INDIAN INSTITUTE OF MANAGEMENT INDORE

STRATEGIC MANAGEMENT II
Study of BOP intervention Launch of M-Pesa by Safari.com

SUBMITTED BY

Anil Joshi Arpit Renwal Koli Rahulkumar Ramdas Mohammed Shahbaaz Saurabh Tandon Seelam Divya Tofik Shikalgar

2011PGP543 2011PGP569 2011PGP692 2011PGP727 2011PGP857 2011PGP862 2011PGP919

SECTION A |PGP 2011 13

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Index
1. Introduction...............................................................................................................3 2. Inception of Idea........................................................................................................3 3. Country conditions that led to design of M-Pesa......................................................3 4. Business model that was sustainable........................................................................7 5. Attracting new customers with usage based model.................................................9 6. Channel Management..............................................................................................10 7. Growth via double tail diffusion of technology........................................................11 8. Impact of M-Pesa.....................................................................................................12 9. M-Pesa technology in India.....................................................................................14 10. Scope of replicating the magic in India Supporting factors................................15 11. Factors to be a hindrance in path of development................................................16 12. Learning from M-Pesa intervention in Kenya.........................................................17 13. Exhibits....................................................................................................................19 14. References...............................................................................................................21

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1. Introduction
M-Pesa is a mobile money transfer technology that allows people to deposit, transfer and withdraw money by using their cell phone. Thus it serves the purpose of electronic payment as well as acts as a store of value. Launched in March 2007 by Safaricom group in Kenya in partnership with the Vodafone group, M-Pesa has seen phenomenal growth impacting the life of more than 14 million people across Kenya. M-Pesa was launched with the purpose of e-remittance in a try to fill the missing gaps in the prevailing structure of Kenya at that time. With an 80% market share, Safricom leveraged its existing system along with a usage based model for M-Pesa to create a profit making business out of it.

2. Inception of Idea
The idea for mobile money transfer was originally developed by a London based team of Vodafone group. It was expected to benefit by cost reduction and efficiency programs as well as a growth in customers mainly in emerging markets. The idea was further developed by Safaricom team in Kenya by the CEO Michael Joseph. Vodafone had 40% stake in Safaricom with the remaining 60% with the Kenya government. They worked together on a revenue share model where Safricom controlled the on-ground operations and Vodafone manages the development and delivery of technical service.

3. Country conditions that led to design of M-Pesa

It was the compelling market conditions in Kenya that led to the need for development of such business logic. We will go about explaining each condition that benefited the successful deployment of mobile money transfer technology

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I.

Strong demand for domestic remittance

M-Pesa was launched with the initial value proposition of Send money home. This was because migration in Kenya was increasing. Being a developing economy, the Tier-1 cities like Nairobi, Mombasa, Nakuru etc were the main revenue generating house of the country. Hence the young Kenya was moving to these cities for jobs. As per the FSD survey of 2006 (Financial Service deepening), there were around 17% of the households in the rural regions dependent on the bread-winners from the family working in cities. This leads to an increasing demand for an efficient service to remittance. Studies have shown that in initial phases of economic development of a country, when the growth is not to the extent to have a complete urbanization, leads to a high demand for remittance where the need for sending money back home to rural parts increases. Safaricom leveraged the opportunity by coming up with an innovative model for filling the gap. II. Inefficient existing channel

Prior to the launch of M-Pesa, the formal system for sending money used to be the Kenya post. It was considered to be highly costly and slow by people and also faced major liquidity shortages in rural parts of Kenya. The other informal systems that existed included mainly buses and matatu (shared cabs). Since they were not legitimate hence it involved a risk of delivery at the destination. Graph below shows the use of existing channels prior to the launch of M-Pesa and after that

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Money transfer service

3% 9% 11% 4%
Direct into bank by cheque

5% 9% 47% 32% 7%

M-Pesa Directly into Bank account By hand sent with family/friends through bus/Matatu company other

58% 24%

post office money order

through bus/Matatu company

27%

By hand sent with family/friends paid in someone's account;who passed it on

Mode of sending money prior to launch of M M-Pesa

Mode of sending money after launch of M-Pesa M

- Graph based on Exhibit-1(a) and 1(b) Exhibit

III.

