Mobile Payments Go Viral_M-PESA in Kenya_Mas and Radcliffe

8/8/2019 Mobile Payments Go Viral_M-PESA in Kenya_Mas and Radcliffe

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Customerregistrationanddepositsarefree.CustomersthenpayaflatfeeofaroundUS404forperson

toperson(P2P)transfersandbillpayments,US33forwithdrawals(fortransactionslessthanUS$33),

andUS1.3forbalanceinquiries.Individualcustomeraccountsaremaintainedinaserverthatisowned

andmanagedbyVodafone,butSafaricomdepositsthefullvalueofitscustomersbalancesonthe

systeminpooledaccountsintworegulatedbanks.Thus,SafaricomissuesandmanagestheMPESA

accounts,but

the

value

in

the

accounts

is

fully

backed

by

highly

liquid

deposits

at

commercial

banks.

CustomersarenotpaidinterestonthebalanceintheirMPESAaccounts.Instead,theforegoneinterest

ispaidintoanotforprofittrustfundcontrolledbySafaricom(thepurposeofthesefundshasnotyet

beendecided).

MPESAisusefulasaretailpaymentplatformbecauseithasextensivereachintolargesegmentsofthe

population.Exhibit1showsthesizeofvariousretailchannelsinKenya.5Notethattherearenearlyfive

timesthenumberofMPESAoutletsthanthetotalnumberofPostBankbranches,postoffices,bank

branches,andautomatedtellermachines(ATMs)inthecountry.UsingexistingretailstoresasMPESA

cashin/cashoutoutletsreducesdeploymentcostsandprovidesgreaterconvenienceandlowercostof

accessto

users.

Exhibit1:OutletsofferingfinancialservicesinKenya6

440800 840

1,510

16,900

100,000

1

10

100

1,000

10,000

100,000

PostBank

branches

Totalpost

offices

Bank

branches

ATMs MPesa

stores

Airtime

resellers

4WeassumeanexchangerateofUS$1:75KenyanSchillings.

5Kenyahasatotalpopulationofnearly40million,with78%livinginruralareasandaGDPpercapitaof$1,600.

19%ofadultshaveaccesstoaformalbankaccount.SeeFSDT(2009a)forfinancialaccessdataderivedfromthe

FinAccesssurvey,anationallyrepresentativesurveyof6,600householdsconductedinearly2009.6DatafromthistablewaspulledfromtheCentralBankofKenya,KenyaPostOfficeSavingsBank,andSafaricom

websites.


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ASnapshotofM-PESAafterThreeYears

MPESAisgoingfromstrengthtostrength.AsshowninExhibit2,Safaricomreachedthe9million

customermark

in

under

three

years.

Exhibit2:GrowthofMPESACustomerBase

ThelatestdevelopmentsandfiguresreportedbySafaricomasofJanuary2010are:7

9.0millionregisteredcustomers,ofwhichthemajorityareactive.Thiscorrespondsto60%of

Safaricomscustomerbase,23%oftheentirepopulation,and40%Kenyanadults.8

16,900retailstoresatwhichMPESAuserscancashinandcashout,ofwhichnearlyhalfare

locatedoutsideurbancenters.

US$320millionpermonthinpersontoperson(P2P)transfers.Onanannualizedbasis,thisis

equaltoroughly10%ofKenyangrossdomesticproduct(GDP).Althoughtransactionsper

customerhavebeenonarisingtrend,theyremainquitelow,probablystillundertwoP2P

transactionspermonth.

US$650millionpermonthincashdepositsandwithdrawaltransactionsatMPESAstores.The

averagetransactionsizeisaroundUS$33,butVodafonehasstatedthathalfthetransactions

areforavalueoflessthanUS$10.

US$7millioninmonthlyrevenue(basedonthesixmonthstoSeptember2009).Thisisequalto

8%ofSafaricomrevenues.

7Seewww.safaricom.co.ke/fileadmin/template/main/images/MiscUploads/M PESA%20Statistics.pdfforkey

monthlystatisticsforMPESA.AdditionalfiguresaretakenfromSafaricomspublishedhalfyearresultsforthe

periodendingSeptember2009andCentralBankofKenyareports.8The2009FinAccesssurvey(FSDT[2009a],p.16)confirmedthat40%ofadultshadusedMPESA.


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19%ofSafaricomairtimepurchasesareconductedthroughMPESA.

Thereare27companiesusingMPESAforbulkdistributionofpayments.Safaricomitselfusedit

todistributedividendsonSafaricomstockto180,000individualshareholderswhooptedto

receivetheirdividendsintotheirMPESAaccounts,outofatotalof700,000shareholders.

SincethelaunchofthebillpayfunctioninMarch2009,thereare75companiesusingMPESAto

collectpayments

from

their

customers.

The

biggest

user

is

the

electric

utility

company,

which

nowhasroughly20%oftheironemillioncustomerspayingthroughMPESA.

Atleasttwobanks(FamilyBankandKenyaCommercialBank)areusingMPESAasamechanism

forcustomerstoeitherrepayloansorwithdrawfundsfromtheirbanksaccounts.

CustomerPerspectivesonM-PESA9

Asurveyof3,000MPESAusersandnonusersconductedinthefallof2008shedconsiderablelighton

theprofileofMPESAsearlyadoptersandcustomerusagepatterns.Thesurveyfoundthattheaverage

M

PESA

user

is,

in

comparison

to

non

users,

twice

as

likely

to

have

a

bank

account

(72

percent

versus

36

percent),wealthier(65percenthigherexpenditurelevels),moreliterate,andbettereducated.Early

adoptersappeartobeexperiencedwithbankingpropositionsandfairlytechsavvy,whichprobably

makesthemmoreacutelyawareoftheconvenienceofferedbyMPESArelativetothealternatives.

Exhibit3highlightshowcustomersusetheservice.Consistentwithitsbroadmarketpositioning,more

thanhalfthesampleuseitprimarilyforsendingandreceivingmoney.Interestingly,21percentofM

PESAusersreportusingMPESAforstoringmoney.However,thesurveyrevealedthatlessthan1

percentofaccountshadbalancesofoverKSh1,000(US$13),andagovernmentauditofMPESAin

August2009revealedthattheaveragebalanceonMPESAaccountswasonlyUS$2.70.10Thesurvey

alsofoundthat52percentofcustomersusetheserviceonamonthlybasis,suggestingthatcustomers

haveyet

to

incorporate

M

PESA

into

their

daily

lives.

Exhibit3:TheUsesofMPESA

9ThedataandtablesfromthissectionarefromSuri,TavneetandWilliamJack(June2008),Theperformanceand

ImpactofMPESA:PreliminaryEvidencefromaHouseholdSurvey.UnpublishedPaper10

Okoth,Jackson(2009).RegulatorgivesMPESAacleanbillofhealth.TheStandard,27January2009.


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Thesurveyalsofoundthat98percentofusersreportbeinghappywiththeserviceand84percentclaim

thatlosingMPESAwouldhavealarge,negativeeffectonthem.Exhibit4belowillustrateshow

customerscompareMPESAwithalternativeservices.

Exhibit4:

Comparing

M

PESA

with

the

Alternatives

M-PESAsServiceEvolution

MPESAsoriginalcoreofferingwastheP2Ppaymentenablingcustomerstosendmoneytoanyone

withaccesstoamobilephone.Itopenedupamarketfortransactionswhichpreviouslywerehandled

largelyinformally

through

personal

trips,

friends,

and

public

transport

networks.

That

is

represented

bythesetoftransactionslabeledpersonalnetworksinthemiddleofExhibit5below.ManyP2P

transactionscanbecharacterizedasscheduledpayments(suchassendingaportionofsalaryearnedat

theendofthemonthtorelativesbackhome),butmanyrepresentabasicformoffinance,where

peoplecandrawonamuchbroadernetworkoffamilymembers,friends,andbusinessassociatesto

accessmoneyasandwhenrequired.Thus,MPESAnotonlyintroducesalargemeasureofconvenience


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totransactionsthatwerealreadyoccurring,butitalsoenablesabasicformoffinancialprotectionfora

largenumberofusersbyenablinganetworkforinstant,ondemandpayments.

Inrecentmonths,SafaricomhasincreasinglyopenedupMPESAtoinstitutionalpaymentsenabling

companiestopaysalariesandcollectbillpayments.Infuture,SafaricomenvisionsincreaseduseofM

PESAfor

in

store

purchases.

