The success of MPESA, Kenya’s premier online mobile money transfer and financing system has proven very difficult to replicate in other emerging markets. In Kenya, MPESA has been wildly successful. Launched in 2007, MPESA allows users to send money to each other using basic SMS technology. It currently has 24 million registered users (95% of adults), and total transaction value of Kshs 5.29tn ($~50bn)[i] equivalent to 75% of the $65bn GDP flowing through the system[ii].
Despite its success and clear benefits to the economy, MPESA has proven incredibly difficult to replicate in other emerging markets, even in neighboring countries[iii], and even by MPESA’s parent company Vodafone (Safaricom) in other markets that it operates in [iv]. Understanding the evolution of MPESA’s business model and its operational decisions can shed light on winning strategies and challenges in replicating the model.
MPESA’s original concept was simple: it would allow users in Kenya’s major cities to send money to relatives in rural areas. There was a ready demand for the service and no alternatives. As the subscriber base grew, MPESA’s product offering expanded, and users are now able to pay bills, buy groceries, withdraw from third-party ATMs, pay for government services, receive social protection payments[v] . It creates value to users by reducing transaction costs and cutting lead times to ~zero, and captures the value by charging transaction charges of 0%-2% to the receiving party of the transaction. In 2016, MPESA’s net revenues hit $302.5 million[vi].
Figure 1: Illustration of MPESA’s original ecosystem[vii]
Operational Model, Levers and Decisions
MPESA tapped into a large, untapped demand for domestic remittances by providing a simple money transfer service that was accessible to any type of mobile phone. Safaricom, MPESA’s parent company, bolstered awareness by heavily promotingit with a clear proposition – “send money home”, targeting city-dwellers who wanted to send money to rural areas iii. Educating the end user about an intuitive product using simple messaging was key to driving adoption [viii].
MPESA relied heavily on scale and network effects by leveraging the the relatively high level of mobile penetration in Kenya [x]; [xi] and the monopolistic nature Safaricom which commanded 70% of mobile phone users in 2007[ix]. Safaricom understood the value of middlemen, so rather than vertically integrating and deploying its own distribution network, it relies on a network of 100,000+ independent agents (i) and third-party ATMs to handle deposits and withdrawals. The agents provide geographical flexibility, enhanced information flow, end-user liquidity and security verification while significantly reducing setup costs. To align incentives across the channels, Safaricom provides generous commissions to agents and third-parties vi, though this creates some transactional friction in the system.
Safaricom also benefited from a favorable regulatory framework that allowed telco operators to handle financial transactions. In part, this was because it was 60% government owned viii. It also gained regulatory and political support in because MPESA was not launched with a profit incentive (there was no real profitable precedent globally), but rather as a CSR project to boost Safaricom’s brand image while solving an obvious need in society[xii]. Safaricom also complied with legal restrictions that limited transaction sizes to ~$700 a day [xiii] to prevent/reduce money-laundering, corruption and financial liability.
To respond to an ever-changing competitive landscape, Safaricom has improved its product offering significantly over the years, despite a lot of internal resistance to innovate. The closed-loop nature of the software, initially designed to enhance security, made it difficult/impossible to integrate with third-parties until September 2015 [xiv]. Since then it has enabled API integration that allows third party fintech applications to access its system. This has led to a proliferation of the suite of products, including: global money transfers, bitcoin exchanges, POS enablement, ATM integration, etc. Currently, Safaricom supports more than 43,000 merchants in Kenya alone (i) though there are still significant limitations on the integration capabilities [xv].
The Road Ahead for MPESA and Mobile Money
Figure 2: Key enablers driving the delivery of mobile money [xvi]
MPESA replicas in Latin America [xvii], India [xviii], South Africa [xix], and most other emerging markets have either outright failed or lacked traction. MPESA succeeded because it benefited from network effects of scale and near-monopoly status; first-mover advantage; lack of viable alternatives; a favorable regulatory environment and a large nascent demand for the service. It also made operational choices such as heavy marketing; incentive alignment with channel stakeholders; and technology enhancements. Other mobile money solutions fail because they’re unable to exercise some of these levers.
Locally, the success of MPESA has reduced barriers to entry for third parties, particularly as it has already established a national network of agents and third party interfaces. Switching costs are increasing lower, and multihoming – by both end users and agents – will reduce the stickiness of subscribers. Additionally, the scale of MPESA has increased regulatory scrutiny. As such, MPESA will need to enhance technology and align stakeholder incentives even more to respond to changes in the competitive landscape.
[vi][vi] BBVA Research: MPESA – The Best of Borth Worlds. Jul 02 2014. Accessed 11/18/2016
[vii] Mobile Payments in Emerging Markets Issue No. 04 – July-Aug. (2012 vol. 14) ISSN: 1520-9202 pp: 9-13 DOI: http://doi.ieeecomputersociety.org/10.1109/MITP.2012.82 Accessed on 11/18/16
[x] Jenny C. Aker and Isaac M. Mbiti. Mobile Phones and Economic Development in Africa. Journal of Economic Perspectives—Volume 24, Number 3—Summer 2010—Pages 207–232
[xiii] Daily Nation. Safaricom in talks to raise M-Pesa limit. Monday, October 4 2010. Accessed 11/18/16