Lesser access to finance

Financial access in Kenya

40% 20% 0% 38% 35% 8% Semi formal 19% Formal

The FSD survey of 2006 reveals that nearly 38% of the population had no access to banking services. This comprised majorly . of the rural population. With a quarter of population having access to formal and semi-formal forms of financial services, formal

Excluded Informal

Based on Exhibit Exhibit-2

the diffusion of technology became easy. The early adopters of such a technology for transferring money have to be the ones who have access to banking and financial services so as to have a confidence of using such services. A high population with no banking access and knowledge assured that banks can not fill in the gaps. This was because the investment from This rural sections was so small that banks with their credit credit-led or savings-led model of earning led money could not survive. Safaricom on the other hand had a usage based model that helped them to make every transaction profita profitable. Thus with a certain population with banking knowledge allowed people to use M M-Pesa for money transfer while major population with lack of financial access helped M Pesa to fill in the Mmissing gaps of banking system.
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IV.

Robust distribution Network

Safaricom, which began its operation in 1997 had nearly 80% of the market share and was way ahead of its next 2 rivals, Zain and Orange. This helped them to leverage their existing retail outlets to convert to cash-in/cash-out agents. So they did not had to wait for letting the customer base increase for increasing the domain of agent outlets. This saved them from chicken and egg trap of whether to wait for increase in customer base first or to increase the agents for increasing customer base.
16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 Apr-07 Sep-07 Feb-08 Jul-08 May-09 Mar-10 Aug-10 Dec-08 Oct-09 Jan-11

As per the data released by Safaricom of their agent outlets on the completion of 5th year of M-Pesa, we can see there has
No. of MPESA Customer

been

positive the

correlation in

between

increase

Graph as per Exhibit-3

customers and the increase in

customers and the increase in agent outlets with further outlets being added to have a stronger base.
30000 25000 20000 15000 10000 5000 0 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11
No. of Agent Outlets countrywide

High

strong

co-relation

between customer base and agent outlets

Graph as per Exhibit-3

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V.

Favorable regulatory framework

The first FinAccess survey of 2006 had revealed very low penetration of banks in the country as we had already seen above with more than 70% of the population with no access to formal or semi-formal modes of financial services. With similar results being revealed by FinAccess survey, the Central bank of Kenya (CBK) was looking in for options to correct the access imbalance. With a 60% stake in safaricom of Kenya government, they had good working relations with the central bank of Kenya and thus helped them to gain regulatory space to design M-Pesa. A deal was signed between the two parties where CBK allowed Safaricom to operate as a payment system outside the provisions of normal banking system in spite of the opposition being faced by CBK from other banks. In response to this Safaricom was required to pay the interest earned of the deposited amount to a not-for-profit trust.

4. Business model that was sustainable

M-Pesa worked on a usage based model under which for every transaction there were fixed charges. They found that when such small amount of money is involved in rural parts of Kenya, it will not be possible to sustain profitably based on interest based earning as is the case with banks and other micro financing institutions. Also the people in rural parts needed money and often did not use the system for as a mode of money storage thus reducing the probability of earning interest further. So M-Pesa declared fixed rate charges for every transaction in particular range. This ensured that a card bought is profit ensured for Safricom. The transaction charges were fixed in currency terms for particular range of transaction (as shown in Exhibit -4). This helped the customers to compare this mode with other available modes of transfer. Also the agent outlets were not allowed to charge any fees as they were paid by Safricom, further reducing the chances of corruption at agent outlets. They emphasized on differentiating themselves from the bank as they were promoted not as a mode of money storage but mainly as a way of e-remittance. As per the FSD survey of 2009, if we compare the number of transactions and the amount of swaihili (Kenya currency) transferred via mobile with other modes like RTGS or ACH or by ATM, we can see that although
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the number of transactions in M-Pesa are way more than normal RTGS or ACH but the value per transaction is very low. Thus it offered to serve a niche market where the reach of banks and other financial institutions was low but the daily need for money was required although in low amounts.
Daily financial transactions RTGS ACH ATM Mobile Value per day (billion KSh) 66.3 8.5 1 0.1 Transactions per day (thousands) 1 39.2 180.2 107.2 Value per transaction (million KSh) 64.67 0.216 0.006 0.003

Source Reference#1

This also supported the fact that the model was sustainable only because it earned profit on a per transaction basis. So higher is the number of transactions, greater will be the profit booked by Safaricom. In the process of building a sustainable model, Safaricom faced further challenges I. II. Building trust in agent outlets so that the customers believe them to be legitimate Managing liquidity crunch at M-Pesa outlets

In order to build trust in the brand outlets, they needed to come up with a way that clearly differentiated the legitimate agent shops. Hence they made it mandatory for M-Pesa outlets to Paint the shop green. This format was called as Safaricom green. Leveraging the fact that they had an 80% market share to convert them to green outlets, they were able to let customer clearly

differentiate between a legitimate and an otherwise one outlet.

