M-PESA pricing is made transparent and predictable for users. There are no customer charges for the SMSs that deliver the service, and instead fees are applied to the actual customer-initiated transactions. All customer fees are subtracted from the customer’s account, and outlets cannot charge any direct fees. Thus, outlets collect their commissions from Safaricom (through their master agents) rather than from customers. This reduces the potential for agent abuses. Customer fees are uniform nationwide, and they are prominently posted in all outlet locations in the poster shown in Exhibit 8 (fees are in Kenyan Shillings (KSh), which trade at about 75 shillings to the US dollar).
M-PESA chose to specify its fees in fixed currency terms rather than as a percentage of the transaction. This makes it easier for customers to understand the precise cost of each transaction and helps them think of the fee in terms of the transaction’s absolute value (e.g., sending money to grandmother). It also helps them compare the transaction cost against alternative and usually costlier money-transfer arrangements (e.g., the matatu fare plus travel time).
Deposits are free to customers. Withdrawals under US $33 cost around 0.33¢. Withdrawal charges are “banded” (i.e., larger transactions incur a larger cost) so as not to discourage smaller transactions. ATM withdrawals using M-PESA are slightly more expensive than at a retail outlet (40¢ versus 33.3¢).
P2P transfers cost a flat rate of around US 40¢. This is where Safaricom makes the bulk of its revenue. Thus, for a purely electronic transfer, customers pay more than double than what they pay for the average cash transaction (17¢) – despite the cost to provide being lower for purely electronic transactions than those involving cash. This reflects a notion of optimal pricing that is less based on cost and more on customer willingness to pay: enabling remote payments is the biggest customer pain point which M-PESA aims to address. M-PESA is cheaper than the other available mechanisms for making remote payments, such as money transfer by the bus companies, Kenya Post’s Postapay or Western Union.19 It is noteworthy that M-PESA has maintained the same pricing for transactions in its first three years, despite the significant inflation experienced during the period. This has helped establish customer familiarity with the service. However, Safaricom has changed the pricing for two customer requests that do not involve a financial transaction: balance inquiries (because the initial low price generated an overly burdensome volume of requests) and PIN changes (because customers were far more likely to remember their PIN if the fee to change it was higher). The volume of both types of requests decreased substantially after these price changes. As noted earlier, the SMS confirmation of a transaction contains the available balance, which also helps cut down on the number of balance inquiries.
Liquidity of Last Resort at Bank Branches and ATMs
From very early on, M-PESA signed up banks as agents, so that any M-PESA customer could walk into the branches of several banks to conduct cash-in/cash-out transactions. One year after its launch, M-PESA went further and partnered with PesaPoint, one of the largest ATM service providers in Kenya. The PesaPoint network includes over 110 ATMs scattered all over the country, giving them a presence in all eight provinces. Customers can now retrieve money from any PesaPoint ATM. To do so, they must select “ATM withdrawal” from their M-PESA menu. They then receive a one-time ATM authorization code, which they enter on the ATM keyboard to make the withdrawal. No bank card is needed for this transaction. By accessing the PesaPoint ATM network, M-PESA customers can now make withdrawals at any time, day or night.
Yet M-PESA’s liquidity system is not without its challenges. Due to cash float constraints, M-PESA retail outlets cannot always meet requests for withdrawals, especially large withdrawals. Furthermore, the agent commission structure discourages outlets from handling large transactions. As a result, customers are sometimes forced to split their transactions over a few days, taking money out in bits rather than withdrawing a lump sum, adding both cost and inconvenience. It also undermines customer trust in M-PESA as a mechanism for high-balance, long-term saving. Using bank branches and ATMs to give customers a sort of liquidity mechanism of last resort bolstered the credibility of the M-PESA system.
With a strong service design in place, Safaricom then set about developing its execution plan. It recognized that it would be difficult to scale M-PESA incrementally as it had to overcome three significant hurdles that are common to any new electronic payment system, namely:
Adverse network effects: The value to the customer of a payment system depends on the number of people connected to and actively using it. The more people on the network, the more useful it becomes.20 While network effects can help a scheme gain momentum once it reaches a critical mass of customers, they can make it difficult to attract early adopters in the early phase when there are few users on it.
Chicken-and-egg trap: In order to grow, M-PESA had to attract both customers and stores in tandem. It is hard to sell the proposition to customers while there are few stores to serve them, and equally hard to convince stores to sign up while there are few customers to be had. Thus, the scheme needed to drive both customer and store acquisition aggressively.
Trust: Customers have to gain confidence in the reliability of a new system. In this case, customers had to be comfortable with three elements that were new at the time in Kenya: (i) a payment system that was operated by a mobile operator, (ii) going to non-bank retail outlets to meet their cash-in/cash-out needs, and (iii) accessing their account and initiating transactions through their mobile phone.
These problems reinforce each other in the early-stage development of a payments system, creating a significant hurdle to growth. We suspect this hurdle helps explain why many other mobile money deployments remain sub-scale. M-PESA overcame this hurdle through very forceful execution on two key fronts: (i) Safaricom made significant up-front investments in building a strong service brand for M-PESA; and (ii) Safaricom effectively leveraged its extensive network of airtime resellers to build a reliable, consistent retail network that served customers’ liquidity needs.