1. The potential of mobile financial services: M-PESA in Kenya Daniel Jones December 2008 Case study

2. 2 © Analysys Mason Limited 2008 M-PESA was introduced in Kenya in March 2007, offering a range of basic financial services M-PESA was originally a pilot study conducted by Safaricom (a 35%-owned Vodafone affiliate) in conjunction with the UK’s Department for International Development. The services currently offered to subscribers include: w the ability to deposit cash into and withdraw cash from their M-PESA accounts via a network of agents w the ability to send money from their M-PESA accounts to any other mobile subscriber w the ability to top up their prepaid accounts or pay their contract bills. The service is being extended to allow: w payments to merchants w payment of bills w withdrawal from ATMs w social payments w international money transfers. similar services have also been launched in Tanzania and Afghanistan by Vodafone Group affiliates. The potential of mobile financial services: M-PESA in Kenya

3. 3 © Analysys Mason Limited 2008 The service has experienced quick and extensive adoption By 3Q 2008, over one-third of Safaricom subscribers had registered as M-PESA users. This is an unprecedented take-up rate for such a service and subscriber growth is still strong almost two years after launch: between June and September 2008, there was a 29% increase in the number of users. The value of total transactions per quarter has also steadily increased, reaching KES9.6 billion (USD136 million) by 3Q 2008. The total quarterly value of transactions per subscriber has decreased over time, however, falling 50% over one year to stand at KES2600 in 3Q 2008. This is to be expected, as heavy users are likely to be early adopters of the service. The potential of mobile financial services: M-PESA in Kenya Figure 2: Subscriber penetration and total transaction value of M-PESA, 1Q 2007–3Q 2008 [Source: Analysys Mason, 2008] Figure 3: Value of total transactions per user per quarter, 1Q 2007–3Q 2008 [Source: Analysys Mason, 2008] 0% 5% 10% 15% 20% 25% 30% 35% 40% 1Q 072Q 073Q 074Q 071Q 082Q 083Q 08 Penetration 0 2 4 6 8 10 Transactions (KES billion) Subscriber penetration of M-PESA Quarterly value of transactions

4. 4 © Analysys Mason Limited 2008 Low cost and ease of use are key aspects of the M-PESA service Given average transaction values of USD41 in 1Q 2008, the cost of sending money to another M-PESA user is usually equivalent to just 1% commission. As shown in Table 1, other charges are also reasonably low, making the service attractive in terms of price. Ease of use also contributes to M-PESA’s success. There are fewer than 800 bank branches in Kenya, compared with 4230 M-PESA agents at the end of September 2008. 1 Clearly, cutting out long journeys to reach a bank will improve ease of use. An academic study of Kibera, a settlement with a population of over 1 million situated 7km outside Nairobi, found that M-PESA customers used the service because it gave them access to financial services without travelling outside Kibera. 2 The potential of mobile financial services: M-PESA in Kenya Cost (KES)Cost (USD) Deposit cashFree Send money to registered M-PESA user 300.40 Send money to non-M-PESA user Depends on value of transfer. Usually 1 – 4% of total transfer Cash withdrawal by registered M-PESA user Depends on value on transfer. Usually 0.5 – 4% of total transfer Cash withdrawal by non M-PESA user Free Buy airtimeFree Table 1: Cost of using the M-PESA service at December 2008 [Source: Safaricom and Analysys Mason, 2008] 1 Central Bank of Kenya (Nairobi, Kenya), Survey on bank charges and lending rates, June 2008. 2 Morawczynski, O. and Miscione, G., Exploring trust in mobile banking transactions: the case of M-PESA in Kenya. Available at http://www.nextbillion.net/files/Morawczynski%20and%20Miscione-%20GATES.pdf http://www.nextbillion.net/files/Morawczynski%20and%20Miscione-%20GATES.pdf

5. 5 © Analysys Mason Limited 2008 Trust has been vital for Safaricom’s success with financial services, and the same will be true for other MNOs Like any other organisation getting into the business of storing and sending money, an MNO must be perceived by the subscriber as trustworthy – or, at least, as reliable as other financial institutions. Factors that will affect trust include: w the operator’s brand w the credibility of its agents w the proportion of transactions completed successfully. Safaricom has a long history in the Kenyan market, a national brand and its leadership is perceived as politically credible, putting it in a strong position to gain the trust of subscribers. Successful services are likely to be run by incumbents, rather than new entrants, unless the new entrant brings with it a strongly credible brand. The potential of mobile financial services: M-PESA in Kenya Figure 4: Trust and financial relationships required for mobile financial services [Source: Analysys Mason, 2008] SubscriberAgent MNO Trust relationship Direct financial relationship

