Full Article: Mobile Payments: Lessons from the world’s leading exponents

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.

Full Article: African Communications – a brewing storm

The outlook for the African Communications Industry is uncertain, at best. For sure, there is currently massive infrastructure investment across the continent. And this investment not only covers mobile technology, there are also major fibre and satellite projects working towards bringing the internet to the population. But a storm is brewing: major African players, such as MTN and Zain, are reassessing their corporate strategies; in-country consolidation in mobile looks inevitable in several countries as too many players have been licensed; and the business case for mass market internet services is unproven.

However, the lesson learnt from the mobile expansion through the continent is that innovation will flourish. This innovation is not only seen in products such as M-PESA, but also in business models. Africans are innovating their own business models for their own environment as well as adapting the tried and trusted business models which work in Western Europe. This article discusses some of the structural problems in some markets, examines some of major players and explores the new projects.

One Continent, Many Countries

Africa is a huge continent with a population close to 1bn and over 50 countries. Populations vary from Nigeria at 148m to Equatorial Guinea at 0.5m. GDP/head varies from the oil-fuelled Libya at US$8,300 to the war-ravaged Liberia at US$130. Importantly for Telco’s each country has a different regulatory framework, taxation regime and competitive intensity.


It is hardly surprising, given all this diversity, that a wide range of strategies have been deployed by Telcos. There are a lot of nationally based local operators, however, a few key operators have been building a pan-African strategy.


Zain emerged from the Kuwaiti operator, MTC, and bought the original pan-African operator, Celtel, in 2005 for US$3.6bn. Since then, Zain has invested in Nigeria, Madagascar and Ghana. JPMorgan estimates in a recent note that including both acquisitions and capital expenditure,Zain has invested a total of US$8.9bn in Africa. Despite this historical commitment, Zain has been in the news recently after announcing that its African operations (excluding Sudan) are up-for-sale with a price tag of US$12bn.

In 2008, Zain Africa had a turnover of US$5bn (US$4.2bn ex. Sudan), EBITDA of US$1.8bn (US$1.4bn ex. Sudan) and net Income of US$401m (US$122m ex. Sudan). On these figures, it is hard to justify Zain Africa being worth US$12bn without complete faith in the potential of Africa. Obviously, the recent discussions between Vivendi and Zain have failed to reach a consensus on valuation.

In our opinion, Zain suffers from two major problems:


  1. Their small subscriber base in many countries means that economies of scale are hard to achieve. Zain has tried with initiatives such as their One Network roaming product and the forthcoming pan-African payments system, Zap, yet have not solved the problem of operating in small, low income countries.
  2. Many of the larger countries in which Zain operates, especially Nigeria, Kenya and Tanzania, suffer from over-competition and Zain has a low market share. Furthermore, Zain is struggling to maintain margins as penetration grows.


MTN is a South African company which has expanded throughout Africa and the Middle East. MTN is currently present in 16 African countries and is particularly strong in the key markets of Nigeria, South Africa and Ghana. MTN has also been in the news recently with a complex merger transaction with Bharti Airtel of India in progress, under which the two companies will take blocks of stock in each other. In 2008, MTN had an approximate African turnover of US$10bn (ZAR86bn) and EBITDA of US$4.7bn (ZAR38bn). South Africa and Nigeria alone made up 74% of turnover.



Vodafone has been present on the African continent since 1993, being one of founders of Vodacom in South Africa. In 1998, Vodafone entered Egypt investing in the second operator, ClickGSM. In 2000, Vodafone entered Kenya with an investment in Safaricom. In 2008, Vodafone entered Ghana with an US$900m investment in Ghana Telecom.

This is a key differentiator for Vodafone from the Zain and MTN strategies – they expanded early, investing with strong local partners and in the largest African economies. The partnerships have not been trouble free, but today Vodafone is probably the strongest African operator in a relatively small number of countries.


In the 12 months to Mar-09, Vodacom alone had turnover of ZAR55bn (US$6.7bn) and EBITDA of ZAR18bn (US$2.2bn); Safaricom had a turnover of US$915m and EBITDA of US$363m; Vodafone Egypt and Ghana results aren’t published.

Unsurprisingly, Vodafone in Africa seems to be adopting a similar strategy to parent and transitioning itself to being a “Total Communications Provider” offering both fixed, mobile and internet services – with the exception of Egypt, where the local partner is the fixed incumbent. For instance, Vodacom has bought a pan-continent Satellite provider, Gateway, who offers services to carriers and businesses.

New Subsea Cables are arriving

The main Sub-Saharan cable connectivity is currently provided by the SAT3/SAFE cable which became operational in 2001. The SAT3/SAFE cable is not only limited to 120GB capacity, but access is controlled by predominately state-owned PTTs. East Africa is not currently served by a cable. Gigabit Ethernet circuits are currently available from London to New York at US$10/MB compared to approximately US$1,000/MB on African routes.


However, the Seacom and Teams cables will be operational this year and bring much needed connectivity to the East Coast of Africa. Prices are expected to drop to as low as US$33/MB over time. Main One and EASSY are expected to follow in 2010. WACS and ACE in 2011. Alternate routes and price competition are bound to follow over time.