Thus,

Safaricom

intends

for

M

PESA

to

become

amore

pervasive

retail

paymentsplatform,astrategyrepresentedbythedownwardarrowinExhibit5.


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Exhibit5:PotentialRangeofTransactionsSupportedbyMPESA

FORMAL FINANCIALPRODUCTS

Savings, credit, insurance

INFORMAL SERVICEPROVIDERS

Pawnbroker, moneylender

On-demand payments

PERSONAL NETWORKS

Scheduled payments

REMOTE B2C/C2B

INSTITUTIONAL PAYMENTS

Salaries, bill pay, G2P,

online/e-commerce

IN-STORE MERCHANT PAYMENTS

For goods & services

JUST

PAYMENTS

PUSHING &

PULLING MONEY

ACROSS TIME

M-PESA role

in promotingfuller f inancialinclusion?

M-PESA as

a fuller retailpaymentsplatform

ThechallengeremainsforMPESAtobecomeavehiclefordeliveryofabroaderrangeoffinancial

servicestothebulkoftheKenyanpopulationrepresentedbytheupwardarrowinExhibit5.Sofar,the

evidenceislimitedthatpeoplearewillingtousethebasicMPESAaccountitselfasastoreofvalue.

Thereislikelytobeaneedtodevelopmoretargetedsavingsproductsthatbalancecustomers

preferencefor

liquidity

and

commitment,

and

which

connect

into

abroader

range

of

financial

institutions.ThisisthejourneyMPESAmustbeonforittodeliveronitspromiseofaddressingthe

challengeoffinancialinclusioninKenya.Akeypreconditionisregulation:theCentralBankofKenyaisin

theprocessoffinalizingregulationsthatwillallownonbankoutletsandplatformssuchasMPESAasa

channelforformaldeposittaking.Beyondthat,Safaricomwillneedtodevelopappropriateservice,

commercialandtechnicalmodelsforMPESAtointerworkwiththesystemsofotherfinancialservice

providers.Wereturntothistopicintheconcludingsectionofthispaper.

The

broader

significance

of

M-

PESA

BeforeexaminingwhyMPESAachievedsuchdramaticgrowth,wediscussbrieflythreetoplinelessons

thathaveemergedfromMPESAssuccess:

First,MPESAhasdemonstratedthepromiseofleveragingmobiletechnologytoextendfinancial

servicestolargesegmentsofunbankedpoorpeople.Thisisfundamentallybecausethemobilephone

isquicklybecomingaubiquitouslydeployedtechnology,evenamongpoorsegmentsofthepopulation.


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MobilepenetrationinAfricahasincreasedfrom3percentin2002to48percenttoday,andisexpected

toreach72percentby2014.11And,happily,themobiledevicemimicssomeofthekeyingredients

neededtoofferbankingservices.TheSIMcardinsideGSMphonescanbeusedtoauthenticateusers,

therebyavoidingthecostlyexerciseofdistributingseparatebankcardstolowprofitabilitypoor

customers.Themobilephonecanalsobeusedasapointofsale(POS)terminaltoinitiatefinancial

transactionsand

securely

communicate

with

the

appropriate

server

to

request

transaction

authorization,thusobviatingtheneedtodeploycostlydedicateddevicesinretailenvironments.

Second,MPESAhasdemonstratedtheimportanceofdesigningusageratherthanfloatbased

revenuemodelsforreachingpoorcustomerswithfinancialservices.Becausebanksmakemostoftheir

moneybycollectingandreinvestingdeposits,theytendtodistinguishbetweenprofitableand

unprofitablecustomersbasedonthelikelysizeoftheiraccountbalancesandtheirabilitytoabsorb

credit.Banksthusfinditdifficulttoservepoorcustomersbecausetherevenuefromreinvestingsmall

valuedepositsisunlikelytooffsetthecostofservingthesecustomers.Incontrast,mobileoperatorsin

developingcountrieshavedevelopedausagebasedrevenuemodel,sellingprepaidairtimetopoor

customersin

small

increments,

such

that

each

transaction

is

profitable

on

astand

alone

basis.

This

is

the

magicbehindtherapidpenetrationofprepaidairtimeintolowincomemarkets:acardboughtisprofit

booked,regardlessofwhoboughttheprepaidcard.Thisusagebasedrevenuemodelisdirectlyaligned

withthemodelneededtosustainablyoffersmallvaluecashin/cashouttransactionsatretailoutlets

andwouldmakepossibleatruemassmarketapproach,withnoincentiveforproviderstodenyservice

basedonminimumbalancesorintensityofuse.

Third,MPESAhasdemonstratedtheimportanceofbuildingalowcosttransactionalplatformwhich

enablescustomerstomeetabroadrangeoftheirpaymentneeds.Onceacustomerisconnectedtoan

epaymentsystem,shecanusethiscapabilitytostoremoneyinasavingsaccount,sendandreceive

money

from

friends

and

family,

pay

bills

and

monthly

insurance

premiums,

receive

pension

or

social

welfarepayments,orreceiveloandisbursementsandrepaythemelectronically.Inshort,whena

customerisconnectedtoanepaymentsystem,herrangeoffinancialpossibilitiesexpandsdramatically.

Puttingtheseelementstogether,MPESAhaspromptedarethinkontheoptimalsequencingoffinancial

inclusionstrategies.Wheremostfinancialinclusionmodelshaveemployedcreditledorsavingsled

approaches,theMPESAexperiencesuggeststhattheremaybeathirdapproachfocusfirston

buildingthepaymentrailsonwhichabroadersetoffinancialservicescanride.

AccountingforM-PESAsSuccess:ThreePerspectives

TherestofthispaperexploresMPESAssuccessfromthreeangles.First,weexaminetheenvironmental

factorsinKenyathatsetthesceneforasuccessfulmobilemoneydevelopment.Then,weexaminethe

servicedesignfeaturesthatfacilitatedtherapidadoptionandfrequentuseofMPESA.And,finally,we

examinetheelementsinSafaricomsexecutionstrategythathelpedMPESArapidlyreachacriticalmass

ofcustomers.

11WirelessIntelligence(www.wirelessintelligence.com)


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Insodoing,wedrawextensivelyonasequenceoffourpaperswhichreaderscanrefertoformore

detailedaccountsoftheMPESAstory:HeyerandMas(2009)onthecountryfactorsthatledtoM

PESAssuccess,MasandMorawczynski(2009)onMPESAsservicefeatures,MasandNgweno(2010)

onSafaricomsexecution,andMas(2009)ontheeconomicsunderpinningbranchlessbankingsystems.

Beyondthecompellingmarketing,coldbusinesslogicandconsistentexecutionofMPESA,itssuccessis

avividexampleofhowgreatthingshappenwhenagroupofleadersfromdifferentorganizationsrally

aroundcommonchallengesandideas.ThestoryofMPESAstraddlesthesocialandthecommercial,the

publicandtheprivate,powerfulorganizationsanddeterminedindividuals:

TheIndividualsandInstitutionsBehindMPESA

TheideaofMPESAwasoriginallyconceivedbyaLondonbasedteamwithinVodafone,ledbyNick

HughesandSusieLonie.Thisteambelievedthemobilephonecouldplayacentralroleinloweringthe

costofpoorpeopletoaccessfinancialservices.TheideawasseizedbytheSafaricomteaminKenya,led

byCEOMichaelJosephandProductManagerPaulineVaughn.Theytoyedwiththeidea,convinced

themselvesof

its

power,

developed

it

thoroughly

prior

to

the

national

launch,

and

oversaw

avery

focusedexecution.

TheCentralBankofKenya(CBK),andinparticularitsPaymentsSystemgroupledbyGeraldNyoma,

deservesmuchcreditforbeingopentotheideaoflettingamobileoperatortaketheleadinproviding

paymentservicestothebulkofthepopulation.TheCBKhadrecentlybeenmadeawareoftheverylow

levelsofbankpenetrationinthecountrybythefirstFinAccesssurveyin2006,andtheywere

determinedtoexploreallreasonableoptionsforcorrectingtheaccessimbalance.TheCBKworkedin

closepartnershipwithVodafoneandSafaricomtoassesstheopportunitiesandrisksinvolvedpriorto

thelaunchandasthesystemdeveloped.Theywereconsciousthatprematureregulationmightstifle

innovation,sotheychosetomonitorcloselyandlearnandformalizetheregulationslater.

