From the beginning, Safaricom sought to foster customer trust in the new payment mechanism and relied on existing customers to be the prime mechanism to draw in new customers. This was all the more difficult because Safaricom was introducing not only a new product, but an entirely new product category to a market that had little experience with formal financial services. The internal launch target for M-PESA was about 1 million customers within one year, equal to 17 percent of Safaricom’s customer base of about 6 million customers at that time.21
National launch at scale. After small pilots involving less than 500 customers,22 M-PESA launched nationwide, increasing the likelihood that the service could reach a critical mass of customers in a short time frame. At launch, Safaricom had 750 stores and had made sure to cover all of Kenya’s 69 district headquarters. It was a massive logistical challenge that led to a great deal of customer and store confusion and, in the first months after launch, several days’ delays to reach customer service hotlines. User and store errors were frequent since everyone was new to the service. But the gamble paid off. Logistical problems subsided after a few months, leaving strong brand recognition and top-of-mind awareness among large segments of the population. The service outran first-year growth targets, quickly turning network effects in their favor as new customers begat more customers and turned M-PESA into a compelling business proposition for more stores.
An appropriate marketing mix. Initial marketing featured and targeted the wealthier city dweller with the need to “send money home” (see Exhibit 9a). This choice of the richer urban dweller as the initial customer created an aspirational image for M-PESA and avoided the impression that it was a low-value product aimed at the poor. Over time, the marketing moved from young, up-market urban dwellers with desk jobs to more ordinary Kenyans from lower-paid professions.
While M-PESA’s launch was associated with significant up-front investment in above-the-line marketing via TV and radio,23 there was also intense outreach through road shows and tents that traveled around the country signing people up, explaining the product, and demonstrating how to use it. Over time, as people became more familiar with the product and how to use it, it was no longer necessary to do this kind of hands-on outreach. TV and radio were largely replaced by the omnipresent M-PESA branding at all outlets, supported with a few large billboards. Newer ads (like the one in Exhibit 9b) feature a general emotional appeal, with a wider range of services indicated.
Exhibit 9a: Early M-PESA ad emphasizing sending money
from urban to rural areas linking into family and social ties
Exhibit 9b: Recent M-PESA ad with
more general emotional appeal
Safaricom understood that the primary role of the mobile phone is to enable the creation of a retail outlet-based channel for cash-to-digital value conversion. And, for this cash-to-digital conversion to be broadly available to the bulk of the population, it had to develop a channel structure that could support thousands of M-PESA stores spread across a broad geography. To achieve this, Safaricom built four elements into its channel management execution strategy: (i) engaging intermediaries to help manage the individual stores, thereby reducing the number of direct contacts it had to deal with; (ii) ensuring that outlets were sufficiently incentivized to actively promote the service; (iii) maintaining tight control over the customer experience; and (iv) developing several different methods for stores to re-balance their stocks of cash and e-value.
Two-tier channel management structure. Safaricom created a two-tier structure with individual stores (sub-agents, in Safaricom’s parlance) who depended on master agents (referred to by Safaricom as Agent Head Offices [HO]). Agent HOs maintain all contact with Safaricom, and perform two key functions: (i) liquidity management (buying and selling M-PESA balance from Safaricom and making it available to individual stores under their responsibility), and (ii) distributing agent commissions (collecting the commission from Safaricom based on the overall performance of the stores under them and remunerating each store). Individual stores may be directly owned by an agent HO or may be working for one under contract.
Incentivizing stores. Retail outlets will not maintain sufficient stocks of cash and e-money unless they are adequately compensated for doing so. Hence, Safaricom pays commissions to agent HOs for each cash-in/cash-out transaction conducted by stores under their responsibility. Safaricom does not prescribe the commission split between agent HOs and stores, though most agent HOs pass on 70 percent of commissions to the store.24 For deposits under US $33, Safaricom pays US 13.3¢ in total commissions, of which US 7.4¢ goes to the store after tax. For withdrawals, Safaricom pays US 20¢ to the channel, of which US 11.1¢ goes to the store. So, assuming equal volumes of deposits and withdrawals, the store earns US 9.2¢ per transaction. Assuming the store conducts 60 transactions per day, it earns around US $5.50 – almost twice the prevailing daily wage for a clerk in Kenya.
