Payments technology and how telcos can profit from it is a favourite topic for study by the Telco 2.0 initiative. Fundamentally payment systems are two-sided markets – payers and payees interact not directly, but through a platform to conclude transactions. Pricing, and which side pays, is crucial to maximize participation, volume and liquidity on the platform. Interconnection strategies with other payment platforms also play a vital role, not only in increasing convenience but in determining share of the value chain.
In this article, we examine in depth two African mobile payments solutions that we consider to be the leading examples of mobile payment, M-PESA and Wizzit. These payment solutions take very different approaches – M-PESA is very much a classic Telco 2.0 style platform business, and Wizzit is designed as an extension to traditional banking. We consider lessons learnt from both for operators worldwide.
M-PESA in Kenya – a star following the ‘Golden Rules’ of platform businesses
There is no doubt that M-Pesa is the star of the current mobile payments landscape, however, one seldom quoted fact is that the platform is not yet profitable more than two years after launch. This was revealed by the CEO of Safaricom, Michael Joseph, in the recent results conference call. This is perhaps the first golden rule of platform business – it requires patience and takes time to build both critical mass and profitability.
The next golden rule of the platform business is that pricing is crucial, especially when deciding which side pays the fees.
The first and perhaps the most important pricing point about M-PESA is that it is free to join – there are currently no membership fees or recurring charges, everything is transacted on a pay-as-you-go basis. While this may seem obvious, it is not always the case with all payments platforms, especially some high-end credit cards. Such is the success of the M-PESA registration scheme that as at end of March-09, M-PESA had 6.175m users which is 46% of the Safaricom base. There was an average of 11k registrations per day during March. To further encourage registrations, there is differential pricing between off-net and on-net pricing: M-PESA users can send money to non-registered users, but it is much more expensive.
The second most important pricing point about M-Pesa is that there are no associated carriage costs (e.g. SMS cost) in using the system – the price of the mobile network usage is bundled in with the transaction costs. Similarly, to deposit money is free – the cost of the “cash-in” process is paid for by the transactions that the cash generates. Also, using cash to buy airtime (either for yourself or someone else) is free – this is paid for by normal voice & text usage charges. The M-PESA system is designed so that the “cash-out” transactions subsidise both the registration and cash-in processes.
The next pricing feature of the M-PESA system is that it is “receiver-pays”, the sender pays a nominal charge but the receiver pays the majority of the transaction cost. This is very similar to how most credit and debit cards operate, but completely different to how voice calls are charged in “calling-party-pays” environments.
Used for paying bills, at ATMs, paying wages, and person to person
M-PESA originally started as a person-to-person money transfer system, but the PayBill features indicates how the capabilities of the platform are growing over time. M-PESA currently has 51 PayBill partners and users can pay a variety of bills from utilities, transport to even school fees through the platform. M-PESA has added these capabilities as the registered users have grown and the payment platform was proven in an adjacent field. Safaricom is in a much stronger position to negotiate the rates now the platform has achieved critical mass – and enforce the “receiver-pays” design of the transaction fee.
Originally the “cash-out” process could only be undertaken at M-PESA authorized agents. Again, now the platform has reached critical mass, an ATM operator, PesaPoint, signed a deal with Safaricom in Sept 2008 to allow cash withdrawals at their ATMs. Again, Safaricom is a strong negotiating position understanding fully the cost of their current “cash-out” process
Even more interesting is that M-PESA is now being used to pay wages, especially of casual workers. The pricing here is not declared, but I’m sure it is not “receiver-pays”. An innovative use of the platform was that Safaricom used it themselves to pay their maiden dividend below KES 35,000 to its 830k shareholders. Safaricom estimated the saving by using M-PESA as KES73m (USD940k) compared to traditional payment mechanisms. A very effective case study of using M-PESA for micropayments.
Key Challenges for M-PESA
The development of M-PESA has been achieved without Safaricom holding a banking licence. The money being circulated is deposited in a physical bank account at the Commercial Bank of Africa, which supervises the daily transactions of M-PESA. Users make their transactions using virtual information.