Finally,theUKsDepartmentforInternationalDevelopment(DfID)playedaninstrumentalrole,firstby

fundingtheorganizationsthatmadetheFinAccesssurveypossibletheFinancialSectorDeepening

TrustinKenya,theFinMarkTrustinSouthAfrica,andthenbyprovidingseedfundingtoVodafoneto

trialitsearliestexperimentswithMPESA.DfIDsroleinspotlightingtheneedformobilepaymentsand

fundingtheearlyriskdemonstratesgoodrolesfordonorfunding.

2.KenyaCountryFactors: UnmetNeeds,FavorableMarketConditions

ThegrowthofMPESAisatestamenttoSafaricomsvisionandexecutioncapacity.However,Safaricom

alsobenefited

from

launching

the

service

in

acountry

which

contained

several

enabling

conditions

for

a

successfulmobilemoneydeployment,including:stronglatentdemandfordomesticremittances,poor

qualityofavailablefinancialservices,abankingregulatorwhichpermittedSafaricomtoexperimentwith

differentbusinessmodelsanddistributionchannels,andamobilecommunicationsmarket

characterizedbySafaricomsdominantmarketpositionandlowcommissionsonairtimesales.


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1

StrongLatentDemandforDomesticRemittances

SafaricombasedtheinitiallaunchoftheMPESAserviceonthesendmoneyhomeproposition,even

thoughitalsoallowstheusertobuyandsendairtime,storevalueand,morerecently,topaybills.

Demandfordomesticremittanceserviceswillbelargerwheremigrationresultsinsplittingoffamilies,

withthe

bread

winner

heading

to

urban

centers

and

the

rest

of

the

family

staying

back

home.

This

is

the

caseinKenya,where17percentofhouseholdsdependonremittancesastheirprimaryincomesource.12

InherstudyofMPESA,Ratan(2008)suggeststhatthelatentdemandfordomesticremittancesis

relatedtourbanizationratios.Morepropitiousmarketswillbethosewheretheprocessofruralurban

migrationissufficientlyrootedtoproducelargemigrationflows,butnotsoadvancedthatrural

communitiesarehollowedout.Countrieswithmidrangeurbanizationratios(20percentto40percent),

especiallythosethatareurbanizingatarapidrate,arelikelytoexhibitstrongruralurbantiesrequiring

transferofvaluebetweenthem.ThisisthecaseinmanyAfricancountrieslikeKenyaandTanzania,

wheretheurbanizationratiosare22percentand25percent,respectively.13InthePhilippinesandLatin

America,where

urbanization

ratios

exceed

50

percent,

remittances

are

more

likely

to

be

triggered

by

internationalratherthandomesticmigrationpatterns.

Whereentirenuclearfamiliesmove,remittanceswillbestrongerwherethereisculturalpressureto

retainconnectionwithonesancestralvillage.InKenya,migrantstieswithruralhomesarereinforced

byanethnic(ratherthannational)conceptionofcitizenship.Theselinksareexpressedthroughburial,

inheritance,crossgenerational,socialinsuranceandotherties,evenincaseswheremigrantsreside

moreorlesspermanentlyincities.14Inothersettings,agreateremphasisonnationalasopposedto

localorethnicidentitymayhavediminishedthesignificanceoftheruralhomeandhencedampened

domesticremittanceflows.

PoorQualityofExistingAlternatives

Latentdemandforepaymentsmustbelookedatinthecontextoftheaccessibilityandqualityofthe

alternatives.Iftherearemanygoodalternativestomobilepayments(asistypicallythecasein

developedcountries),itwillbedifficulttoconvinceuserstoswitchtothenewservice.InthePhilippines,

forexample,theGCashandSmartMoneymobilepaymentservicesexperiencedlowtakeupinpart

duetotheavailabilityofacompetitivealternativetomobilepaymentsanextensiveandefficientsemi

formalretailnetworkofpawnshopswhichoffereddomesticremittanceservicesat3percent.

InKenya,

the

most

common

channel

for

sending

money

before

M

PESA

was

informal

bus

and

matatu

(sharedtaxi)companies.Thesecompaniesarenotlicensedtotransfermoney,resultinginconsiderable

riskthatthemoneywillnotreachitsfinaldestination.AndKenyaPost,Kenyasmajorformalremittance

12FSDKenya(2006)

13CIAWorldFactBook(https://www.cia.gov/library/publications/theworldfactbook)

14ForfulleranalysesoftheuseofmobilemoneyfordomesticremittancesinKenya,seeRatan(2008)and

Morawczynski(2008).


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1

provider,isperceivedbycustomersascostly,slow,andpronetoliquidityshortagesatruraloutlets.

Meanwhile,Kenyassparsebankbranchinfrastructure(840branches)isfartoolimitedtocompetewith

MPESAs16,900cashin/cashoutoutlets.Exhibit6belowillustrateshowKenyanhouseholdssent

moneybeforeandafterMPESA.Notethedramaticreductionintheuseofinformalbussystemsand

KenyaPosttotransfermoneybetween2006and2009.

Exhibit6:MoneyTransferBehaviorBeforeandAfterMPESA15

Asnotedabove,MPESAsearlyadopterswereprimarilybankedcustomers,whichsuggeststhatMPESA

didnotacquireitsinitialcriticalmassthroughcompetitionwiththeformalsectorbutratherasa

complementtoformalservicesforclientswhowerewealthier,moreexposedtoformalfinancialservice

options,andlessriskaverse.Asservicesmovedeeperintothemarket,unbankeduserswilllikelydrive

MPESAs

expansion,

due

to

the

competitive

advantages

of

formal

mobile

offers

over

other

options.

This

isonereasonwhyAfrica,withitshighpopulationofunbanked,isseenassuchapromisingmarketfor

mobilemoneydeployments.

ASupportiveBankingRegulator

Regulationofmobilemoneycanhelptosecuretrustinnewmobilemoneyschemes.Atthesametime,

regulationmayconstrainthesuccessofamobilemoneydeploymentbylimitingtheschemeoperators

degreesoffreedominstructuringthebusinessmodel,serviceproposition,anddistributionchannels.In

thecaseofMPESA,SafaricomhadagoodworkingrelationshipwiththeCentralBankofKenya(CBK)

andwasgivenregulatoryspacetodesignMPESAinamannerthatfititsmarket.

TheCBKandSafaricomworkedoutamodelthatprovidedsufficientprudentialcomforttotheCBK.The

CBKinsistedthatallcustomerfundsbedepositedinaregulatedfinancialinstitution,andreviewedthe

15FSDKenya(2006)andFSDKenya(2009).


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1

AReasonableBaseofBankingInfrastructure

Finally,theabilityofMPESAstorestoconvertcashtoevalueforcustomersdependsonhoweasilythey

canrebalancetheirliquidityportfolios.Thiswillbemoredifficulttoachieveifbankbranchpenetration

istoolow,asthiswillforcetheagentchanneltodevelopalternativecashtransportmechanisms.Thus,

anagent

network

will

need

to

rely

on

aminimal

banking

retail

infrastructure.

(This

qualifies

our

earlier

pointthatlackofaccesstoformalservicesindicatesastrongmarketopportunity.Thereappearstobea

branchpenetrationsweetspotformobilemoney,wherepenetrationisnotsohighthatithampers

demandformobilemoneyservices,butnotsolowthatagentsareunabletomanagetheirliquidity.)

KenyaisreasonablywellsuppliedwithruralliquiditypointsduetothebranchnetworksofEquityBank

andotherbanksandMFIs.Evenso,shortageofcashorelectronicvalueforMPESAagentsisaproblem

bothincountryandcity.Othercountriesfacemoreseriousliquidityconstraints,especiallyinruralareas,

whichislikelytobeamajorfactoraffectingthesuccessofmobileservicesinspecificcountrycontexts.