Recall that Safaricom charges customers US 33.3¢ on a round-trip savings transaction (free deposit plus US 33.3¢ withdrawal), which is in fact equal to what the channel gets (US 13.3¢ on the deposit + US 20¢ on the withdrawal). So, assuming equal volumes of deposits and withdrawals, Safaricom doesn’t make any money on cash transactions. It merely “advances” commissions to the channel when customers deposit, and recoups it when customers withdraw. By charging US 40¢ on electronic P2P transactions (which are almost costless to provide), Safaricom opted to generate the bulk of its revenue from the service for which there is highest customer willingness to pay - remote P2P payments.
Because store revenues are dependent on the number of transactions they facilitate, Safaricom was careful not to flood the market with too many outlets, lest it depress the number of customers per agent. Instead, it maintained a balanced growth in the number of outlets relative to the number of active customers, resulting in an incentivized and committed agent base.
Maintaining tight control over the customer experience. Safaricom also recognized that customers need to have a good experience at the retail points, where the bulk of transactions take place. To ensure that it maintained control over the customer experience, Safaricom did not rely on the broad base of agent HOs to perform all channel management functions. Instead (as mentioned above), it concentrated the evaluation, training, and on-site supervision of stores in a single outsourcing partner, Top Image. Thus, we see that Safaricom delegated the more routine, desk-bound, non-customer-facing store support activities (e.g. liquidity management, distribution store commissions) to a larger pool of agent HOs. At the same time, through its contract with Top Image, it retained direct, centralized control over the key elements of the customer experience (e.g. store selection, training, supervision).
Developing multiple store liquidity management methods. By far the biggest challenge faced by M-PESA stores is maintaining enough liquidity in terms of both cash and e-float to be able to meet customer requests for cash-in and cash-out. If they take too many cash deposits, stores will find themselves running out of e-float with which to facilitate further deposits. If they do too many withdrawals, they will accumulate e-float but will run out of cash. Hence, they frequently have to rebalance their holdings of cash versus e-float. This is what we refer to as liquidity management.
The M-PESA channel management structure was conceived to offer stores three methods for managing liquidity. Two of these place the agent HO in a central role, with the expectation that the agent HO will ‘recycle’ e-float between locations experiencing net cash withdrawals (i.e. accumulating e-float) and locations with net cash deposits (i.e. accumulating cash). We discuss each of these methods in turn:
Agent HO provides direct cash support to stores- Under this option, the store clerk comes to the agent HO’s head office to deliver or offload cash, or the agent HO sends cash runners to the store to perform these functions.
Agent HO and stores use their respective bank accounts- Under this option, if the store has excess cash and wants to buy M-PESA e-float from the agent HO, the store will deposit the cash into the account of the agent HO at the nearest bank branch or ATM. Once the agent HO confirms receipt of the funds into its account, the HO transfers M-PESA e-float to the store’s M-PESA account. If the store wants to sell e-float to get cash, the store transfers M-PESA e-float to the agent HO. The agent HO then deposits (or transfers) money into the store’s account at the branch of the store’s bank. The store can then withdraw the cash at the nearest branch or ATM.
Stores interact directly with a bank that has registered as an M-PESA “superagent”- Under this option, the agent HO does not get involved in liquidity management. Instead, stores open an account with a participating “superagent” bank. To rebalance their cash, stores deposit and withdraw cash against their bank account at the nearest branch or ATM of the bank. The store then electronically buys and sells e-float in real time against their bank account. From a store’s perspective, one drawback of the bank-based superagent mechanism is that it can only use it during banking business hours. This presents a problem for stores in the evenings and on weekends.
The e-float-cash nexus will remain the key constraint to the further development of M-PESA since it requires the physical movement of cash around the country and is thus the least scalable part of the system.
M-PESA’s Future Evolution
The experience of M-PESA demonstrates how powerful a payment network that offers convenience at an affordable cost can be once a critical mass of customers is reached. It also shows that achieving critical mass requires both a service design that removes as many adoption barriers as possible and significant investment in marketing, branding, and agent network management. The Kenyan experience also suggests that several country-level environmental factors need to align to set the scene for a successful mobile money development, including the labor market profile (demand for remittances generated by rural-urban migration), the quality of available financial services, support from the banking regulator, and the structure of the mobile communications market (dominant mobile operator and low airtime commissions).
Yet, while M-PESA has been successful beyond what anyone could have imagined at its launch, the model still has substantial room to develop further. Our wish list for M-PESA is three-fold: (i) the mainstreaming of M-PESA’s regulatory treatment; (ii) pricing that opens up a much larger market of micro-transactions; and (iii) building of a much more robust ecosystem around M-PESA that enables customers to access a broader range of financial services. We address each of these below, before offering some concluding thoughts on how M-PESA offers a rekindled vision for achieving financial inclusion in developing countries.