Inland Long Distance Networks

Getting fibre to the shore is only one part of the equation; connecting the major cities is another. It appears that a vibrant set of altnets are starting to emerge: companies such as Neotel in South Africa and Jamii in Kenya. Companies such as Altech Stream East Africa are starting to build regional networks.

New Satellites are being launched

For most communications providers whether fixed, mobile or internet, the only option currently is slow and expensive satellite links. Slow as the current generation of geo-satellites have a latency of approximately 600ms and expensive as data is priced at approximately US$25k/MB. A next generation of 16 satellites are planned to be launched by O3b Networks (with Google as an investor) and due to be operational by late 2010.


Each of these satellites will orbit the earth providing coverage not only to Africa, but South America and Asia, and as they orbit much lower than the geo-stationary satellites are expected to have a latency of 120ms and approx. 10GB of capacity each. Cost will be around US$500/MB, which, whilst still expensive, makes the economics of rural Africa connecting within sight.

Chicken & Egg

The big question is whether all this investment will deliver a decent return to investors. The huge bubble investment in Western Markets in fibre, satellite and alternative networks in general at the turn of century ended with a lot of the original investors losing all their money. Demand is uncertain for advanced, or even basic, internet services in Africa. However, the infrastructure needs to be place before innovation and new services can flourish. The eggs are being laid and only time will tell whether the chicken will come home to roost.

With this second wave of investment, it becomes apparent why major operators such as MTN and Zain are reassessing their position and at a minimum are looking at spreading the risk through bringing in new partners. Vodafone is pushing ahead on a limited geographical footprint leveraging from a position of strength in mobile.

Full Article: M-Banking: can Zain’s new business model for ZAP rival M-PESA?

One of the major successes of the mobile industry in recent years has been the growth of m-banking in the developing world. Although a considerable number of well-funded, vendor- and operator-backed efforts to deploy m-payments systems in Europe have failed, m-banking succeeded in Africa and Asia – largely because it catered to needs that the rest of the financial system simply didn’t supply. Now, a major emerging market operator, Zain, has entered the game with a radically different business model.

Another driver of success was that the developers of M-PESA and other systems observed that the airtime credit transfer features built into their prepaid OSS solutions were being used by their subscribers as a crude money transfer system; rather than prescribing a solution, they built on user creativity. Telco 2.0 is interested in this not only because this form of development is profoundly Telco 2.0, but also because m-banking is the ultimate example of the opportunities that appear where there is a large and positive difference between the quantity of data transferred, and its social value.

By far the best-known systems are M-PESA, developed in-house by Safaricom in Kenya and now deployed in several other countries, and Smart Telecom in the Philippines. However, as you’d expect, the success of these has attracted imitators and competitors as well as emulators. If you’d asked most people in the industry which operator was likely to reach the market first with such a product, they would probably have said Celtel, the hugely respected emerging market GSM specialists founded by Mo Ibrahim. After all, by 2006 they’d already integrated their East African HLRs, ending roaming charges in the area and permitting cross-border credit transfer, a single currency of sorts.

Well, Celtel was sold to Kuwait’s MTC not long after that, changing its name to Zain. Mo Ibrahim took his money and began offering African presidents a bonus for retiring peacefully. Now, however, Zain has moved into the mobile money business. It is certain that this will be an important moment in its development; Zain’s sheer scale makes that certain. The initial deployment covers some 100 million subscribers. This also means that some markets now have competing mobile payments services – Tanzania, for example, has Zain’s ZAP and two competing M-PESA deployments. This is probably going to teach us a lot about this business in the next few months.

Cash: the crucial application in cashless payments systems

The killer application for mobile payments is cash. This is one of the reasons projects like Simpay failed; rather than extending the existing financial system they tried to leap directly to a cashless system. Network effects are vital to understanding this; if the money in the system can’t be converted into cash, the whole system is afflicted by a first-fax problem as no-one is likely to accept payment from it. It’s therefore crucial that it deals with cash.

Cash is also the form of payment that mobile banking systems compete with. This is another reason why the successes were in cash or pre-cash economies, rather than in Western Europe – most people where Simpay was trialled have access to modern banking and ATMs readily distribute cash for all and sundry. Handling cash is always expensive and risky, whereever in the world you are; it is frequently stolen or embezzled, it needs guarding. These problems are much aggravated if there is no effective policing. Hence, in large parts of the world, people are excluded from the ability to save (or to borrow), and are reliant on expensive and frequently risky informal transfer networks.

Mobile operators were able to step into the breach because the development of PAYG (Pay As You Go) service had created an alternative, lightweight financial infrastructure, consisting of real-time OSS solutions in the network and an extended user interface, made up of various tokens (vouchers, SMS transfers) and a network of micro-entrepreneurs who sell them. The business process here essentially provides a way of authenticating to the OSS that the user presenting a voucher code has indeed paid cash to acquire a given number of minutes of use, and then recovering cash into the operator through a wholesale business relationship with the vendors. There is really very little difference between this and the corresponding process of ingesting cash into a mobile payments system – which the subscribers were quick to understand and repurpose the airtime-selling network accordingly.