3.M-PESAs

Service

Design:

Getting

People

onto

the

System

WhileMPESAsexplosivegrowthwasfueledbycertaincountryspecificenablingconditions,thesuccess

ofsuchaninnovativeservicehingedonthedesignoftheservice.Conductingfinancialtransactions

throughamobilephoneisnotanintuitiveideaformanypeople,andwalkingtoacornershopto

conductdepositsandwithdrawalsmaynotatfirstseemnaturaltomany.Toovercomethisadoption

barrier,SafaricomhadtodesignMPESAinawaythat(i)helpedpeoplegraspimmediatelyhowthey

mightbenefitfromtheservice,(ii)removedallbarriersthatmightpreventpeoplefromexperimenting

withtheservice;and(iii)fosteredtrustintheretailoutletswhowouldbetaskedwithpromotingthe

service,registeringcustomers,andfacilitatingcashin/cashoutservices.

ASimpleMessageTargetingaBigPainPoint

MPESAwasoriginallyconceivedasawayforcustomerstorepaymicroloans.However,asSafaricom

markettestedthemobilemoneyproposition,theyshiftedthecorepropositionfromloanrepaymentto

helpingpeoplemakeP2Ptransferstotheirfriendsandfamily.Fromitscommerciallaunch,MPESAhas

beenmarketedtothepublicwithjustthreepowerfulwords:sendmoneyhome.Thismessagewas

welladaptedtotheKenyanphenomenonofsplitfamiliesdiscussedaboveandtappedintoamajorpain

pointformanyKenyanstherisksandhighcostassociatedwithsendingmoneyoverlongdistances.

Thisbasiceremittanceproductbecamethemusthavekillerapplicationthatcontinuestodrive

service

take

up

and

remains

the

main

(though

not

only)

marketing

message

three

years

later.

Although

peoplehaveprovedcreativeinusingMPESAfortheirownspecialneeds,sendingmoneyhome

continuestobeoneofthemostimportantusesthenumberofhouseholdsreceivingmoneyinKenya

hasincreasedfrom17percentto52percentsinceMPESAwasintroduced.18

18FinAccessSurvey,FSDT(2009a),p16.


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1

ASimpleUserInterface

ThesimplicityofMPESAsmessagehasbeenmatchedbythesimplicityofitsuserinterface.TheMPESA

userinterfaceisdrivenbyanapplicationthatrunsfromtheusersmobilephone.Theservicecanbe

launchedrightfromthephonesmainmenu,makingiteasyforuserstofind.Themenuloadsquickly

becauseit

resides

on

the

phone

and

does

not

need

to

be

downloaded

from

the

network

each

time

it

is

called.Themenupromptstheusertoprovidethenecessaryinformation,onepromptatatime.For

instance,foraP2Ptransfer,theuserwillbeaskedtoenterthedestinationphonenumber,theamount

ofthetransfer,andthepersonalidentificationnumber(PIN)ofthesender.Oncealltheinformationis

gathered,itisfedbacktothecustomerforfinalconfirmation.OncethecustomerhitsOK,itissentto

theMPESAserverinasingletextmessage.Consolidatingallinformationintoasinglemessagereduces

messagingcosts,aswellastheriskofthetransactionrequestbeinginterruptedhalfwaythrough.A

finaladvantageisthattheapplicationcanusethesecuritykeysintheusersSIMcardtoencrypt

messagesendtoend,fromtheusershandsettoSafaricomsMPESAserver.

RemovingAdoptionBarriers:FreetoRegister,FreetoDeposit,No

MinimumBalances

Safaricomdesignedtheschemetomakeitaseasyaspossibleforcustomerstotrythenewservice.

Theydesignedaquickandsimpleprocessforcustomerregistration,whichcanbedoneatanyMPESA

retailoutlet.Customerspaynothingtoregisterandtheclerkattheoutletdoesmostoftheworkduring

theprocess.First,theclerkprovidesapaperregistrationform,wherethecustomerentershisorher

name,IDnumber(fromKenyanNationalID,Passport,MilitaryID,DiplomaticIDorAlienID),dateof

birth,occupation,andmobilephonenumber.TheclerkthencheckstheIDandinputsthecustomers

registrationinformationintoaspecialapplicationinhismobilephone.IfthecustomersSIMcardisan

oldonethatisnotpreloadedwiththeMPESAapplication,theclerkreplacesit.Thecustomersphone

numberisnotchangedeveniftheSIMcardis.

SafaricomthensendsboththecustomerandoutletanSMSconfirmingthetransaction.TheSMSgives

customersafourdigitstartkey(onetimepassword),whichtheyusetoactivatetheiraccount.

CustomersenterthestartkeyandIDnumber,andtheyarethenaskedtoinputasecretPINoftheir

choice,whichcompletestheregistrationprocess.Inadditiontoleadingcustomersthroughthisprocess,

retailoutletsexplainhowtousetheapplicationandthetariffsassociatedwitheachservice.Suchagent

supportearlyintheprocessisparticularlyimportantinruralareas,whereasignificantpercentageofthe

potentialuserbaseisilliterateorunfamiliarwiththefunctioningoftheirmobilephone.

WhiletheminimumdepositamountisaroundUS$1.25,thereisnominimumbalancerequirement.

Customerscandepositmoneyforfree,sothereisnoimmediatebarriertotakinguptheservice.M

PESAchargescustomersonlyfordoingsomethingwiththeirmoney,suchasmakingatransfer,

withdrawal,orprepaidairtimepurchase.


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1

BeingAbletoSendMoneytoAnyone

MPESAcustomerscansendmoneytononMPESAcustomers,includinganypersonwithaGSMmobile

phoneinKenya,whethertheyaresubscribersofSafaricomorofanyoftheotherthreecompeting

networks(Zain,OrangeandYu).Underthisservice,moneyisdebitedfromthesendersaccount,and

therecipient

gets

acode

by

SMS

which

it

can

use

to

claim

the

monetary

value

at

any

M

PESA

store.

Thus,itsanaccounttocashservice,withthereceiversexperiencebeingsimilartohowWesternUnion

workstoday.Thepricingonthisserviceisinteresting:customerspayahigher(roughlytriple)P2Pcharge

whensendingmoneytoanoncustomer,butattheotherendcashingoutisfreeforanoncustomer,

whereasregisteredcustomerspayacashoutfeeofatleastUS$0.30.Sowhypenalizethecustomer

ratherthanthenoncustomer?Safaricomunderstoodthatthesenderhadpowerovertherecipient,so

itchosetoputpressureonthesendertorequiretherecipienttoregisterwithMPESA.Furthermore,

thenoncustomergotagreatfirstexperiencewithMPESAwhenhereceivedmoneyforfree,which

SafaricomhopedwouldconvincethemtoregisterforMPESA.

BuildingTrustintheRetailNetwork

SafaricomrecognizedthatMPESAwouldnotachieverapidadoptionunlesscustomershadenoughtrust

intheMPESAretailnetworkthattheywerewillingtoconductcashin/cashouttransactionsthrough

thoseoutlets.Safaricomemployedseveralmeasurestobuildthattrust.

First,itcloselylinkedtheMPESAbrandtocustomersaffinitywithandtrustinSafaricomsstrong

corporatebrand.AsthemobileoperatorinKenyawithadominantshare(over80%atMPESAslaunch

andscarcelylesstoday),Safaricomwasalreadyabroadlyrespectedandtrustedbrand,evenamonglow

incomecustomers.AsshowninExhibit7below,MPESAretailoutletsarerequiredtopainttheirstore

Safaricomgreen

which

not

only

builds

gives

customers

confidence

that

the

store

is

acting

on

behalf

of

Safaricom,butalsomakesiteasierforcustomerstolocatecashin/cashoutpoints.

Exhibit7:ATypicalMPESARetailOutlet


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1

Second,Safaricomensuredthatcustomerscanwalkintoanyretailauthorizedoutletandhavea

remarkablysimilarexperience.Thishashelpedtobuildtrustintheplatformandtheoutlets,andgives

customersaconsistentlypositiveviewoftheservice.Safaricommaintainsthiscontroloverthe

customerexperiencebyinvestingheavilyinstoretrainingandonsitesupervision.Safaricomchoseto

centralizethesefunctionsinasinglethirdpartyvendor(TopImage)ratherthanrelyingonitschannel

intermediaries(e.g.

master

agents)

to

cascade

these

functions

to

retail

shops.

A

Top

Image

representativevisitseachoutletatminimumonamonthlybasisandrateseachstoreonavarietyof

criteria,includingvisibilityofbrandingandthetariffposter;availabilityofcashandMPESAelectronic

valuetoaccommodatecustomertransactions;andthequalityofrecordkeeping.

