Why M-Pesa Outperforms Other Developing Country Mobile Money Schemes

Why has M-Pesa been so successful in Kenya, yet mobile money initiatives in other developing countries much less so?  Recent Centre for Development Informatics research[1] can help provide a systematic response.

M-money services have two core functionalities.  Registered customers can convert between e-cash and real cash (typically at the physical premises of an m-money agent), and can transfer e-cash from their account to that of another account holder via SMS. They might use this to send money to family members or friends, or to pay a provider – anyone from a taxi driver to a local school – for goods and services.

M-Pesa was launched in Kenya in 2007.  It has grown spectacularly: in mid-2012, there were 19.5 million m-money users in Kenya (83% of the adult population), transferring nearly US$8 billion per year (equivalent to 24% of GDP) – M-Pesa is responsible for more than 90% of these transfers.  Transfers are growing at nearly 40% per year.

It’s not that m-money initiatives in other developing countries have failed: there are an estimated 250m users of m-money services in emerging markets.  Just that they have not – yet – succeeded on anything like the scale of M-Pesa, with Kenya accounting for 30% of all emerging market m-money transactions in 2011.  For example, a recent survey in South Africa found only 16% of respondents with a mobile money account.  In Nigeria, only 3% of adults use mobile money.  And Africa is the lead continent: outside the Phillipines, m-money has been very slow to catch on in Asia. In India, for example, Nokia quit the m-money business in 2012 after two years of failing to build a critical mass.

How do we explain the differences?  University of Manchester research, based on six months of primary fieldwork conducted by Chris Foster, analysed the reasons M-Pesa has grown so fast in Kenya; reasons summarised in the model shown below:

Ongoing support from government – liberalisation of the mobile market; investment in infrastructure; light-touch regulation; facilitation of the initial pilot, etc – combined with strong consumer demand across all strata of society (itself partly fed by the instability and disruption following the disputed 2007 elections).  These drove a virtuous circle:

• Competition between mobile sector firms pushed them to seek profits beyond the traditional middle-of-the-pyramid; answering the demand from the majority market of the country’s poor.
• The service was delivered via atomised distribution networks that reached right down into poor urban and rural communities; a network of nearly 50,000 agents by 2012.
• Those embedded intermediaries – essential in scaling any innovation to reach the base-of-the-pyramid – were given the flexibility to adapt business models, retailing patterns and service offerings so they met the specific and heterogeneous needs of their local customers.  Effective knowledge channels allowed these innovations to filter back up to the lead firms, which then scaled those they found most useful; fuelling yet further growth.

Armed with this model, we can analyse the m-money weaknesses in other emerging markets.  For example:

• Much lower levels of customer demand (put down to both culturo-institutional factors and more effective functioning of and access to existing financial services) combined with a more stringent regulatory regime are behind the slow growth rates in India.
• A much smaller number of intermediaries (agents) and a lack of innovation (e.g. to address cash float problems) is restricting growth of m-money in Uganda and Tanzania.
• Tighter regulation and the much small number of intermediaries has held back expansion of mobile money services in South Africa.

We are not the first to try to understand the different performance of M-Pesa vs. other countries (see e.g. Wolfgang Fengler, Amaka Okechukwu who both also note the value of Safaricom’s market domination).  However, we hope that our model provides a clear and transferable framework for comparison, that can be used alongside more in-depth evidence from other countries to help understand their relative success or failure in mobile money.

If you see ways in which you think the model should be modified – based either on experiences in Kenya or elsewhere; then let us know . . .

Follow @CDIManchester

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[1] Foster, C. & Heeks, R (2012) Analysing policy for inclusive innovation: the mobile sector and base-of-the-pyramid markets in Kenya, paper presented at Globelics 2012, Hangzhou, 9-11 Nov [copy available on request: innov4dev@gmail.com]

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Can Mobile Phones Bring Financial Services to Africa’s Poorest?

Since MTN’s Mobile Money service was introduced in Uganda in March 2009, other network service providers – Uganda Telecom and Zain – have entered the market with similar money transfer products.  In the opinion of Richard Mwami, MTN’s Mobile Money head, “mobile phones have created a new battleground for banking”.  There is a strong belief that new services can transform the way in which the ordinary citizens of Uganda conduct their monetary transfers and payments.