But as the invaluable Valuable Bits blog points out, there is one big difference between informal airtime credit transfer and formal m-banking; transaction cost. You can be confident of getting the minutes of use you pay for, but what happens when it comes to converting them back into cash? Well, you don’t know. Valuable Bits estimates that the transaction cost ranges between 5 and 40 – 40! – per cent of the transaction, a figure that makes even Western Union’s margins look modest. And worse, it’s not a risk but an uncertainty. This form of money varies in value between people and between markets, and also in time. The canonical purposes of money are as a means of exchange, a store of value, and a unit of account – stability is crucial for all of these.

Trusted agent networks are decisive

So, it’s crucial to build a network of agents who are trusted by both the network and the public, so that the system can both accept cash and pay it back out. The golden rule of cellular has always been that superior coverage wins. If you’re already selling airtime this way, you’ve got an advantage; and in fact, there is an earlier alternative system that works this way. In some places, bus companies use the fact they collect cash in strange and remote places to run a similar money transfer business. In fact, you don’t necessarily need a transport system at all – the hawala has worked rather well for many, many years purely on trust and the assumption that transfers roughly balance out.

In a realistic deployment, it’s likely that there will be clearly defined source and sink areas, though – for example, people in the city (a source) send money to the countryside (a sink), migrants to the Gulf (a source) send money back to East Africa (a sink). So it’s more complicated than we often think; the wholesale element may need to advance cash to agents in some places in order to keep the system liquid, rather like a central bank. But whatever else you do, first of all, you need the agents, which means that the business model must make room for them to earn a living.

M-PESA originally used the simplest possible option – a fixed transaction fee. This has the problem that it is regressive; the poor pay more as a percentage of their transactions. In an environment where the competition is cash or the informal sector, this worked against their interests; they later introduced a scale of pricing that tapered the transaction fee off as the transaction size fell. Either way, the pricing was pre-determined with regard to the end user.

ZAP works completely differently. Instead of a rate card, ZAP has a revenue-share between the agents and the network, and the vendors can set whatever price they believe the market will bear. Further, Zain is planning to monetise this by collecting an explicit transaction fee from their agents in cash; most other operators have instead used an implicit fee by charging for SMS or USSD traffic used by the service.

Reducing uncertainty – Zain and the Kerala example

In an oversimplified way, this ought to have the effect of rapidly discovering the market clearing price. However, it’s also true that the market for this service is likely to be geographically fragmented, locally monopolistic, and skewed by asymmetric information. In pure economic theory, this may be a problem but it won’t be for long – the markets will eventually converge. But businesses don’t live in theory – they live in practice, and a bad start can easily wreck your chances for good. Remember WAP.

It’s a brave decision from Zain, but we’re concerned it may defeat the purpose of m-banking. After all, one of the main sources of value to the end-user is getting rid of the uncertainty, risk, and transaction costs associated with informal solutions. The famous Kerala study showed that the deployment of GSM radically cut the volatility of the price of fish, and also the spreads between different markets, with the result that the volume of fish that failed to find a buyer before going off was drastically curtailed. The chart below shows the price of fish over time at three markets which successively received GSM coverage; the drop in volatility is clearly shown.

jensenplot.jpg (Source here.)

Uncertainty and transaction costs are exactly the friction that Telco 2.0 keeps saying that telcos should specialise in getting rid of; they are also very often the reason why people decide to form a two-sided trading hub.Hernando de Soto, the Peruvian economist who argues that secure title to property and land is the crucial factor in economic development, has paid the price of success by having his views turn into an oversimplified cliche, but few would disagree with his basic contention that uncertainty and insecurity are a major brake on bottom-up economic development. Therefore we’re concerned that a degree of this seems to be inherent in this model.

Conclusions: more two-sidedness needed

Perhaps this is intended to encourage the recruitment of agents. However, field reports suggest that the agents themselves are harder to find than their competitors. Zain is also charging for both deposits and withdrawals; two-sided theory would suggest that it would be wiser to choose one side to subsidise in order to build transaction numbers.

Experience in West Africa with Orange’s m-banking operations shows that a significant (15%) share of revenue can come from bank interest on customer balances, and the greater the volume of money in the system, the more likely it is that transactions will be carried out by credit transfer rather than cash.

Our preliminary analysis is therefore that deposits should probably be free, that pricing should be as stable and transparent as possible and probably collected implicitly (as SMS or USSD service charges), and that agents should perhaps receive an allocation of free minutes of use for sale in recognition of their recruitment of users rather than cash, minimising the complexity of the system’s internal economy and its need for internal cash transfers.

Do’s and Don’ts of M-banking

On this score, we suspect that Zain may need to change its m-banking business model to compete with M-PESA and Z-PESA effectively.

  • M-banking’s value proposition is reduced cost and uncertainty

  • Agent recruitment is vital

  • Minimise internal cash transfers as far as possible