially those that are urbanizing at a rapid rate,

    are likely to exhibit strong rural-urban ties requiring transfer of value between them. This is the

     case in many African countries like Kenya and Tanzania;in the Philippines and Latin America,

    where urbanization ratios exceed 50 percent, remittances are more likely to be triggered by

    international rather than domestic migration patterns.

    Domestic remittances might also be driven by students schooling away from home. This

    reverses the flow of money, from rural households to dependents in larger urban centers. Young

    people may be schooled away from home due to a lack of schools in rural areas (such as in

    Uganda and Tanzania) or due to the better quality of educational choices available in larger

    towns (such as in the Philippines and Latin America).

    Payments also play an important role in enabling informal economic activity, and the degree of

    informal sector entrepreneurship may fuel the growth of mobile money. This was initially the

    case with traders in Tanzania, where early uptake of the service was in high demand by rural

    retailers sending payments to urban wholesalers, thereby contributing to a strong rural-urban

    flow. In Kenya, informal sector employers are increasingly using the service as a salary payment


     8 For fuller analyses of the use of mobile money for domestic remittances in Kenya, see Ratan (2008) and

    Morawczynski (2008).


Safaricom took on the domestic remittance opportunity by launching a nationwide service, with

    agents scattered around the country. This might be too risky and costly a proposition for smaller

    operators or in larger countries such as India. In this case, being able to identify corridors for

    remittances would permit a more targeted, phased roll-out of agent networks and customer

    acquisition campaigns. This is the approach Eko is taking in India, using customer call records

    from partner telco Airtel to precisely identify potentially ‘thick’ remittance corridors.

    Focusing on remittance corridors as opposed to broad national markets could also yield

    significant returns in the African context, where cross-border regional remittance corridors represent a potentially strong market opportunity. Of Africa’s 16 million international labor

    migrants, 63 percent are regional as opposed to trans-continental, with major corridors in West

    Africa (Isaacs, 2008). Some international or regionally-based mobile operator groups (such as

    MTN, Orange, Orascom and Zain in Africa) may be able to create regional remittance networks

    linking their operations in neighboring countries, thereby harnessing this lucrative market.

    Tapping international remittances is generally much harder than domestic remittances because

    a mobile money scheme operator would have to rely on foreign partners to address one leg of

    the transaction. Smart Money and G-Cash in the Philippines are partnering with Western Union

    to effectively extend the reach of their mobile money service to the sizable overseas Filipino


    While remittance markets have so far afforded the most lucractive mobile money opportunities,

    large-scale institutional payments may also comprise significant markets. Bill payments

    constitute an important and easily reachable niche application for mobile money, especially in

    countries where basic infrastructure is reasonably well developed. This may be the case, for

    example, in Nigeria, where a substantial share of the population pays utility bills and relies on

    cumbersome bureaucracies to do so. Government is also a major collector (payee) for services

    such as market fees, land rates/rental and other fees, licenses and services, as well as for

    contributions into government national health and social security funds. Microcredit repayments and micro-insurance premium collections can be a third driver of volume of

    institutional payments. But tapping into these payment sources requires a certain degree of

    sophistication on the part of the IT systems of microfinance institutions, which may not always

    be the case.

     Mobile money schemes can provide substantial convenience to bill payers by: (i) linking the

    payment to an account from which the payment can be triggered instantaneously at any time,

    and (ii) expanding the reach of payment outlets to include any available cash in/cash out agent,

    for those wanting to pay in cash. For institutional billers, promoting real-time electronic

    payments through mobile money reduces credit risk, unremunerated float and channel

    management costs. So they are often willing to bear the cost of the transaction, making it free

    to the customer.


In addition to being a collector, government is often the single largest payer in a country, with

    millions of small payments on a monthly basis for salaries, pensions and social welfare transfers.

    Thus, government payments are likely to be particularly suited to the efficiencies offered by mobile money solutions. Brazil is a prime example, where a bank-led payment model operated

    through cards and point-of-sale (POS) devices is now the main vehicle for government social

    welfare payments to 11 million recipients. South Africa also has a nation-wide social transfers

    system covering one-third of households.

    Mobile money schemes would be best placed to tap into bill payments and government

    payments if they were nationally interoperable. Billers and government payers are naturally

    resistant to pursue payment options that only reach a portion of the population and to overly

    fragment their payment channels.

    Mobile money schemes can also tap into the payment needs of larger commercial players.

    Smart Money in the Philippines and Wizzit in South Africa serve as a platform for airtime top-ups.

