Imagine needing to send part of your wages home to your parents, and not having time to take it to them yourself since they live five hours away. So you hand the envelope of cash to the driver of the bus that runs that route, and ask him to hand it over for you. Imagine needing to pay your electricity bill, and walking for an hour just to get to the office. Then you stand in line for two hours before being able to hand over the necessary amount of cash. Before 2007, Kenya’s financial payments infrastructure was dependent on low-level cash transactions, the liquidity-strapped post office and personal favours. Increasing urbanisation intensified the need for a secure and efficient way to send money back to families in rural areas, and it took a telephone operator to come up with a solution.
Kenya does not strike the casual visitor as being in the forefront of financial technology, nor a world leader in mobile innovation. With a population of 47 million, 45% of which lives on less than $1.50 a day, and with GDP per capita 157th in the world ranking, it is too easy to label the country an “emerging economy”, and condescendingly assume that corruption and lack of infrastructure will make true technological progress difficult. Which is why its breakout success in the complicated field of payments is both inspirational and humbling, and gives us insight into why mobile payments innovation does not work so well elsewhere.
M-Pesa is the world’s most successful mobile payments story. Launched by Kenyan telecom company Safaricom in 2007, it now has over 20 million accounts, and is used by 76% of the adult population. Approximately 66% of Kenya’s national payments volume passed through M-Pesa in 2014. In other words, it’s a very big part of the country’s economic infrastructure, and its success has inspired similar attempts in the developing and in the developed world.
Yet nowhere does it work as well as in Kenya. The GMSA mobile money tracker estimates that there are approximately 260 similar experiments going on, with another 100 in the pipeline, in 72 developing countries. In almost all cases, stricter regulation, more evenly distributed competition and relatively efficient alternatives – present in virtually all developed economies and with at least one factor present in most developing ones – are hampering growth. To put Kenya’s success into perspective, Japan has the highest mobile money use in the developed world, but still nowhere near that of Kenya in absolute terms, even though its GDP is 45 times larger. Half of all global mobile transactions take place in Kenya.
How does it work?
M-Pesa accounts can be set up by any one of Safaricom’s 85,000 agents around the country. All the agent needs to see for verification is an identity document, which makes it much easier to open than a bank account. Once the account is open, the customer can hand the agent cash, in exchange for which Safaricom issues electronic tokens in the same denomination as the national currency (the shilling). These e-shillings can be wholly or partially transferred to other M-Pesa account holders via SMS to make payments, or can be sold back to Safaricom in exchange for cash. There are no charges for deposits, but a scaled fee is charged on withdrawals and a flat fee on transfers.
The beauty of this system is its simplicity. It can be used on even the most basic of mobile phones. The ability to make payments across the country by pushing a few buttons has not only made remittances much more efficient, but has also made paying bills easier, which reduces costs, increases transactions and improves the circulation of money. Those without a bank account have a reliable place to store money, which encourages savings. Rural families are finding it more worthwhile to invest in education, since graduates can now successfully work in the city and easily send money home. And for the first time women can manage their own money, investing it in their businesses, educating their children… One study found that in rural Kenyan households that adopted M-Pesa, incomes increased by 5-30%.
How did it get so big so fast?
After launching in March 2007, M-Pesa signed up 20,000 customers its first month, 2 million by the end of its first year, and within three years was servicing almost 50% of the country’s adult population. That percentage has now increased to almost 80%.
This explosive growth took even Safaricom by surprise. Although in retrospect, the cumbersome difficulty of making payments pointed to a definite need. Also, the infrastructure was in place. Setting up cell towers was more economical and practical than laying land lines in such a disperse and rugged terrain, so the telephone operators focussed on mobile communication coverage. In 2007 when M-Pesa launched, 33% of adult Kenyans had a mobile phone, while only 3% of households in Kenya have a landline connection. At mid- 2014, approximately 80% of Kenyan adults had a mobile phone.
Safaricom also had the intelligence to rapidly cultivate a network of agents trained to help people set up their M-Pesa accounts, and to load it up with money in exchange for cash. It now has over 85,000 agents, or 1 for every 500 Kenyans. This may seem like a high fixed-cost base, but the limited regulation of the agents enabled profitability – they were viewed as intermediaries rather than banking service providers. And pretty much anyone could become an agent: Safaricom airtime dealers, bank branches, gas stations, supermarket chains, dry cleaners, couriers…
Safaricom’s strong market position – it currently holds approximately 70% of mobile phone contracts – also helped the expansion of the M-Pesa program. Mobile payments business suffer from what is known as a “network effect” problem. The value of a payments system to the customer depends on the number of people actively using it. The more people on the network, the more useful it becomes, but how do you get people on the network until it’s useful? Unless you can send a payment to just about anyone you need to send a payment to, it’s probably not worth your while. Few will bother to open two mobile payment accounts just because some of the people or businesses you transact with are on another one, especially if it means extracting your SIM card and inserting a new one each time you want to switch networks.
The government’s relatively relaxed attitude to monopolies and its awareness of the need to increase the financial inclusion of the population led it to choose to not regulate Safaricom as a financial services provider. This kept costs down and gave the company considerable latitude in keeping the sign-up procedure simple. It also enabled speed. M-Pesa evolved from concept to country-wide launch in 4 years, and achieved scale less than 3 years later. M-Pesa has since launched in India and South Africa, but overzealous regulation has constrained growth and forced fundamental changes to the business model.
