M-pesa in Kenya Ignacio Mas and Dan Radcliffe, Bill & Melinda Gates Foundation1 March 2010

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Poor Quality of Existing Alternatives

Latent demand for e-payments must be looked at in the context of the accessibility and quality of the alternatives. If there are many good alternatives to mobile payments (as is typically the case in developed countries), it will be difficult to convince users to switch to the new service. In the Philippines, for example, the G-Cash and Smart Money mobile payment services experienced low take-up in part due to the availability of a competitive alternative to mobile payments – an extensive and efficient semi-formal retail network of pawnshops which offered domestic remittance services at 3 percent.
In Kenya, the most common channel for sending money before M-PESA was informal bus and matatu (shared taxi) companies. These companies are not licensed to transfer money, resulting in considerable risk that the money will not reach its final destination. And Kenya Post, Kenya’s major formal remittance provider, is perceived by customers as costly, slow, and prone to liquidity shortages at rural outlets. Meanwhile, Kenya’s sparse bank branch infrastructure (840 branches) is far too limited to compete with M-PESA’s 16,900 cash-in/cash-out outlets. Exhibit 6 below illustrates how Kenyan households sent money before and after M-PESA. Note the dramatic reduction in the use of informal bus systems and Kenya Post to transfer money between 2006 and 2009.
Exhibit 6: Money Transfer Behavior Before and After M-PESA15

As noted above, M-PESA’s early adopters were primarily banked customers, which suggests that M-PESA did not acquire its initial critical mass through competition with the formal sector but rather as a complement to formal services for clients who were wealthier, more exposed to formal financial service options, and less risk-averse. As services move deeper into the market, unbanked users will likely drive M-PESA’s expansion, due to the competitive advantages of formal mobile offers over other options. This is one reason why Africa, with its high population of unbanked, is seen as such a promising market for mobile money deployments.

A Supportive Banking Regulator

Regulation of mobile money can help to secure trust in new mobile money schemes. At the same time, regulation may constrain the success of a mobile money deployment by limiting the scheme operator’s degrees of freedom in structuring the business model, service proposition, and distribution channels. In the case of M-PESA, Safaricom had a good working relationship with the Central Bank of Kenya (CBK) and was given regulatory space to design M-PESA in a manner that fit its market.
The CBK and Safaricom worked out a model that provided sufficient prudential comfort to the CBK. The CBK insisted that all customer funds be deposited in a regulated financial institution, and reviewed the security features of the technology platform. In turn, the CBK allowed Safaricom to operate M-PESA as a payments system, outside the provisions of the banking law.16
Safaricom has had to pay a certain price for this arrangement. For instance, interest earned on deposited balances must go to a not-for-profit trust and cannot be appropriated by Safaricom or passed on to customers. There are also limits on transaction sizes to address anti-money laundering concerns. But, fundamentally, Safaricom was able to design the service as it saw fit, without having to contort its business model to fit within a prescribed regulatory model.
The CBK has continued to support M-PESA’s development, even in the face of pressure from banks. In late 2008, after a lobbying attack from the banking industry seeking to shut down the service, the Central Bank did an audit of the M-PESA service at the request of the Ministry of Finance and declared it safe and in line with the country’s objectives for financial inclusion.17 So far, the Central Bank appears justified in its confidence in M-PESA as there have been no major reports of fraud. And system downtime, although frequent, has not been catastrophic.

A Dominant Mobile Operator and Low Airtime Commissions

The chances of a mobile money scheme taking root depend also on the strength of the mobile operator within its market. Market share is an important asset because it is associated with a larger customer base for cross-selling the mobile money service, a larger network of airtime resellers which can be converted into cash-in/cash-out agents, stronger brand recognition and trust among potential customers, and larger budgets to finance the heavy up-front market investment needed to scale a deployment. With a market share of around 80 percent, Safaricom enjoyed each of these benefits when it launched M-PESA.

A mobile money deployment will also have greater chance of success in countries where the commissions mobile operators pay airtime resellers are relatively low. This is because if commissions are too high, resellers will not be attracted by the lower commissions of the incipient cash-in/cash-out business. In Safaricom’s case, airtime commissions total 6 percent, of which 5 percent are passed on to the retail store. A 1-2 percent commission on a cash-in/out transaction is plausibly attractive – the store need only believe that the cash business may be five times as big as the airtime business in volume terms. This seems reasonable, considering that the bulk of airtime sales are of low denominations (around US 25¢).

A Reasonable Base of Banking Infrastructure

Finally, the ability of M-PESA stores to convert cash to e-value for customers depends on how easily they can rebalance their liquidity portfolios. This will be more difficult to achieve if bank branch penetration is too low, as this will force the agent channel to develop alternative cash transport mechanisms. Thus, an agent network will need to rely on a minimal banking retail infrastructure. (This qualifies our earlier point that lack of access to formal services indicates a strong market opportunity. There appears to be a branch penetration “sweet spot” for mobile money, where penetration is not so high that it hampers demand for mobile money services, but not so low that agents are unable to manage their liquidity.) Kenya is reasonably well supplied with rural liquidity points due to the branch networks of Equity Bank and other banks and MFIs. Even so, shortage of cash or electronic value for M-PESA agents is a problem both in country and city. Other countries face more serious liquidity constraints, especially in rural areas, which is likely to be a major factor affecting the success of mobile services in specific country contexts.

  1. M-PESA’s Service Design: Getting People onto the System

While M-PESA’s explosive growth was fueled by certain country-specific enabling conditions, the success of such an innovative service hinged on the design of the service. Conducting financial transactions through a mobile phone is not an intuitive idea for many people, and walking to a corner shop to conduct deposits and withdrawals may not at first seem natural to many. To overcome this adoption barrier, Safaricom had to design M-PESA in a way that (i) helped people grasp immediately how they might benefit from the service, (ii) removed all barriers that might prevent people from experimenting with the service; and (iii) fostered trust in the retail outlets who would be tasked with promoting the service, registering customers, and facilitating cash-in/cash-out services.
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