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Additionally, each outlet was required to maintain a record of cash-in/cash-out transactions which had to be signed by the customer. Agent income, as given by Safaricom was a function of the transaction log. In order to fight with the liquidity constraints, Safaricom had partnered with PesaPoint, one of the largest ATM service providers in Kenya having presence in all 8 provinces. This allowed customers to withdraw e-float as money from any of the PesaPoint ATMs. The customers received a one-time authorization code which they could use in any of the PesaPoint ATMs to withdraw money from their mobile account. Thus in areas with ATM reach, it was not mandatory for people to have a bank account with PesaPoint for increasing liquidity. They could use their mobile accounts for the same purpose.

5. Attracting new customers with usage based model

Safaricom had a clause to their charging scheme to ensure that they targeted to the right market for attracting new customers. Launched with the basic purpose of serving for e-remittance, Safaricom knew that in such a transaction, the power is in the hands of the person who is sending money to his household. So they allowed mobile money transactions between an M-Pesa customer and a non-customer but at an extra charge. The non-customer received a message on his mobile which had a one-time usable code. This could be used at any of the outlets to encash for money without any transaction charges. On the other hand, the M-Pesa user was charge thrice the amount of a normal transaction. Thus in all with such a transaction they made 50% more profit as compared to a normal one but all the charges were on to the customer. This was because the person who was sending remittance back home was the main earning member and had the power to coerce his family back at home for having an M-Pesa account so as to have an overall reduction in charges. The survey results of FSD 2009 are also in line with their strategy stated above.

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Urban Tier-1 Urban other Rural

Users Non-Users Total 20.39% 12.32% 15.86% 56.09% 42.89% 48.68% 23.52% 44.78% 35.46%
Users profile/background

Receive money Send money Store/save money for everyday use Buy airtime for myself Buy airtime for someone else Others

28.40% 25.08% 14.39% 13.58% 8.30% 10.25%

Purpose of using mobile transfer Source Reference#2

With around 23% users in rural regions because each member who moved to urban area would have a connection while there will be only 1 connection back at home. As can be seen from the graph, major use of M-Pesa was for e-remittance (53%). So the strategy of charging extra for a customer to a non-customer transaction helped in increasing number of connections in rural Kenya.

6. Channel Management
Safaricom had a two-tier channel management structure where the Master agents referred by Safaricom as Agent Head office maintained and supervised the individual retail outlets. The head office had 2 main functions I. II. To maintain liquidity at each of the M-Pesa agent outlet Distributing commission to agents

To minimize the problems of liquidity crunch at each of the agent outlets, Safricom provided their head offices with surplus cash reserves. The head office maintained the timely transfer of money to each of the outlets that it covered. Generally the transfer to individual outlets was on a daily basis. The division of commission between agent HOs and the outlets that they covered was generally in the ratio of 70:30, with HOs passing nearly 70% of the commission to the agent outlets. As the model was based on number of transactions and so was the revenues of individual stores so Safaricom ensured that they do not open too many store outlets in a particular area so as to bring down the number of transactions per centre and hence de-incentivizing the outlet owners. The evaluation, training and on-site supervision of workers at the agent outlet was
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outsourced to a third part, thus centralizing the functions to have a similar experience at each retail outlet.

7. Growth via double tail diffusion of technology

Every new technology that is brought in use has generally 5 layers of diffusion through masses as per the diffusion of technology study. The innovators being the first one to use the product/service with the early adopters following them. The role of marketing for the company comes into play in converting the early majority into their customers. Most of the companies are able to diffuse through this much of population with being unable to cover the late majority and laggard efficiently because of their resource constraints. In case of M-Pesa, the diffusion of technology was two-tailed. With innovators and early adopters using the technology for remittance purpose and since sending to a noncustomer was charge higher, so people made sure to have an M-Pesa account back at home. Thus with every increase in innovators and early adopters of the population for using technology, there was in a the
Source Reference#3

corresponding

increase

laggards and late majority also for for using the M-Pesa account. Thus with a simultaneous reach in both parts, Safaricom saw an exponential growth in the number of customers with around 20,000 customers in April 2007 to more than 1 million customer by November 2007 and nearly 14 million present customer base. In order to make sure that diffusion of technology takes place in rural side also where the resources are constraint, Safaricom removed the adoption barriers with a free to register, free to deposit and a no minimum balance requirement. This allowed people with limited money in rural parts to try M-Pesa accounts for receiving remittance easily.
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8. Impact of M-Pesa
With a safer mode of storage and money transfer, M-Pesa had huge impact on the Kenyan economy helping to bring major developments around the rural regions I. Money circulation