Third,customersreceiveinstantSMSconfirmationoftheirtransaction,helpingcustomerslearnby

experiencetotrustthesystem.TheconfirmingSMSconstitutesanelectronicreceipt,whichcanbeused

indisputeresolution.Thereceiptconfirmingamoneytransferdetailsthenameandnumberofthe

recipientandtheamounttransferred.Thisallowsthesendertoconfirminstantlythatthemoneywas

senttotherightpersonthemostcommonsourceoferror.

Fourth,Safaricomrequiresitsoutletstorecordallcashin/cashouttransactionsinapaperbased,

Safaricombrandedlogbook.Foreachtransaction,thestoreclerkenterstheMPESAbalance,thedate,

agentID,transactionID,transactiontype(customerdepositorwithdrawal),value,customerphone

number,customername,andthecustomersnationalIDnumber.Customersarethenaskedtosignthe

logforeachtransaction,whichhelpsdiscouragefraudandalsogivesagentsawaytoofferfirstline

customercareforcustomersqueryingprevioustransactions.Eachentryinthelogiswrittenintriplicate.

Thetopcopyiskeptbytheretailoutletforhisownrecords,asecondispassedontothestoresmaster

agent,andthethirdissenttoSafaricom.Recallthatallinformationcontainedintheagentlog(except

forthecustomersignature)iscapturedelectronicallybySafaricomwhenthetransactionismadeandis

availabletothemasteragentsviatheirwebmanagementsystem.Hence,themainpurposeoftheagent

logisnotforrecordkeeping,buttoprovidecomforttocustomerswhoareusedtohavingtransactions

recordedonpaper.

SimpleandTransparentPricing

MPESApricingismadetransparentandpredictableforusers.Therearenocustomerchargesfor

theSMSsthatdelivertheservice,andinsteadfeesareappliedtotheactualcustomerinitiated

transactions.Allcustomerfeesaresubtractedfromthecustomersaccount,andoutletscannot

chargeany

direct

fees.

Thus,

outlets

collect

their

commissions

from

Safaricom

(through

their

master

agents)ratherthanfromcustomers.Thisreducesthepotentialforagentabuses.Customerfeesare

uniformnationwide,andtheyareprominentlypostedinalloutletlocationsinthepostershownin

Exhibit8(feesareinKenyanShillings(KSh),whichtradeatabout75shillingstotheUSdollar).

MPESAchosetospecifyitsfeesinfixedcurrencytermsratherthanasapercentageofthetransaction.

Thismakesiteasierforcustomerstounderstandtheprecisecostofeachtransactionandhelps


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1

themthinkofthefeeintermsofthetransactionsabsolutevalue(e.g.,sendingmoneyto

grandmother).Italsohelpsthemcomparethetransactioncostagainstalternativeandusually

costliermoneytransferarrangements(e.g.,thematatufareplustraveltime).

Exhibit8:MPESATariffStructure

Depositsare

free

to

customers.

WithdrawalsunderUS$33cost

around0.33.Withdrawal

chargesarebanded(i.e.,larger

transactionsincuralargercost)

soasnottodiscouragesmaller

transactions.ATMwithdrawals

usingMPESAareslightlymore

expensivethanataretailoutlet

(40versus33.3).

P2Ptransferscostaflatrateof

aroundUS40.Thisiswhere

Safaricommakesthebulkofits

revenue.Thus,forapurely

electronictransfer,customerspay

morethandoublethanwhatthey

payfortheaveragecash

transaction(17)despitethecost

toprovidebeinglowerforpurely

electronictransactions

than

those

involvingcash.Thisreflectsa

notionofoptimalpricingthatis

lessbasedoncostandmoreon

customerwillingnesstopay:

enablingremotepaymentsisthe

biggestcustomerpainpointwhich

MPESAaimstoaddress.MPESAis

cheaperthantheotheravailable

mechanismsformakingremotepayments,suchasmoneytransferbythebuscompanies,KenyaPosts

Postapayor

Western

Union.19

ItisnoteworthythatMPESAhasmaintainedthesamepricingfortransactionsinitsfirstthreeyears,

despitethesignificantinflationexperiencedduringtheperiod.Thishashelpedestablishcustomer

19Inherfieldresearch,OlgaMorawczynskifindsthatsendingKSh1,000throughMPESAis27%cheaperthanthe

postofficesPostaPay,and68%cheaperthansendingitviaabuscompany.SeeMorawczynskiandPickens

(2009).


18/28

1

familiaritywiththeservice.However,Safaricomhaschangedthepricingfortwocustomerrequeststhat

donotinvolveafinancialtransaction:balanceinquiries(becausetheinitiallowpricegeneratedan

overlyburdensomevolumeofrequests)andPINchanges(becausecustomerswerefarmorelikelyto

remembertheirPINifthefeetochangeitwashigher).Thevolumeofbothtypesofrequestsdecreased

substantiallyafterthesepricechanges.Asnotedearlier,theSMSconfirmationofatransactioncontains

theavailable

balance,

which

also

helps

cut

down

on

the

number

of

balance

inquiries.

LiquidityofLastResortatBankBranchesandATMs

Fromveryearlyon,MPESAsignedupbanksasagents,sothatanyMPESAcustomercouldwalkintothe

branchesofseveralbankstoconductcashin/cashouttransactions.Oneyearafteritslaunch,MPESA

wentfurtherandpartneredwithPesaPoint,oneofthelargestATMserviceprovidersinKenya.The

PesaPointnetworkincludesover110ATMsscatteredalloverthecountry,givingthemapresenceinall

eightprovinces.CustomerscannowretrievemoneyfromanyPesaPointATM.Todoso,theymustselect

ATMwithdrawalfromtheirMPESAmenu.TheythenreceiveaonetimeATMauthorizationcode,

whichtheyenterontheATMkeyboardtomakethewithdrawal.Nobankcardisneededforthis

transaction.ByaccessingthePesaPointATMnetwork,MPESAcustomerscannowmakewithdrawalsat

anytime,dayornight.

YetMPESAsliquiditysystemisnotwithoutitschallenges.Duetocashfloatconstraints,MPESAretail

outletscannotalwaysmeetrequestsforwithdrawals,especiallylargewithdrawals.Furthermore,the

agentcommissionstructurediscouragesoutletsfromhandlinglargetransactions.Asaresult,customers

aresometimesforcedtosplittheirtransactionsoverafewdays,takingmoneyoutinbitsratherthan

withdrawingalumpsum,addingbothcostandinconvenience.ItalsounderminescustomertrustinM

PESAasamechanismforhighbalance,longtermsaving.UsingbankbranchesandATMstogive

customersasortofliquiditymechanismoflastresortbolsteredthecredibilityoftheMPESAsystem.

4. Execution: GettingtoCriticalMass,Quickly

Withastrongservicedesigninplace,Safaricomthensetaboutdevelopingitsexecutionplan.It

recognizedthatitwouldbedifficulttoscaleMPESAincrementallyasithadtoovercomethree

significanthurdlesthatarecommontoanynewelectronicpaymentsystem,namely:

Adversenetworkeffects:Thevaluetothecustomerofapaymentsystemdependsonthe

numberof

people

connected

to

and

actively

using

it.

The

more

people

on

the

network,

the

moreusefulitbecomes.20Whilenetworkeffectscanhelpaschemegainmomentumonceit

20Ithasbecomehabitualtoillustratenetworkeffectswithreferencetofaxmachines:thefirstsetofpeoplewho

boughtafaxmachinedidntfinditveryusefulastheycouldntsendfaxestomanypeople.Asmorepeople

boughtfaxmachines,everyonesfaxesbecamemoreandmoreuseful.Networkeffectsaresometimesreferredto

asdemandsideeconomiesofscale,toemphasizethatscaleaffectsthevalueoftheservicetoeachcustomer.


19/28

1

reachesacriticalmassofcustomers,theycanmakeitdifficulttoattractearlyadoptersinthe

earlyphasewhentherearefewusersonit.

Chickenandeggtrap:Inordertogrow,MPESAhadtoattractbothcustomersandstoresin

tandem.Itishardtosellthepropositiontocustomerswhiletherearefewstorestoservethem,

andequallyhardtoconvincestorestosignupwhiletherearefewcustomerstobehad.Thus,

thescheme

needed

to

drive

both

customer

and

store

acquisition

aggressively.

