M-Pesa: Financial Inclusion through Mobile Payments (Part 1)

I have previously written about my enthusiasm for mobile payment and remittance schemes, particularly for their transformational potential in emerging markets.  It therefore seemed appropriate to dedicate a couple of posts to Safaricom’s M-Pesa, perhaps the most famous and successful mobile payment scheme launched in a developing country. 

In today’s entry I’ll give an overview of M-Pesa’s business model, describe its progress to date and explore the lessons for financial inclusion and development.  market conditions that facilitated the development of a mobile payment scheme.  My next entry will focus on the market conditions that facilitated M-Pesa’s success and Safaricom’s impressive execution and likely future developments.

For those who are not familiar with M-Pesa, it is an electronic payment and store of value system accessible through mobile phones.  The idea was developed by Vodafone in London and launched through its Kenyan subsidiary in 2007.  Customers sign up to the service through Safaricom’s extensive network of mobile credit agents.  The user provides basic personal information and identification and is assigned a payment account that is linked to an application that sits on their SIM card.  If the user’s SIM card is not already enabled, the agent will provide an upgraded SIM card at no cost.

The fee model is entire usage-based, so customers can sign up and deposit funds for free.  The user is then charged a flat fee for available services; P2P transfers, bill payment, withdrawals and balance enquiries.  As Safaricom is not a licensed bank, all funds are deposited with a commercial bank and customers are not offered interest on money that is stored in their account.  Instead, all interest that is generated from deposits are donated to a non-profit organisation.

By mid-2010, M-Pesa had achieved tremendous success in the Kenyan market (source: http://www.pymnts.com/mobile-payments-go-viral-m-pesa-in-kenya/):

·      9 million customer base, equal to 40% of the adult population

·      17,000 agents for cash-in/cash-out services, of which nearly half are located outside urban centres

·      $320 million monthly P2P transfers, equal to roughly 10% of GDP

·      $650 million monthly cash deposits and withdrawals

A 2008 study revealed that early adopters of M-Pesa are more likely to be relatively affluent, have access to other bank services and be educated, literate and tech savvy.  Yet usage is basic, with more than half of users primarily sending and receiving funds, and very few storing meaningful value.  Still, 98 percent of users report being happy with the service and 84 percent claim that losing M-PESA would have a large, negative effect.

In a 2010 World Bank publication, Igancio Mas and Dan Radcliffe identify three important lessons from the M-Pesa experience for encouraging financial inclusion:

1.     The potential of mobile and prepaid technologies to facilitate financial inclusion in developing countries.  These technologies combines the ubiquity of mobile phones with low-risk nature of prepaid financial services to make basic banking services available to everyone

2.     Usage-based fee models, as opposed to float-based models, are critical in reaching poor customers.  These are customers that are not profitable in a traditional float-based model, I which banks make money from collecting and re-investing deposits.  However, mobile operators in developing countries have developed a usage-based, prepaid model for mobile airtime.  This model is fully aligned with the small-value, transactions-based payments model that is needed to serve poorer customers that are not profitable for traditional banks

3.    The importance of developing a low-cost transactional platform that enables customers to complete a broad range of financial services.  With access to M-Pesa, customers are able to complete all financial transactions that are necessary to fully participate in society

Combined, these three lessons suggest that financial inclusion through a low-cost, usage-based payment platform may be an important development strategy on par with more traditional credit- and savings-led approaches.  In fact, providing access to a basic payment may be a more appropriate first step, on which credit- and savings-strategies can build.

Migrant Workers and their Dependents: Defining the Future of Mobile Payments

Nearly 200 million migrant workers currently use remittance services to send money to a recipient base of around 800 million people.  On average, they send back $2,000 – 5,000 annually – approximately 20 – 30% of their earnings.  The World Bank estimated the total market to be close to $600 billion in 2008.  This is up 63% in 5 years and expected to continue growing in the years to come.

India, China, Mexico and the Philippines are the four largest recipient countries, while the US, Saudi Arabia and Western Europe are the largest originating countries. 

For individuals in developing countries, access to remittance funds has the potential to bring profound change to their lives, and to the social and economic growth of their communities. For recipient countries, such funds have huge economic and social benefits on a national scale.  Ensuring secure and efficient transfer of funds is therefore paramount, not only for the individuals involved, but also for national economies and international development.

However, two challenges in particular restrict the market from reaching its full potential; access and cost.  The vast majority of migrant workers and recipients do not have access to the banking sector and rely on alternative, cash-based remittance channels, such as commercial remittance establishments (e.g. Western Union and MoneyGram) and check-cashing stores.  These are costly to operate and therefore charge high fixed commission costs per remittance, particularly for smaller transactions.  Average transaction costs are estimated to 15%, increasing to 25% for remittances below $100.

The ubiquity and low-cost nature of mobile technology has the potential to revolutionise the remittance market.  According to the UN, more than 3.3 billion people now have access to mobile phones.  The majority of these are enabled with the functionality required for mobile money transfers.  Moreover, mobile money transfers eliminate the operating costs associated with today’s cash-based systems and significantly reduces the transaction costs.

With improved access and lower costs, the UN estimates that such use of mobile technology would encourage lower-value remittances and increase the value of remittances to more than $1 trillion in the next 5 years.  This would clearly be tremendously beneficial for economic development.

Hence, not only is this market incredibly attractive to mobile operators, financial institutions and other entrepreneurs, it would also make mobile phones the primary financial channel for more than 1 billion people in emerging economies.  Without access to alternative financial channels, these people and their societies are likely to be early adopters to other mobile financial services.  Therefore, to see the future of mobile payments, we should look to migrant workers and their dependents in emerging economies.