With a greater money flow via remittances in rural parts of Kenya, an increase in money volume and velocity was observed. This further boosted local consumption which leading to an increase in flow of money mainly in the rural parts of India. FSD survey showed that another major impact of the increased flow of money was the easy availability of rescue money where in if a person runs out of money, he could get the required amount from his friends/relatives miles apart, within few minutes. An increase used of mobile payments for regular transactions was also observed wherein people using this for bill payments, buying airtime and other purposes too. So the need to carry cash in hand was largely reduced. II. Increase in household savings

Keeping cash in hand was considered to be unsafe in Kenya. With M-Pesa offering as a store of money, it allowed people in rural parts with no access to bank accounts to keep their savings in the form where it cannot be exploited by others. It also allowed women to have some savings of their own in cases where men controlled all flows of transactions as per their requirements. Thus in a way it helped to empower women in undeveloped parts by allowing them to have their own savings for personal use. III. Expansion of business

With an increase in local consumption leading to an increase in needs of people, community saw a number of small scale business, mainly informal coming up to serve the needs. This led to an increased availability of goods and services in the marketplace leading to more competition and lower transaction costs for consumers.
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IV.

Increase in Employment

M-Pesa had both direct and indirect impact on community in terms of employment opportunities. As a direct opportunity, with a continuous increase in agent outlets, more number of people opened M-Pesa kiosks leading to increased employment on small scale. With the expansion of business, more number of people forayed into different business thus having an increase in the employment opportunity for people. V. Physical and food security

With an increasing use as a mode of storing money, it allowed people not to carry cash in hand thus reducing the chances of thefts. Survey results have shown that an increasing amount of money is being carried by people helping in prospering business. M-Pesa agents were located near many of the micro financing institutions, allowing people to convert their loans into e-float and store in their mobile accounts. Farmers in rural areas often lacked certain resources due to their inability to pay for the resources at the required time. This was affecting the overall productivity of the system. With an option of paying directly into mobile accounts and an increased availability of remittances, they were able to fill in the missing gaps thus ensuring better food security. VI. Increase in human capital accumulation

With higher money circulation and increasing availability of remittances, families in the rural parts started believing in the need for development of the youth in the form of proper education and medical resources so as to ensure their growth and hence further increase in money availability to them. Thus with greater investments in education and medical procedures, it led to an increase in human capital accumulation which is a mandatory requirement for a developing country to sustain its growth.

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9. M-Pesa technology in India

In India, with the modification of regulation policy of R.B.I, that allows the profit companies to become a business correspondent for banks, it has opened vast opportunities for Telcom industry to venture in the field of mobile payments. The current delivery model, as per the RBI regulations has to be bank-linked where a registered mobile phone user needs to have a bank account on which he can register for the mobile payment technology with the specific bank. Once registered, a customer can the transfer money via sms or can pay for goods and buy airtime and other similar services. The Mobile payment forum of India is the umbrella organization responsible for deploying the service in India. The Indian giants have already ventured in the market with Airtel has come up with its money transfer service as Airtel money along with Western union and State bank of India. Based on the results of its pilot implementation in delhi-NCR and Chennai, the service was launched across 300 cities by March 2011. It has been promoted as an easier alternative to cash card payment options in the urban regions. Vodafone tied up with HDFC bank to launch its mobile money transfer service called M-Paisa after a pilot implementation that was carried out in Sikar district of Rajasthan. Reliance has also partnered with ICICI bank to come up with a similar service for mobile banking. An international conference is being conducted by the business forum Mobile Payments India 2012! to discuss on the new technologies of mobile payments and mobile banking and the impact of institutions link up with financial system on the end customer. Our analysis shows that there are certain factors that will support the growth of technology in India while certain factors that we need to work upon so as to make mobile payments a successful venture in respect of its impact on the bottom of pyramid in India too.