Trust:Customershavetogainconfidenceinthereliabilityofanewsystem.Inthiscase,

customershadtobecomfortablewiththreeelementsthatwerenewatthetimeinKenya:(i)a

paymentsystemthatwasoperatedbyamobileoperator,(ii)goingtononbankretailoutletsto

meettheircashin/cashoutneeds,and(iii)accessingtheiraccountandinitiatingtransactions

throughtheirmobilephone.

Theseproblemsreinforceeachotherintheearlystagedevelopmentofapaymentssystem,creatinga

significanthurdletogrowth.Wesuspectthishurdlehelpsexplainwhymanyothermobilemoney

deploymentsremainsubscale.MPESAovercamethishurdlethroughveryforcefulexecutionontwo

keyfronts:

(i)

Safaricom

made

significant

up

front

investments

in

building

astrong

service

brand

for

M

PESA;and(ii)Safaricomeffectivelyleverageditsextensivenetworkofairtimeresellerstobuilda

reliable,consistentretailnetworkthatservedcustomersliquidityneeds.

AggressiveUp-FrontInvestmentinPromotingtheM-PESABrand

Fromthebeginning,Safaricomsoughttofostercustomertrustinthenewpaymentmechanismand

reliedonexistingcustomerstobetheprimemechanismtodrawinnewcustomers.Thiswasallthe

moredifficultbecauseSafaricomwasintroducingnotonlyanewproduct,butanentirelynewproduct

categorytoamarketthathadlittleexperiencewithformalfinancialservices.Theinternallaunchtarget

forM

PESA

was

about

1million

customers

within

one

year,

equal

to

17

percent

of

Safaricoms

customer

baseofabout6millioncustomersatthattime.21

Nationallaunchatscale.Aftersmallpilotsinvolvinglessthan500customers,22MPESAlaunched

nationwide,increasingthelikelihoodthattheservicecouldreachacriticalmassofcustomersinashort

timeframe.Atlaunch,Safaricomhad750storesandhadmadesuretocoverallofKenyas69district

headquarters.Itwasamassivelogisticalchallengethatledtoagreatdealofcustomerandstore

confusionand,inthefirstmonthsafterlaunch,severaldaysdelaystoreachcustomerservicehotlines.

Userandstoreerrorswerefrequentsinceeveryonewasnewtotheservice.Butthegamblepaidoff.

Logisticalproblemssubsidedafterafewmonths,leavingstrongbrandrecognitionandtopofmind

awarenessamong

large

segments

of

the

population.

The

service

outran

first

year

growth

targets,

quickly

Thisdistinguishesitfromsupplysideeconomiesofscale,whichrefertosituationswhereaveragecostsper

customerfallasvolumeincreases.Davidson(2009)discussesimplicationsofnetworkeffectsformobilemoney.21

SafaricomcompanyresultsfortheyearendingMarch2007.22

Theearliestpilotprojectconductedin2004/05revolvedaroundmicroloanrepayments,andinvolvedthe

CommercialBankofAfrica,Vodafone,FauluKenyaandMicroSave,inadditiontoSafaricom.


20/28

2

turningnetworkeffectsintheirfavorasnewcustomersbegatmorecustomersandturnedMPESAinto

acompellingbusinesspropositionformorestores.

Anappropriatemarketingmix.Initialmarketingfeaturedandtargetedthewealthiercitydwellerwith

theneedtosendmoneyhome(seeExhibit9a).Thischoiceofthericherurbandwellerastheinitial

customercreated

an

aspirational

image

for

M

PESA

and

avoided

the

impression

that

it

was

alow

value

productaimedatthepoor.Overtime,themarketingmovedfromyoung,upmarketurbandwellerswith

deskjobstomoreordinaryKenyansfromlowerpaidprofessions.

WhileMPESAslaunchwasassociatedwithsignificantupfrontinvestmentinabovethelinemarketing

viaTVandradio,23therewasalsointenseoutreachthroughroadshowsandtentsthattraveledaround

thecountrysigningpeopleup,explainingtheproduct,anddemonstratinghowtouseit.Overtime,as

peoplebecamemorefamiliarwiththeproductandhowtouseit,itwasnolongernecessarytodothis

kindofhandsonoutreach.TVandradiowerelargelyreplacedbytheomnipresentMPESAbrandingat

alloutlets,supportedwithafewlargebillboards.Newerads(liketheoneinExhibit9b)featureageneral

emotionalappeal,withawiderrangeofservicesindicated.

Exhibit9a:EarlyMPESAademphasizingsendingmoney

fromurbantoruralareaslinkingintofamilyandsocialties

Exhibit9b:RecentMPESAadwith

moregeneralemotionalappeal

AScalable

Distribution

Channel

Safaricomunderstoodthattheprimaryroleofthemobilephoneistoenablethecreationofaretail

outletbasedchannelforcashtodigitalvalueconversion.And,forthiscashtodigitalconversiontobe

broadlyavailabletothebulkofthepopulation,ithadtodevelopachannelstructurethatcouldsupport

23Asurveyof1,210usersinlate2008revealedthat70%ofsurveyrespondentsclaimedtheyhadfirstheardabout

MPESAfromadvertisements,TVorradio.FSDT(2009b),p.6.


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2

thousandsofMPESAstoresspreadacrossabroadgeography.Toachievethis,Safaricombuiltfour

elementsintoitschannelmanagementexecutionstrategy:(i)engagingintermediariestohelpmanage

theindividualstores,therebyreducingthenumberofdirectcontactsithadtodealwith;(ii)ensuring

thatoutletsweresufficientlyincentivizedtoactivelypromotetheservice;(iii)maintainingtightcontrol

overthecustomerexperience;and(iv)developingseveraldifferentmethodsforstorestorebalance

theirstocks

of

cash

and

evalue.

Twotierchannelmanagementstructure.Safaricomcreatedatwotierstructurewithindividualstores

(subagents,inSafaricomsparlance)whodependedonmasteragents(referredtobySafaricomas

AgentHeadOffices[HO]).AgentHOsmaintainallcontactwithSafaricom,andperformtwokey

functions:(i)liquiditymanagement(buyingandsellingMPESAbalancefromSafaricomandmakingit

availabletoindividualstoresundertheirresponsibility),and(ii)distributingagentcommissions

(collectingthecommissionfromSafaricombasedontheoverallperformanceofthestoresunderthem

andremuneratingeachstore).IndividualstoresmaybedirectlyownedbyanagentHOormaybe

workingforoneundercontract.

Incentivizingstores.Retailoutletswillnotmaintainsufficientstocksofcashandemoneyunlessthey

areadequatelycompensatedfordoingso.Hence,SafaricompayscommissionstoagentHOsforeach

cashin/cashouttransactionconductedbystoresundertheirresponsibility.Safaricomdoesnot

prescribethecommissionsplitbetweenagentHOsandstores,thoughmostagentHOspasson70

percentofcommissionstothestore.24FordepositsunderUS$33,SafaricompaysUS13.3intotal

commissions,ofwhichUS7.4goestothestoreaftertax.Forwithdrawals,SafaricompaysUS20to

thechannel,ofwhichUS11.1goestothestore.So,assumingequalvolumesofdepositsand

withdrawals,thestoreearnsUS9.2pertransaction.Assumingthestoreconducts60transactionsper

day,itearnsaroundUS$5.50almosttwicetheprevailingdailywageforaclerkinKenya.

Recallthat

Safaricom

charges

customers

US

33.3

on

around

trip

savings

transaction

(free

deposit

plus

US33.3withdrawal),whichisinfactequaltowhatthechannelgets(US13.3onthedeposit+US20

onthewithdrawal).So,assumingequalvolumesofdepositsandwithdrawals,Safaricomdoesntmake

anymoneyoncashtransactions.Itmerelyadvancescommissionstothechannelwhencustomers

deposit,andrecoupsitwhencustomerswithdraw.BychargingUS40onelectronicP2Ptransactions

(whicharealmostcostlesstoprovide),Safaricomoptedtogeneratethebulkofitsrevenuefromthe

serviceforwhichthereishighestcustomerwillingnesstopay remoteP2Ppayments.

