M-Pesa: How Sub-Saharan Africa Bred the Global Leader in Mobile Money
M-Pesa set the global bar for mobile money innovation in one of least sophisticated financial services sectors through operationally leveraging an existing mobile phone user base and 3rd-party distribution network
Context
Often perceived globally as a lagging region when it comes to innovation, Sub-Saharan Africa – specifically Kenya – has served as the perfect breeding ground for a major leap in how the basic consumer bank account is structured. In 2007, the retail banking market characteristics in Kenya included:
• Exceptionally high costs for transferring money relative to even similarly developing country financial sectors
• Driven partially by the above, a cultural aversion to electronic payments and a broader lack of trust toward financial services companies was apparent – resulting in a largely cash-based economy
• Significant mobile phone penetration across the country with the biggest player (Safaricom) dominating the market with ~80% share
Company overview
As a response to these market inefficiencies, M-Pesa was launched in 2007 by Safaricom with Vodafone as a minority shareholder. Originally developed with a sole purpose of expediting loan disbursements and collections for microfinance institutions, its core proposition quickly expanded to include:
• A “mobile wallet” with functionality to make deposits and withdrawals
• Mobile-based money transfers to both users and non-users of M-Pesa – all that is required is for the receiver to have a mobile number
• Bill payments
• Linkages to full-service bank accounts
Business strategy/ objectives
M-Pesa was developed with the objective of transforming the way that money is managed and transferred by the average consumer. The strategy the company deployed to achieve this objective rested on the following pillars:
1. Scale (customers and money volume) – the success of M-Pesa would rest on the company’s ability to generate a sufficient foundation of users due to the network effect. This was due not only to ensure future growth of the user base but also to attract enough 3rd-party agents to execute operationally (see “operating model” section)
2. Low cost to the user – given the low income levels of the typical customer and the relatively low ticket sizes of money transfers, a low transaction cost was critical for adoption to be achieved. The company’s ability to employ such competitive rates rested on their success in driving volume (#1)
3. Product simplicity – as the Kenyan financial services market was immature, the typical consumer was uneducated about what we might consider to be ‘core’ banking products in western markets and also lacked trust in the financial system. Simple, standardized products were required to bypass these barriers in the first instance.
Operating model
To meet its strategic objectives, M-Pesa employed the following key differentiating components in its operating model:
• Low infrastructure costs through use of 3rd-party agents: M-Pesa was able to forego high capital expenditure and management of infrastructure by having 3rd-party agents serve as its “branch network”
o These agents would facilitate the disbursement/ collection of funds, sign up new users and offer basic customer service
o In return, agents received a portion of the transaction costs from users
o In practice, agent “branches” are often ancillary stands that are part of the Agent’s core business (e.g. retail store, gas station)
• Leveraging of existing mobile phone channel: In order to start using the service, all a customer needed was a mobile phone. Given Safaricom’s dominant share in the market, they were therefore able to leverage this extensive network to effectively achieve incrementally free distribution of the banking technology (an app download was required).
• Co-management of customer service across mobile and banking products: M-Pesa achieved additional operational synergies by leveraging the customer service infrastructure (e.g. call centers) Safaricom had already set up for its mobile business.
M-Pesa Today
After a stellar launch, the company has continued to be incredibly successful and has shown no signs of slowing down. In 2014:
• 42% of Kenya’s GDP passed through M-Pesa
• 50% of all Safaricom customers held M-Pesa accounts; total subscribers are ~20 million
• An agreement with the South African telecom MTN facilitated the expansion of the services to seven East-African countries; similar joint-ventures have pushed M-Pesa’s presence to central Asia and Europe
Mobile payment is one of the hottest emerging industries and I am fascinated by such meaningful business models that operate at the bottom of the pyramid. This is becoming big in India too and is slowly helping to bring in more people into formal banking institutions given that less than 40% of India’s population uses formal banking systems currently. Given the ease of scale, low investment, rapid adoption, there seems to be too much competition in this space. Apart from first mover advantage, what other competitive levers do you think M-pesa can pull to ensure continued sustenance?
42% of Kenya’s GDP!!!! Whoa. That is amazing.
Farhaz – mpesa is a super interesting case study. Having worked with these systems in Kenya and Uganda, have a couple of questions about their uptake and future. Firstly, mobile money is regularly used as a solution to a lot of financial inclusion issues and has been for a number of years, however mpesa remains an outlier in terms of their penetration and uptake – why do you think it has been so much more successful than some of its competitors? Secondly, you mention that mpesa is relatively cheap but depending on the transaction amount the fees can still be ~5% of the payment – surely this is ripe for further disruption? What might that look like?