    In Zambia, Celtel uses its mobile money service to support payments between major distributors

    and their retail store networks. In Cambodia, WING launched a mobile money service in

    partnership with the garment industry to deliver salaries for workers, who then constituted an

    ‘early adopter’ segment that propagated the service more widely. Where an ‘early adopter’ niche is not easily identifiable, partnering with large-scale institutions to roll out a mobile offer

    can deliver the initial momentum needed to stimulate viral propagation.

    Lastly, global evidence shows that the demand for safe savings products is very large (Collins et

    al., 2009). Yet only about 10 percent of the world’s poor have access to formal bank accounts.

    Savings propositions which allow poor people to save money as and when they earn it,

    conveniently near where they live or work, in small sizes, can mobilize a very large number of


    Range and quality of existing alternatives

In order to assess the market opportunity for a new mobile money scheme, demand-side

    indicators must be looked at in the context of the accessibility and quality of the alternatives. If

    there are many good alternatives (as is typically the case in developed countries), it will be

    difficult to convince users to switch to the new mechanism. At the other extreme, if there are no

    current alternatives, the mobile operator will need to create an entirely new service category in

    people’s minds and will have few market references on which to base their marketing campaign,

    which may be a slow process. For example, the use of airtime transfers as an informal way of

    sending money in Tanzania provided initial competition for mobile money offers, but also

    established the idea of electronic value transfer in people’s minds, facilitating popular

    acceptance of mobile products in the long-run.

    Mobile money schemes can gain traction through identifying specific weaknesses of existing

    alternatives, and crafting their service proposition to demonstrate advantages over those


    attributes. At the same time, there is likely to be high inertia about switching to a new system, which will not necessarily be addressed through a convincing service proposition. Brand value and market share may be more significant to speed of uptake (see section on cellular market landscape).

    We can distinguish payments and store-of-value alternatives by whether they are formal (licensed and regulated), semi-formal (legally constituted but not regulated) or informal. In all these contexts, attributes which are important to consumers include direct costs (fees, interest rates), safety (what is the probability that I may lose my money?), reliability (is it available for me to use whenever I need it? is there going to be sufficient liquidity when I need to get money out?), and convenience (is it easy to use? how long does it take and how far do I need to travel to access it?). For low income groups, the most significant of these factors is often the last: the opportunity costs relating to accessibility and convenience. Semi-formal and informal options generally have a strong advantage in relation to convenience, while formal services tend to be more secure and reliable.

    In general, mobile money should help in three key ways. First, the ubiquity of mobile money services should increase convenience and reduce opportunity costs (such as travel and queuing times), especially with respect to formal alternatives which tend to be more concentrated. Second, the electronic nature of transactions should increase safety, especially with respect to semi-formal and informal alternatives which are unsupervised and often even unrecorded. While customers may not be in a good position to understand the intrinsic security afforded by electronic channels, the fact that transactions happen in real time should help them to quickly gain trust in the system experientially (since the sender of funds can immediately call the recipient to confirm the success of the transaction). Third, mobile money schemes, with their greater range of agents, give greater control to users on where to transact, which helps protect privacy and reduce corruption. In the analysis below, we concentrate on three specific drivers of transactions from the list reviewed in the previous section: domestic remittances, bill payment and savings.

    Formal remittance services are dominated by banks and postal services. In Tanzania, bank

    transfers are particularly attractive since inter-bank transfers are free. However, only a small

    share of the population has access to a bank account, and the geographic footprint of banks is very limited: even market-leading NMB Bank only has 128 branches across Tanzania’s main

    towns. Thus, opportunity costs are high, as senders and recipients must queue sometimes for a whole day to transact at bank branches, and those living in more remote locations must travel to branches in bigger, distant towns. In other markets such as in Kenya, the absence of inter-bank payments infrastructure makes it very expensive, and bank branch presence cannot compete with mobile services. Market-leading Equity Bank has only 300 branches and ATMs across Kenya against M-Pesa’s 7000 shops and Safaricom’s 100,000 airtime sellers.


For poor people, the more common form of formal domestic remittance services is through post

    offices. India Post, with over 150,000 outlets mainly in rural areas, is the largest postal network

    9in the world. Sending money costs 5-15 percent depending on the size of the transaction and

    typically takes 5-7 days to process. The cost of a transfer may in practice be higher; it is not

    uncommon for postmen, particularly in rural areas, to charge an informal fee to the recipient.