Becausestorerevenuesaredependentonthenumberoftransactionstheyfacilitate,Safaricomwas

carefulnottofloodthemarketwithtoomanyoutlets,lestitdepressthenumberofcustomersper

agent.Instead,

it

maintained

abalanced

growth

in

the

number

of

outlets

relative

to

the

number

of

activecustomers,resultinginanincentivizedandcommittedagentbase.

Maintainingtightcontroloverthecustomerexperience.Safaricomalsorecognizedthatcustomers

needtohaveagoodexperienceattheretailpoints,wherethebulkoftransactionstakeplace.Toensure

thatitmaintainedcontroloverthecustomerexperience,Safaricomdidnotrelyonthebroadbaseof

24Safaricomwantsthesplittobe20%/80%,thuspassingmoreofthecommissiondowntotheretailoutlet.


22/28

2

agentHOstoperformallchannelmanagementfunctions.Instead(asmentionedabove),itconcentrated

theevaluation,training,andonsitesupervisionofstoresinasingleoutsourcingpartner,TopImage.

Thus,weseethatSafaricomdelegatedthemoreroutine,deskbound,noncustomerfacingstore

supportactivities(e.g.liquiditymanagement,distributionstorecommissions)toalargerpoolofagent

HOs.Atthesametime,throughitscontractwithTopImage,itretaineddirect,centralizedcontrolover

thekey

elements

of

the

customer

experience

(e.g.

store

selection,

training,

supervision).

Developingmultiplestoreliquiditymanagementmethods.ByfarthebiggestchallengefacedbyMPESAstoresismaintainingenoughliquidityintermsofbothcashandefloattobeabletomeet

customerrequestsforcashinandcashout.Iftheytaketoomanycashdeposits,storeswillfind

themselvesrunningoutofefloatwithwhichtofacilitatefurtherdeposits.Iftheydotoomany

withdrawals,theywillaccumulateefloatbutwillrunoutofcash.Hence,theyfrequentlyhaveto

rebalancetheirholdingsofcashversusefloat.Thisiswhatwerefertoasliquiditymanagement.

TheMPESAchannelmanagementstructurewasconceivedtoofferstoresthreemethodsformanaging

liquidity.TwooftheseplacetheagentHOinacentralrole,withtheexpectationthattheagentHOwill

recycleefloatbetweenlocationsexperiencingnetcashwithdrawals(i.e.accumulatingefloat)and

locationswithnetcashdeposits(i.e.accumulatingcash).Wediscusseachofthesemethodsinturn:

1) AgentHOprovidesdirectcashsupporttostoresUnderthisoption,thestoreclerkcomestothe

agentHOsheadofficetodeliveroroffloadcash,ortheagentHOsendscashrunnerstothestoreto

performthesefunctions.

2) AgentHOandstoresusetheirrespectivebankaccounts Underthisoption,ifthestorehasexcess

cashandwantstobuyMPESAefloatfromtheagentHO,thestorewilldepositthecashintothe

accountoftheagentHOatthenearestbankbranchorATM.OncetheagentHOconfirmsreceiptof

the

funds

into

its

account,

the

HO

transfers

M

PESA

e

float

to

the

stores

M

PESA

account.

If

the

storewantstosellefloattogetcash,thestoretransfersMPESAefloattotheagentHO.Theagent

HOthendeposits(ortransfers)moneyintothestoresaccountatthebranchofthestoresbank.

ThestorecanthenwithdrawthecashatthenearestbranchorATM.

3) StoresinteractdirectlywithabankthathasregisteredasanMPESAsuperagentUnderthis

option,theagentHOdoesnotgetinvolvedinliquiditymanagement.Instead,storesopenan

accountwithaparticipatingsuperagentbank.Torebalancetheircash,storesdepositand

withdrawcashagainsttheirbankaccountatthenearestbranchorATMofthebank.Thestorethen

electronicallybuysandsellsefloatinrealtimeagainsttheirbankaccount.Fromastores

perspective,onedrawbackofthebankbasedsuperagentmechanismisthatitcanonlyuseitduring

bankingbusiness

hours.

This

presents

aproblem

for

stores

in

the

evenings

and

on

weekends.

TheefloatcashnexuswillremainthekeyconstrainttothefurtherdevelopmentofMPESAsinceit

requiresthephysicalmovementofcasharoundthecountryandisthustheleastscalablepartofthe

system.


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2

5.M-PESAsFutureEvolution

TheexperienceofMPESAdemonstrateshowpowerfulapaymentnetworkthatoffersconvenienceat

anaffordablecostcanbeonceacriticalmassofcustomersisreached.Italsoshowsthatachieving

criticalmassrequiresbothaservicedesignthatremovesasmanyadoptionbarriersaspossibleand

significantinvestment

in

marketing,

branding,

and

agent

network

management.

The

Kenyan

experience

alsosuggeststhatseveralcountrylevelenvironmentalfactorsneedtoaligntosetthescenefora

successfulmobilemoneydevelopment,includingthelabormarketprofile(demandforremittances

generatedbyruralurbanmigration),thequalityofavailablefinancialservices,supportfromthebanking

regulator,andthestructureofthemobilecommunicationsmarket(dominantmobileoperatorandlow

airtimecommissions).

Yet,whileMPESAhasbeensuccessfulbeyondwhatanyonecouldhaveimaginedatitslaunch,the

modelstillhassubstantialroomtodevelopfurther.OurwishlistforMPESAisthreefold:(i)the

mainstreamingofMPESAsregulatorytreatment;(ii)pricingthatopensupamuchlargermarketof

microtransactions;

and

(iii)

building

of

amuch

more

robust

ecosystem

around

M

PESA

that

enables

customerstoaccessabroaderrangeoffinancialservices.Weaddresseachofthesebelow,before

offeringsomeconcludingthoughtsonhowMPESAoffersarekindledvisionforachievingfinancial

inclusionindevelopingcountries.

MainstreamingM-PESAsRegulatoryTreatment

MPESAsregulatorytreatmentasapaymentsvehicleneedstobeformalizedsothatitcanbecome

regulatedinthemostappropriateway.Tothisend,theCBKhasbeentryingtogetanewpaymentslaw

enactedbyParliament,butthedrafthasnotyetbeenapproved.TheintentionisforMPESAtobe

coveredin

future

by

regulations

emanating

from

this

payments

law.

The

CBK

is

also

in

the

process

of

finalizingagentbankingregulationswhichwouldallowcommercialbankstouseretailoutletsasa

deliverychannelforfinancialservices.Banksarequitereasonablycomplainingthattheycouldnot

replicatetheMPESAservicethemselvessincetheyarenotcurrentlyallowedtoundertakecustomer

transactionsthroughagentnetworksontheirown.Webelievethereshouldbealevelplayingfield,so

thatbothbanksandMPESAcanoperatesuchagentnetworks.

PricingthatEnablesSmallerPayments

MPESAscurrentpricingmodelisnotconduciveforsmalltransactions.AUS$10P2Ptransferplus

withdrawal,forexample,costsaround7percentofthetransactionsize(US0.40forthetransferplus

US0.33forthewithdrawal).WeseetwoadvantagestoadjustingMPESAscurrentpricingmodelto

makeitworkforsmallerdenominationtransactions:

Itwouldmaketheserviceaccessibletoapoorersegmentofthepopulation,forwhompricingis

nowtoohighgiventheirtransactionalneeds.ThiswouldallowSafaricomtomaintaincustomer

growthoncesaturationstartstosetinatcurrentpricing.


24/28

2

ItwouldallowcustomerstouseMPESAfortheirdailytransactionneeds,andinparticularto

saveonadailybasiswhentheyarepaiddaily.

Areductionincustomerpricescouldcomeaboutinseveralways:

Forelectronic

transactions,

the

current

P2P

charge

of

US

40

allows

for

substantial

scope

for

pricereductions.Butletsbecareful.Thereisacompellinglogicbehindthecurrentmodelof

extractingvaluefromremotepayments(forwhichthereissubstantialcustomerwillingnessto

pay),whilemaintainingtightpricingoncashtransactions(forwhichcustomersarelesswillingto

pay).ButwedobelievethereisroomfortranchingtheP2Pfeesothatthepriceworksfor

smaller(e.g.daily)transactions.

Forcashtransactions,onewaytoenablelowerfeeswouldbetocreateacategoryofstreet

levelsubagents,characterizedbylowercostsandcommissionsthanstorebasedagents.Sub

agentswouldbeakindofesusucollector,operatingwithsmallworkingcapitalbalancesin

ordertoaggregatesmallcustomertransactions.SubagentswouldusenormalMPESAretail

outletsto

rebalance

their

cash

and

M

PESA

stored

value.