Innovation: sell more people more products
Once people are using M-Pesa, getting them to add other financial services is not that difficult. In November 2012 Safaricom teamed up with the Commercial Bank of Africa to launch M-Shwari, M-Pesa’s savings and loans cousin. M-Pesa users can get loans without even having a bank account, simply by filling out a form. Commercial Bank uses customers’ phone records as a credit history. Since launch M-Shwari has opened over 10 million accounts, and grants about 50,000 loans every day. One third of active M-Pesa accounts are also M-Shwari users.
In March of this year, Safaricom and Kenya Commercial Bank launched KCB M-Pesa, also offering mobile money loans but with higher limits, longer terms, and different rates and repayment structures. By June, it had managed to sign on 1.8 million users, and by October, the number had reached 3 million.
One of the limitations of the M-Pesa system has been its limited geographical reach, which will slow down its growth as market saturation approaches. Unless, of course, regional telecoms can find a way to work together. Earlier this month the leading Rwandan telecom operator and Safaricom announced a “corridor” that will allow mobile money transfers between the two services, boosting regional remittances and cross-border trade. We can assume that other similar agreements are in the pipeline.
Competition: friend or foe?
Yet few success stories go unregulated and with little competition for long.
Last year Safaricom’s competitor Airtel, which holds approximately 22% of the Kenyan mobile market (but only 3% of the mobile money market), filed an official complaint against Safaricom’s mobile money, demanding that M-Pesa’s agents also be allowed to set up competing mobile money accounts. The Communication Authority of Kenya ruled in its favour, and the over 85,000 M-Pesa agents can now also offer competing services.
In July of this year, Kenya’s Equity Bank launched Equitel, a mobile payment and banking platform. It hit almost 1 million subscribers almost instantly, by issuing free SIM cards to its 8.7 million bank account holders. Equitel also issues “thin SIMs” that can be used in conjunction with Safaricom SIMs, which allows users to switch between operators whenever they want. Safaricom has tried to block this innovation in the courts, citing data security risks.
In August a consortium of banks announced the impending launch of Switch, an interoperability service aimed at recovering some of the lost money transfer revenue.
Safaricom still has a dominant position, but the fight is just beginning.
So, will increased competition in mobile payments be good for the market and the economy as a whole? The question is more complicated than it seems. As we saw earlier, mobile payments platforms suffer from the “network effect”, in which without mass adoption, it’s not worth using, so you won’t get mass adoption. A monopolistic position helps. And the profitability that a monopoly guarantees encourages infrastructure investment, which spreads use even further.
But, monopolies tend to stifle innovation, not encourage it. High prices maintain networks, at the cost of the user. And eventually, a monopoly will reach market saturation, with users eager for better and cheaper alternatives.
Interestingly, the Competition Authority of Kenya has ruled that “market dominance does not a monopoly make”.
This fundamental conflict raises even more very important questions.
Is it possible to maintain simplicity while diversifying services? One of the main reasons for M-Pesa’s success has been its simplicity. An easy sign-up and loading process and an uncomplicated interface encouraged even the most technologically reticent to give it a try. The extra “user experience” barrier of having to choose between different mobile payment networks would almost certainly have put a speed bump in front of the rapid expansion. Network-switching, a cluttered menu and complicated fee structures for complex services could counteract the positive impact of broadening reach. Starting with one monopolistic provider encouraged a wider use than had several players tried to enter the market at the same time. Yet once the cultural barriers to initial adoption have been overcome, customers will look for better alternatives. And advances in technology and the use of data to identify needs and patterns make it ever more possible to design simple systems that offer complex solutions. It’s not easy, but it’s possible.
Is it possible to achieve profitability without the network effect? Safaricom deserves to profit from its backing of this life-changing development. It has invested heavily in expanding its infrastructure, building cell towers in remote areas, increasing speed and improving the connectivity of the population as a whole. And let’s face it, it came up with a great idea, and executed it successfully. Yet the fees are relatively high, and 45% of Kenyans live below the poverty line. Without going into the social debate, that obviously leaves the field wide open to lower-priced competition. The cultural barriers to technology adoption are lower than just a few years ago. And technological advances bring costs down, and make interaction even easier. So, while 8 years ago the answer would most likely have been no, that’s not the case today.
And M-Pesa has indeed been profitable. M-Pesa accounted for 20% of Safaricom revenues and helped total profit jump 38% to 31m Kenyan shillings in the financial year 2014/2015. It achieved revenue growth of 23%. That growth is likely to slow down as competition enters the market, but as the economy as a whole has benefitted and will continue to benefit from enhanced efficiency, higher savings and improved circulation of money, it is safe to assume that telephone usage across the board will grow. More open competition will most likely foster even more innovation, both in technology and in business models.
Meanwhile, the success of M-Pesa will continue to serve as a useful case study of brilliant innovation, good management and luck. Eight years ago it would have been virtually impossible to reach such market penetration so fast without a dominant market position, low regulation and inefficient alternatives. Today the situation is different. Technology, infrastructure and customer needs have advanced. A large part of that advance is due to what M-Pesa achieved. Their profit margins on mobile money will almost certainly shrink as they lower prices to stay in the market. And innovative competitors will offer new services that customers will switch to. This will continue to benefit not only Safaricom and its competitors, but also Kenyan businesses and the economy as a whole. The ripple effects of the success of the M-Pesa launch will most likely be felt for a long time to come.