6. 6 © Analysys Mason Limited 2008 Safaricom has marketed M-PESA, but knowledge of the service has spread virally Marketing for the M-PESA service was initially very simple. The proposition to subscribers was to use the service to send money home, for example, from towns to rural areas. This simple message was key in attracting subscribers to the service. As the number of available services increases, Safaricom is starting to market them. This should drive up growth in the average usage of the service. The marketing channels it uses include radio advertisements and billboards. The ever-expanding network of agents also play a role in introducing subscribers to the service and have an interest in doing so, because of the commission they can earn. According to Nick Hughes, Vodafone Group’s Head of Mobile Payments, knowledge and take-up of the service has largely spread virally, rather than as a result of a strong marketing drive. “We have marketed the service, but not as much as you’d think,” Hughes said. This is not unexpected, given that the service initially involved solely person-to-person transfers. Each transaction involves two parties, and non-users can be sent money via M-PESA, raising awareness of the service and significantly increasing its adoption. The potential of mobile financial services: M-PESA in Kenya

7. 7 © Analysys Mason Limited 2008 Particular features of the Kenyan market have helped Safaricom’s service to take off Large market share Safaricom has an 80% share of the Kenyan mobile market. Given such a significant market share, the fact that M-PESA is only available on one network does not put the service at a great disadvantage. Mobile subscribers able to use the M-PESA system can also send money to those not registered as users, although these transactions are more expensive. Regulation MNOs seeking to implement mobile financial services may face the challenge of having to comply with financial regulations. In Kenya, Safaricom has been allowed to go ahead with M-PESA without regulatory intervention, so far. It is likely that Safaricom will experience some regulatory intervention in the future, but the fact that the service was allowed to launch without any such barrier has allowed it to flourish. Small banking sector The Kenyan banking sector has fewer than 800 outlets. This compares with 4230 agent outlets for M-PESA. The relatively small size of the banking sector has increased the popularity of M-PESA because the Safaricom service is much more convenient for many subscribers to use. Kenya is, therefore, a more suitable market for the service than countries with a more-developed financial sector. The potential of mobile financial services: M-PESA in Kenya

8. 8 © Analysys Mason Limited 2008 Safaricom’s ARPU has increased, although agents take a significant share of this The potential of mobile financial services: M-PESA in Kenya The effect of M-PESA on Safaricom and Vodafone Group has, according to Nick Hughes, Head of Mobile Payments at Vodafone Group, been felt more through subscriber retention and acquisition, than through the uplift in ARPU. Our calculations, based on typical commission rates for transactions, assume that an average commission of 1% is taken from subscribers for each transaction. Assuming that the ARPU of M-PESA users was similar to that of typical Safaricom subscribers, this implies that M-PESA usage will increase ARPU by about 5%. However, Hughes identifies agent’s commission as the largest operational expense of M-PESA, suggesting that a significant fraction of the revenue generated is kept by the agent. Despite this, Hughes estimates that the service will be NPV-positive two years after launch. 3Q 2008 Average number of M-PESA subscribers 3 673 750 Total transaction amountKES9.6 billion (USD136 million) Average quarterly transaction value per user KES2613 (USD37) Commission rate1%* ARPU from M-PESAKES26 (USD0.37) Safaricom’s blended ARPUKES503 (USD7.10) M-PESA ARPU as a proportion of Safaricom’s blended ARPU 5.2% Table 2: Estimated effect of M-PESA on Safaricom’s ARPU [Source: Analysys Mason, 2008] * Estimated rate.

9. 9 © Analysys Mason Limited 2008 Subscriber acquisition and retention has been a major benefit of M-PESA Although ARPU generated from value-added services, such as mobile payments, is the most obvious way in which an operator may benefit, such services can also attract subscribers. Safaricom’s share of the Kenyan market increased from 76% to 80% in the 12 months to September 2008. With over one-third of its subscribers now using the M-PESA service, and given the clear importance of financial services to subscribers, there is no doubt that it is a factor in reducing churn and attracting new subscribers to Safaricom. Now that forms of payment other than person-to-person are becoming possible through M-PESA, it is likely that M-PESA will allow Safaricom to differentiate itself in the enterprise segment. The potential of mobile financial services: M-PESA in Kenya