This is the challenge for M-PESA going forward – ensuring that they get the right support from the banking regulators. The potential problem is that banking regulation could both add additional cost to the platform and hamper innovation going forward. In addition, the traditional telco regulators will probably want to examine at some time in the future if the M-PESA platform is supporting the dominant position of Safaricom in the mobile world – Safaricom themselves estimate they have 85% share of mobile revenues. Also, future interconnection into the existing banking infrastructure needs to be achieved at a rate which does not increase the transaction costs of the platform.
Wizzit in South Africa – a mobile extension of traditional banking
Wizzit is another transformational banking service launched in 2005 aimed at serving both the unbanked and underbanked which are estimated to be in excess of 14m people in South Africa alone. Wizzit positions itself as a virtual bank and has no branches of its own. Wizzit uses a combination of mobile and traditional payments technology. On mobile, each user interacts with an USSD-based application for person to person transfers, person to business transactions, pre-paid purchases, any other internet-enabled banking processes, and to let it act as a point of sale device in the informal sector, rather like Oi Paggo. The application works on all mobile phones on all mobile networks. Wizzit also issues a Maestro branded debit card for transactions in the formal sector and ATM cash withdrawals. Wizzit has a banking license through an arrangement with the South African Bank of Athens. Therefore, Wizzit cannot be viewed as pure mobile banking application, but instead as an extension of traditional banking infrastructure. Wizzit has attracted venture capital from the International Finance Corporation.
Building a new route to market
Safaricom in Kenya already had a distribution network of entrepreneurs selling handsets and airtime and a brand well-known for handling balances; Wizzit’s first hurdle to overcome as a start-up was to build this trusted brand, which is essential in banking, and build a sales force. (We discussed the vital importance of this element here after Zain’s ZAP launched as a competitor to M-PESA.)
Wizzit’s innovative solution was to recruit the jobless, who have an intimate knowledge of the potential customers, and today Wizzit has a direct salesforce in excess of 3,000. The Wizzit Kids are paid a commission based upon both registrations and transactions. Registration is not free and costs ZAR50 (USD6). Although cheaper than opening an account at a major South African bank and a much simpler process, the registration fee represents a significant barrier to entry for the platform.
The transaction fees also appear to be not as favourable to a two-sided business model compared to M-PESA. Rather than a “receiver-pays” type of model, every individual transaction is charged. One of the key lessons from two-sided business model theory is that the ultimate beneficiary of any transaction should be the one who pays. However, the relative cost of banking is much cheaper than traditional banking accounts and the fees are geared to the cost of using the traditional clearing system.
Wizzit had competition almost from day one with MobileMoney, a rival service with a very similar cost structure. MobileMoney is, a joint venture between MTN, the second largest mobile operator, and Standard Bank launching a rival service with a very similar cost structure. MobileMoney uses a SIM toolkit approach, rather than the more lightweight USSD service.
Wizzit does not advertise its customer base or operating metrics, but a recent article in the Financial Times puts its user base at 250,000. Wizzit has plans to break-even in 2010 and is currently loss-making. The key challenge for Wizzit going forward is not competition from the traditional banking sector, but what happens if a competitor emerges, targeting their demographic with a M-PESA type charging model.
Vodacom, South Africa’s leading mobile operator, is part of the same group that launched M-PESA in Kenya. Vodacom have launched the M-PESA service in Tanzania and it is probably only a matter of time before the service arrives in South Africa.
Lessons from the leaders
Mobile banking solutions will always be a creature of the environment they operate in. Two similar services targeting a similar demographic (the unbanked) have ended up with radically different designs especially in terms of cost and different take-ups. However the trend is clear – mobile payments in emerging markets, of whatever nature, offer a real solution to a real problem with potential for mass market take-up.
For Western operators, like Zoompass, the task is much more complex with most of the population already having existing banking facilities with often multiple providers – operators are not trying to best the deficiencies of cash transactions, but the efficiency of plastic transactions. Western operators also suffer from not having the same low cost, entrepreneurial distribution networks. Most “cash-in” transactions for prepaid mobile users are already served electronically from banking accounts; and even where cash is used, the points-of-sale for electronic top-ups already have a multitude of devices for accepting plastic and have limited loyalty to the mobile operators.
Payment platforms win or lose on four key features: security, availability, simplicity and cost. Mobile payments have a high hurdle to overcome with security and availability, but simplicity and cost is definitely an potential area to innovate in going forward. And crucially, it is vital to design payments platforms on 2-sided business model principles and avoid duplicating pricing models from the banking world.