    Semi-formal remittance services, where they exist, probably present the most formidable competitor for mobile money offers. They form around networks of businesses in another

    sector. They are systematized and efficient, leveraging high volume markets to offer a

    competitive service. In the Philippines, pawnshops form networks of various sizes that offer a cheap domestic remittance service. In Tanzania, people can send money through bus companies,

    at a commission of 10 percent and with a significant risk of theft. This method may not be

    convenient if the sender and recipient must travel to the company office to collect the money.

    Informal remittance services develop in a more opportunistic way. The most popular

    remittance mechanism in Tanzania is through airtime transfers, which can be construed as a prototype of mobile money, though it is not legal. The sender buys prepaid airtime and transfers

    it electronically (instantaneously) to the intended recipient. The recipient then locates a ‘cash out’ agent (available on every street corner), who exchanges the airtime value for cash at a

    discount (commission) of 15-25 percent of the face value of the airtime redeemed. The agent is

    then able to resell the airtime to network users. The service is expensive, but it is convenient,

    relatively reliable and available on all networks. Airtime transfers are not legal, but they have

    provided strong competition for recent mobile money launches in Tanzania.

    In the Middle East and Asia, Hawalla networks are well developed along major labor migrant or

    diaspora corridors, and some have even been formalized (for example Dahabshil bank in

    Somaliland). While these networks are not necessarily competitive with formal offers in relation

    to price, they are substantially more convenient, with few barriers to access, and have

    developed high levels of trust among their clientele. Given the regulatory hurdles for formal

    options in delivering low cost international remittances, Hawalla networks are likely to remain

    competitive in the context of international markets, at least in the medium term.

    The most basic form of remittances, though, involves human carriage of the funds. Many people

    opt to deliver the money personally or through friends or family members who are travelling.

    This presents safety, reliability and privacy issues, and often entails hidden ‘costs’ which must be

    repaid at a later date.

    Utility bill payments, to the extent that utility services are available to poor people, are typically

    made in four locations: at the offices of the utility company, at bank branches (and possibly

    ATMs), at the outlets of specialized payments networks, and at retail shops that have an agency

    agreement with the utility company. The first two typically have limited geographic reach and

     9 India Post, Annual Report 2007-2008.


entail long queues on bill payment days. Specialized payment networks are developing fast

    through Latin America (such as Pago Fácil in Argentina and Pago Express in Paraguay), and offer

    quicker and friendlier service. Mobile money services present an opportunity to lower the cost

    and broaden the geographic reach of bill payments. On the other hand, mobile bill payments

    require the customer to enter long strings of billing account data on a small mobile keypad,

    which may cause a big customer service burden in dealing with wrong entries. This can be

    solved by automatically linking biller account numbers with users’ phone numbers, or by

    combining bill payment with electronic bill presentment services. Mobile offers are thus

    potentially competitive for this market niche.

    In relation to savings the other element of the value proposition for mobile money along with electronic payments are another potential driver of mobile money. Access to formal bank

    accounts may be very limited in emerging markets, where banks are often not able to compete

    directly with non-bank providers due to higher fixed and operating costs and much more limited

    physical presence. Postal banks offer more accessible services, but the quality of their service is

    sometimes deficient.

    Informal savings options are quite widespread but they may not always be reliable. Deposit collectors in places like India and West Africa also offer savings services for a fee. The service

    they offer is a combination of temporary safe-keeping of funds as well as discipline (through

    their daily visits to peoples’ homes or stalls in the market). Informal savings groups exist in many

    low-income countries, especially among women. They entail nil or minimal fees (for record

    keeping and group formation services), but participants need to invest significant time in

    building group solidarity and monitoring performance. Other popular savings options are

    entirely intra-household (typically in the form of hidden cash, jewels, livestock or building materials), between friends and family (typically in the form of loans) or within the community

    (through savings-led groups). Given the lack of reliability and/or high opportunity costs of

    informal savings options, a low-cost, widely available formal option would be very attractive.

    Generally speaking, mobile money offers for remittances, savings and bill payments are strongly

    competitive in relation to formal options for the mass market. For mobile money providers, the

    areas to watch out for are semi formal services, and, in some cases informal services. These

    have developed highly efficient networks, especially in relation to remittances.

    Meanwhile it is interesting to note that, in Kenya, mobile services have been taken up initially by

    formal service users (70 percent of M-Pesa users are banked as opposed to 40 percent of non-

    users (Pulver et al, 2009). Thus, M-Pesa did not acquire its initial critical mass through

    competition with the formal sector, but rather as a complement to formal services, for a

    clientele who were wealthier, more exposed to formal financial service options and less risk-

    averse. However, as services move deeper into the market, volumes of unbanked will be likely

    to drive expansion, due to the competitive advantages of formal mobile offers over other


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