10. 10 © Analysys Mason Limited 2008 Operators must take care to create a product offering that overcomes potential barriers to success The example of M-PESA in Kenya shows that operators in growth markets can successfully take advantage of gaps in the provision of financial services to their existing subscriber bases to boost ARPU and to deepen the relationship with the subscriber. MNOs must, however, be aware of the factors that have led to the success of the M-PESA service and of what could inhibit the launch of similar services by other MNOs. The potential of mobile financial services: M-PESA in Kenya Potential barriers to adoption Lack of trust in the MNO as a financial services provider Prohibitive cost of the service outweighing the benefit of the ease of making transactions Other financial services are as easy, or easier, to use How can barriers be overcome? The MNO must be a recognised and credible brand in order to gain the subscriber’s trust. If the MNO is not in this position, a partnership with a financial service provider may be the best option The service must be priced so as to encourage a large number of low-value transactions, so that subscribers use the service regularly Countries where traditional banking institutions are few and far between are the best environments for MNOs to create agent networks offering better access

11. 11 © Analysys Mason Limited 2008 A large agent network is vital and MNOs are in a good position to exploit their existing distribution networks One of the key success factors for M-PESA in Kenya has been the large number of agents that users can go to in order to make deposits or withdrawals. By September 2008, M-PESA had 4230 agents, while there were fewer than 800 bank branches. Safaricom was able to leverage its existing distribution network of over 8000 agents to build up the network of M-PESA agents, although only those with significant cash flows were suitable. Distributors for M-PESA include: w retail outlets w all Post Office Savings Bank branches w petrol station chains w other existing agents in the distribution network. Already having distribution networks in place, MNOs are generally well positioned to offer value-adds such as financial services, which require a large distribution network for success. The potential of mobile financial services: M-PESA in Kenya

12. 12 © Analysys Mason Limited 2008 The paucity of banking in other countries presents opportunities for MNOs Kenya is not unique in having few bank branches for the size of its population, but banks are more plentiful per head of population in many other developing markets. Other large growth markets with low ratios of bank branches to population include: China, Nigeria, Russia, Kazakhstan and Egypt; in Pakistan and Saudi Arabia, bank branches are three to four times as numerous as in Kenya, compared to the size of the population (see Table 3). If a mobile payments solution on the scale of M-PESA in Kenya were rolled out in one of these markets, even in one with four times as many bank branches as Kenya, it would offer twice as many mobile payment agents as there were bank branches. This suggests that there is potential for successful mobile financial services in many of the world’s largest growth markets. CountryBranches per 100 000 people Uganda0.53 China1.33 Kenya1.38 Nigeria1.62 Russia2.24 Kazakhstan2.47 Egypt3.62 Pakistan4.73 Saudi Arabia5.36 United States30.86 France43.23 Table 3: Abundance of bank branches in selected countries, per 100 000 population [Source: Journal of Financial Economics 3 and Analysys Mason, 2008] The potential of mobile financial services: M-PESA in Kenya 3 Beck, T., Demirguc-Kunt, A, and Martinez Peria, M. S. (2007), ‘Reaching out: access to and use of banking services across countries’, Journal of Financial Economics, Vol. 85(1), pp. 234–266.

13. 13 © Analysys Mason Limited 2008 Other operators are now seizing the opportunity to launch mobile financial services Recently, France Telecom announced that it had begun a pilot of the ‘Orange Money’ mobile payment service in its Ivory Coast subsidiary. The service allows users to: w deposit and withdraw cash w transfer money w top up their phones w pay electricity bills w buy goods and services. Tariffs for usage are higher than M-PESA’s in Kenya, the lowest commissions on withdrawals being 3%. This is likely to give France Telecom the ability to make higher margins. The effect of the higher charges on adoption has yet to be seen, as the pilot of the service has only just started. As with M-PESA, non-subscribers to the service are able to receive payments, although in this case only subscribers to the Orange network (38% of the market at the of 2007) can benefit. MTN is reportedly piloting ‘MTN Mobile Money’ in three West African operations, has extended this to Uganda and will shortly extend it further to Rwanda. The potential of mobile financial services: M-PESA in Kenya

14. 14 © Analysys Mason Limited 2008 Conclusions Operators in many growth markets should take note of the potential opportunities offered by mobile financial services. There is potential for these services to lead to an improvement in subscriber acquisition and a reduction in churn for an operator, as the first launch within a country offers a valuable and unique service. It is important for operators to understand the factors that drive adoption, including a lack of existing banking facilities, the extent of the agent network, pricing, trust and ease of use. In the right setting, and if the service is implemented appropriately, the benefits are such that adoption can spread virally throughout the subscriber base without the need for heavy marketing, lowering opex costs. Other countries that lack financial services provision and in which there are opportunities for mobile financial services to be successful include some large growth markets, such as China, Egypt, Nigeria, Kazakhstan and Russia. The potential of mobile financial services: M-PESA in Kenya