MTN had 40,000 service subscribers by June 2009, with a relatively low average value for each transfer of US$35. A large proportion of these have been conducted ‘up-country’ outside of the capital city – Kampala; evidence that the service is attracting less well-off clients.  The true impact has yet to be empirically demonstrated.  However, a recent Working Paper from the University of Manchester’s Centre for Development Informatics provides some pointers to areas of potential and also possible constraints.  Given Uganda’s reflection of broader patterns in both financial services and mobile usage, this should also tell us something about the situation in other African nations.

The paper shows participation in financial services in Uganda falls into four categories:

• Those who access and make use of the formal banking sector and who may hold deposit or savings accounts (18% of the adult population).
• Those who access semi-formal micro-finance institutions or savings and credit co-ops (3% of the adult population).
• Those who participate in informal sector financial services – ROSCAs (Rotating Savings and Credit Associations), ASCAs (Accumulating Savings and Credit Associations) and other community-based savings clubs and funds (17% of the adult population).
• A fourth group includes all those who are financially un-served and they constitute approximately 62% of the adult population (aged 15 and over).

Interestingly, the proportions estimated for financial service access seem to strongly mirror that for mobile phones.  It is estimated that 20% of the adult population own a mobile phone, whilst 42% have access.  Thus, 58% remain without meaningful access (based on 2007 data).  This correlation between mobile phone ownership and formal sector financial service participation is also demonstrated in research conducted by Johnson & Nino-Zarazua (2007) who found that those who own a mobile phone are more likely to have a formal sector bank account by a factor of three than those who do not.  MTN’s Mobile Money subscribers account for approximately 1.4% of the 2.9 million adults that bank in the formal or semi-formal sector.  The make-up of the subscriber base is not known, but it might be assumed that all are mobile phone owners and a large proportion will already be banked.

The potential to expand the subscriber base for m-payments (and subsequently broader m-banking services such as accounts and credit) is large even among current mobile phone owners.  As the working paper suggests, though, the constraints may also be significant – particularly amongst the financially un-served.  These include:

• Lack of financial literacy – access to post-primary education is a key factor in building financial literacy (data from 2006 suggests that only 18.1% of the population attended secondary school).  Lack of literacy skills has been mentioned as a reason for lack of use of text-based services in Uganda where only 10% of the poorest wealth quintile use SMS compared with 82% of the richest.
• Affordability – service costs are relatively low: MTN’s Mobile Money charges as little as US40 cents per transaction; comparing favourably with services such as M-PESA in Kenya.  However, and despite strong declines, mobile usage and ownership costs remain high in Uganda.  To illustrate, consider the cost of 100 minutes of network use as a percentage of GNI (Gross National Income) per capita.  In Uganda this figure stood at 96% in 2007, compared with only 7% for South Africa.  Handsets are also far from affordable by the majority.  The extent to which the currently unbanked may be drawn into mobile phone ownership for the purpose of accessing m-payments services is likely to be highly price sensitive.  For poor households, it may depend upon whether expenditure on mobile phone services is prioritised ahead of other essential expenditure.
• Organisational factors – for access to cash-in and cash-out facilities the services of local agents become essential.  A key issue is not just the proximity of agents to communities that wish to use the service, but also trust in the individual agent concerned, as well as trust in the technology and the financial security of the service provider.  New entrants such as mobile phone operators may be an an advantage here.  In comparison, studies reviewed in the paper report a particularly low level of trust of existing financial service providers.

Reaching the unbanked will likely require ingenuity and innovation on the behalf of service providers.  In the first instance, there is a need to more accurately define the extent of mobile phone ownership and use among this group; given that these are ever-rising.  There is also a need to understand more fully how mobile phones are used by the poor.  Evidence suggests that mobile is more likely to be used as a tool to communicate and coordinate cash transactions, rather than to deliver funds electronically.  The extent and impact of use of airtime as a currency is also unknown.

If mobile networks are to facilitate cash transfers for the poor it will be necessary to enable access to services for those who do not own phones, and to those who do not have access within their immediate vicinity.  This will require an intermediated solution and effective participation and inclusion of appropriate community-based groups in m-payments initiatives.