The

key

principle

here

is

that

segmentationofcustomersneedstogohandinhandwithsegmentationofagents.

LinkingwithBanksandotherInstitutionalPartnerstoOfferaFuller

RangeofFinancialServices

WhilesomecustomersuseMPESAasasavingsdevice,itstillfallsshortofbeingausefulsavings

propositionformostpoorpeople.AccordingJanuary2009CBKauditofMPESA,theaveragebalanceon

MPESAaccountswasaroundUS$3.Thisispartlyalargenumberproblem: if900,000peopleusedM

PESA

to

save,

that

would

only

be

10

percent

of

users

and

their

savings

would

be

diluted

within

an

averagesavingsbalance.Butthefundamentalproblemisthatthereisstillalotofconversionof

electronicvaluebackintocash,sayfollowingreceiptofadomesticremittance.Weattributethistoa

combinationoffactors:

Lackofmarketing.SafaricomdoesnotwanttopubliclypromotethesavingsusageofMPESA

forfearofprovokingtheCentralBankintotighterregulationofMPESA.

Customerpricing.ThereisaflatfeeofaroundUS33forwithdrawalsunderUS$33,which

meansthatsmallwithdrawalscarryalargepercentfee.

Productdesign.MPESAworksverymuchlikeanelectroniccheckingaccount,anddoesnot

offerstructured

saving

products

which

may

help

people

build

discipline

around

savings.

Inflation.MPESAdoesnotpayinterest.Inanenvironmentwith15percentinflation(duringits

firstfullyearofoperationin2008),thismaybetooonerousforsavings.

Trust.DepositsarenotsupervisedbytheCentralBank.Andunlikepayments,wheretrustcanbe

validatedexperientiallyinrealtime,savingsrequirestrustoveralongerperiodoftime.

Privacy.Peoplemaywantmoreprivacyintheirsavingsbehaviorthananagentprovides.


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2

Excessliquidity.16,000cashinpointsarealso16,000cashoutpoints.TheubiquityofMPESA

agentsmaymakeittooeasyforcustomerstocashouttheirfunds,thuslimitingtheirabilityto

accumulatelargebalances.

RatherthanexpectingSafaricomtodevelopandmarketrichersavingsservices,webelievethatMPESA

shouldsupport

savings

propositions

by

linking

into

banks.

M

PESA

would

then

become

amassive

transactionacquisitionnetworkforbanksratherthananalternativetothem.Safaricomisbeginningto

connectwithbanks.InSeptember2009,forexample,FamilyBankconnectedtoMPESAtoallowtheir

customerstotransfermoneyfromMPESAtotheirFamilyBankaccount(usingMPESAsbillpay

function).ThisisfollowingasuccessfulpilotofloanrepaymentsviaMPESAsbillpayfunction.

MPESAwouldalsobenefitfromestablishingfurtherlinkageswithinstitutionsbeyondbanks,suchas

billers,distributors,andemployers.BypromotingMPESAasamechanismfordistributingsalariesand

socialwelfarepayments,enablingpaymentsacrosssupplychains,andpayingbills,theneedforcashin

andcashoutwouldbeminimized,and,asaresult,akeycomponentoftransactioncostscouldbe

reduced.We

also

suspect

savings

balances

would

be

higher

if

people

received

payments

directly

into

theiraccountratherthanincash,andiftheyhadmoreusefulthingstheycoulddowiththeirmoneyin

electronicform.

Concludingthoughts:HowM-PESAcanreinvigoratevisionsaround

financialinclusion

Imagineaworldwherebanksarenowherenearwhereyoulive.Thenearestbranchis10kilometers

away,butittakesyoualmostanhourtogettherebyfootandbusbecauseyoudonthaveyourown

wheels.Withwaitingtimesatthebranch,thatsaroundtripoftwohoursaquarterorsoofyour

workingdaygone.Andthebusfareisonly50cents,butthatsonequarterofwhatyoumakeonagood

day.Soeachbankingtransactioncostsyoutheequivalentofalmosthalfadayswages.Itwouldbelike

anATMchargingussomethinglike$50foreachtransaction,givenwhatweearn.

Then,imagineaworldwithoutcreditinstrumentsorelectronicpayments.Nochecks,nocards,no

moneyorders,nodirectdebits,nointernetbanking.Allyourtransactionsaredoneincashor,worse,by

barteringgoods.Allexchangesarephysical,persontoperson,handtohand.Considerthehassleand

theriskofsendingmoneytodistantrelatives,businesspartners,orbanks.

Howwouldyouoperateinsuchaworld?Arecentbook,PortfoliosofthePoor,hasdocumentedhow

poorpeople

cope.

How

they

save

to

push

some

excess

money

from

today

to

tomorrow,

how

they

borrowtopulltomorrowsmoneytofundsomeneededexpensetoday.Youstoresomecashinthe

hometomeetdailyneeds,youparkitwithatrustedfriendforemergencies,youbuyjewelrybecause

thatrepresentsafutureforyourchildren,youpileupsomebricksforthedaywhenyoucanbuildan

extraroominyourhouse.Youmakeregularcontributionstoasavingsgroupwithacircleoffriendsto

buildupapot,andonedayitwillbeyourturntotakethatpothometobuynewclothes.Youalso


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2

borrowfromfriends,seekadvancesfromyouremployer,pawnsomeofyourjewelry,andgotothe

moneylender.

TheauthorsofPortfoliosofthePoordocumentsomepoorfamiliesacrossIndia,BangladeshandSouth

Africausingupto14differentmechanismstomanagetheirfinanciallives.Theyhavefewoptions,but

youneed

to

deploy

all

your

ingenuity

to

use

them

all,

precisely

because

none

are

very

good.

Some

are

notverysafebecauseoftheirsheerphysicality.Ifyousavebystoringyourgrainorbuyinggoats,when

yourvillagehitshardtimesyoumaynotbeabletofindreadybuyersforyourgrainorgoats.Forget

aboutgettingloansfromneighborsduringhardtimes.Thelocalmoneylenderrunsaquasimonopolyin

thevillagebecauseitistoocostlyforyoutogotoothermoneylendersinothervillages,andinanycase

theydontknowyouthere.Soyouenduppayingdearlyforaloan.

Weestimatethatover2billionpeopleneedtocopewithsuchcircumstances.Thelackofgoodfinancial

optionsisundoubtedlyoneofthereasonswhypoorpeoplearetrappedinpoverty.Theycannotsustain

orevenaspiretohigherincomebecausetheyarenotabletoinvestinbetterfarmingtoolsandseedsto

enhancetheirproductivity,startamicroenterprise,oreventakethetimetosearchforbetterpaying

employmentopportunities.Theirincomeisvolatile,oftenfluctuatingdaily,sowithoutreliablewaysof

pushingandpullingmoneybetweengooddaysandbaddaystheymayhavetofacethestarkdecisionto

pullthekidsoutofschoolorputlessfoodonthetableduringbadpatches.Andwithoutgoodfinancial

toolstheymaynotbeabletocopewithshocksthatsetthembackperiodically.Mostoftheseshocksare

foreseeableifnotentirelypredictable:adrought,illhealth,lifecycleeventssuchasmarriageanddeath.

Cashisthemainbarriertofinancialinclusion.Aslongaspoorpeoplecanonlyexchangevalueincash

or,worse,physicalgoodstheywillremaintoocostlyforformalfinancialinstitutionstoaddressin

significantnumbers.Collectinglowvaluecashdepositsandredeemingtheirsavingsbackintosmall

sumsofcashrequiresacostlyinfrastructurewhichfewbanksarewillingtomakeextensiveinlow

incomeor

rural

areas.

But

once

poor

people

have

access

to

cost

effective

electronic

means

of

payments

suchasMPESA,theycould,inprinciple,beprofitablymarketablesubjectsbyarangeoffinancial

institutions.

MPESAitselfdoesnotconstitutefinancialinclusion.Butitdoesgiveusglimpsesofacommercially

sound,affordableandeffectivewaytoofferfinancialservicestoall.


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2

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Documents

Mobile Payments Go Viral_M-PESA in Kenya_Mas and Radcliffe