M-Pesa: Financial Inclusion through Mobile Payments (Part 2)

As a follow-up to my previous entry on M-Pesa, today’s post will focus on the market conditions that facilitated its success, Safaricom’s impressive execution approach as well as future opportunities.

Although Safaricom’s roll-out of M-Pesa was exemplary, it is important to recognise the market conditions that enabled its success:

·      Strong demand for domestic remittances: being a developing country, Kenya’s working population is increasingly drawn to urban centres.  This migration pattern leads to split families, where the migrant workers remit parts of their salaries to family members in rural areas

·      Poor quality of existing alternatives: Kenya’s banking network consists of less than 1,000 branches, too few to serve a market of Kenya’s size.  Migrant workers therefore resorted to insecure, slow and costly alternatives, such as the postal service and unlicensed money carriers

·      A supportive banking regulator: the Central Bank of Kenya recognised the need for a secure, convenient and cost efficient payment system and adopted a flexible regulatory approach.  The CBK required all deposits to be held by a regulated commercial bank, restricted M-Pesa from earning interests on deposits or lending money to its users and set a limit on transaction sizes.  Beyond this, M-Pesa was free to operate outside the banking law

·      Safaricom’s dominant market position: beyond Safaricom’s ability to finance the scheme, its dominant market position was important for three key reasons:

o   Greater customer base to cross sell the product

o   More agents (retail stores) to handle cash-in/cash-out services

o   Better brand recognition and trust to handle sensitive business

Having laid out the market conditions in Kenya, let’s look at how Safaricom designed the M-Pesa product offering and marketing approach.  Safaricom knew that people may be intimidated by new technology and designed M-Pesa to overcome any barriers to adoption.  Mas and Radcliffe identify seven key pillars to their approach:

·      Easy to understand, straightforward message: Safaricom recognised that M-Pesa would seem daunting to many potential users, and chose to focus their marketing on one basic message for which they new there would be a demand; ‘Send Money Home’

·      Simple user interface: in line with the marketing message, Safaricom opted for a basic, step-by-step user interface that would be intuitive to anyone

·      No set-up costs: to encourage users to sign up and try the service, Safaricom charges no fees to register for the service, deposit money or maintain the account.  All fees are usage based and therefore directly related to activities users value 

·      Payments available to anyone: to further encourage adoption; receiving money through M-Pesa is not restricted to registered users or even customers of Safaricom.  Non-customers simply receive a PIN-code by SMS, with which they can withdraw cash at any M-Pesa agent.  Safaricom recognised that receiving money would be a fantastic first interaction with M-Pesa for non-customers and use this to win new customers

·      High trust agent network: as it was left to retail stores that sell Safaricom airtime to handle all cash-in/cash-out transactions, it was essential that customers perceive them as trustworthy.  To build trust in the network, Safaricom took a three-step approach:

o   As a well-known and trusted mobile network, Safaricom linked M-Pesa and its agents closely with its own brand.  Agents were required to point their stores in ‘Safaricom Green’ to underline this visual identity

o   Safaricom rolled out a training programme for front-line employees and inspect each store on a monthly basis

o   Agents record transactions in a ledger and give a paper receipt to the custom, who also receives a confirmation from Safaricom by SMS 

·      Transparent, easy-to-understand pricing: Safaricom adopted a usage-based, flat-fee pricing structure that any customer would easily understand

·      Banks offer liquidity of last resort: as customers rely on individual agents being liquid to receive cash, Safaricom has signed up local banks to offer liquidity of last resort

Having understood the market conditions and customer needs in Kenya and designed a product and communications approach accordingly, Safaricom recognised that they would also need to execute M-Pesa flawlessly.  There were two main components to their execution plan:

·      Launch with national scale: Safaricom had identified remittances as the key feature of M-Pesa and knew that they would need to launch at a national scale in order to achieve relevance.  Having completed a small pilot with 500 customers, they therefore launched across all 69 districts of Kenya, involving 750 retail agents.  This was clearly a risky approach and inevitably led to a umber of teething problems, but these were quickly straightened out and M-Pesa had become a national brand within a few months

·      Staged brand positioning and advertising: in line with the marketing message of ‘Send Money Home’, M-Pesa was initially targeted at young, upmarket, urban workers.  This positioned M-Pesa as an aspirational, sophisticated product and enabled a quick roll-out to other segments.  The advertising campaign was also initially centralised, with TV and radio ads, backed up with roadshows.  Later, this was substituted with a more local approach, where billboards and agents promoted M-Pesa in their communities.

The greatest logistical challenge of launching at a national scale was to build the agent network.  Let’s look at the key challenges and how Safaricom went about solving this:

·      Two-tier agent management structure: Safaricom recognised that a national network of retail agents would require thousands of stores and implemented a structure that would enable them to manage at this scale.  They therefore developed a two-tier system, in which certain agents were assigned Head Office (HO) status and would manage its own network of agents.  This would enable Safaricom to maintain a level of control over the network without spreading itself too thin

·      Managing the customer experience: to complement the two-tier network structure, Safaricom realised that it would be important to retain central control of the customer experienced.  While agent HOs manage the day-to-day activities, Safaricom therefore hired a third-party agency to deliver training to agents and regularly visit them to ensure brand consistency

·      Incentivising agents: M-Pesa relies on local agents being sufficiently liquid to perform the basic cash-in/cash-out service that underlies remittances.  Safaricom therefore chose to incentivise agents based on the number of cash-in/cash-out transactions they perform, which indirectly rewards agents for managing their liquidity

·      Ensuring agent liquidity: to enable agents to maintain liquidity, Safaricom made available three separate channels for local agents to trade cash for e-credits.  Agents are able to make this trade directly with the Head Office, with the Head Office but through a bank or directly with banks.  Each of these channels have their benefits and drawbacks and each play a critical role in providing liquidity

Having gotten a better understanding of the market conditions, product design and implementation strategy that lay behind M-Pesa’s success, let’s look at future opportunities. 

Upon launch, Safaricom opted for a flat-fee pricing structure.  This had the advantage of being easy-to-understand and transparent, but discourages smaller transactions, as the fee becomes relatively high.  In order to encourage smaller transactions, become more ingrained in its customers’ daily lives and open up for poorer customers that view M-Pesa as prohibitively expensive, Safaricom should consider variable fees for transactions under a certain threshold.

Furthermore, Safaricom has only begun to partner with non-bank businesses and should explore opportunities to enable customers to receive salaries and government payments to their accounts and pay bills to utilities and other service providers.  Broadening the range of available transactions would reduce the need for cash-in/cash-out services and take M-Pesa to another level.

Finally, Safaricom does not have a banking license and is not allowed to offer interest on deposits and is consequently unable to offer savings products.  Although M-Pesa is a fantastic means to encourage financial inclusion, its customers also need access to savings and credit products in order to improve their financial opportunities further.  Working with the Central Bank, Safaricom should therefore explore opportunities to integrate closer with local banks, enabling them to offer customers access to a broader range of banking products.

In conclusion, we have seen that M-Pesa has been both a fantastic business opportunity to Safaricom and a tool for social transformation.  Its success is credit to a product that was well designed to meet the market specificities and customer needs in Kenya, as well as flawless execution of a considered implementation strategy.  Although, M-Pesa has already been a fantastic success, there are still opportunities to attract lower income segments, cover a broader range of transaction needs and widen the choice of banking services.  Without doubt, it will be exciting to follow the M-Pesa story going forward as well as similar initiatives around the world.