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10. Scope of replicating the magic in India Supporting factors

Following are the factors that give us an indication that mobile technology can have a phenomenal growth in India I. RBIs inclination towards mobile wallet

As per RBI estimates, nearly 40% of the population lacks access to financial services and hence is unbanked. So RBI has shown increasing interest in formulating the policies that allows them to increase their reach to the furthermost corners of the country where there is no access to banking services but due to developed network coverage, access to mobile services is present. RBI has allowed companies to tie up with banks for developing mobile payment services. The government has also taken several projects for boosting m-banking in India. The National payment corporation of India (NPCI), has launched an interbank mobile payment service that allows fund transfer within banks through mobile phones. Thus not limiting the scope of mbanking to transfer via same service provider. II. Increasing migration in developing economy

With a growth rate of 2.53% per month, the population in India is increasingly moving towards urban cities for employment. This has created an increasing need for remittance service. As per the graph from Exhibit-5, we can see that the GDP real growth rate of India has been
GDP - real growth rate 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP - real growth rate

15 10 5 0

increasing.

Thus

creating

an

increasing demand for people to migrate to areas with better earning opportunity. This high migration has resulted in an increa

Source Reference#4

increasing need for providing efficient service for remittance.

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III.

Increasing mobile phone subscribers in India

With a 915 million subscriber base and a growth rate of more than 8 million subscribers per month, India has a ubiquitously available network which can be leveraged for financial services needs. There are furthermost parts of the country in its rural base where there is even no know
60 50 40 30 20 10 0

-how of banking services but there is the reach of mobile phone networks.
mobile users per 100 population

Mobile banking services can help in filling in such markets where banks cannot reach or serve.

Source Refernce#5

IV.

Need for banking sector deepening

With less than 100k ATMs and more than 600k villages across India, there is a mismatch in the supply and demand of banking services and there is a huge potential for an intervention to fill in the missing gaps.

11. Factors to be a hindrance in path of development

Following are the factors on which we believe that India needs to work upon so as to make sure that the expected growth and impact from mobile payment technology is achieved I. Creating trust in retail outlets

With an increasing competition among the Indian giants, an exclusive agent channel will be very difficult to maintain. In India, the trend is also that a single outlet keeps the recharge coupons for all service providers and hence company specific providers are very less. Also the agents earn commission on the basis of number of transaction. So even if we try to create company specific outlets, the number of transactions that an agent caters to will decrease. Hence lowering the overall commission per agent and making the business unprofitable for them.

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II.

Increasing population a daunting challenge and a big opportunity

As per the current RBI policies, each mobile account has to be linked with your bank account. India has nearly 300 million bank accounts. The integration of these mobile accounts with individual bank accounts will be a daunting task considering the huge number. This will require a better technology that can cater to such large number of transactions and can maintain this huge database. If implemented, it will open vast forays of growth in financial service sector for Indian telecom industry. III. Low literacy levels in India

As per the Census-2011, literacy level in India is at 74.04%. Educating the rural population for the efficient use of technology will be a difficult task. This can be a major hindrance in the path of growth of mobile payment technology because this model is sustainable only on the basis of number of transactions taking place. Hence as long as the customer is not educated and he does not believe in the legitimacy of the system, he will not be willing to transact. Thus bringing down the overall profitability of the system.

12. Learning from M-Pesa intervention in Kenya

Based on our study of the intervention of Safricom along with Vodafone group in Kenya for the development of mobile payment technology, we derive the following 3 learning as the most important one I. Importance of having usage based model for reaching poor customers

Banks find it difficult to serve to poor strata of society because their model is based on the savings i.e they generate revenues from interest earned on the deposited amount. Since the amount deposited in rural sector is very small and also the time for which it is deposited is very less, so banks find it difficult to sustain with such a model. In such a state we need to come up with a new model in which the revenue generated depends on the process taking place the maximum number of times which in this case was a transaction based model.

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II.

Leveraging technology for having a double rate diffusion for an exponential growth

Most of the product or services are able to penetrate through to the early adopters and some part of late adopters. The problem aggravates when you are developing for the lower strata of the society because in such a case, diffusion till even the early adopters stage is very difficult and a slow process. So we must need to design a technology that causes an increased growth because only then we will be able to have a tangible impact along with making profit. The marketing strategy and channel management used by Safaricom is a good example of how to leverage your resources for an increased growth in demography. III. Leveraging mobile technology to extend financial services to the unbanked poor

Reach of banking sector is limited and hence it limits the reach of financial sector too. But the latest technologies like the mobile and wireless have seen by far the fastest growth and reach to the farthest part of the country. Hence integrating these technologies with financial services can help us in development of those regions where as such profitable reach would not have been possible.

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13. Exhibits
Exhibit 1(a) How people sent money prior to the launch of M-Pesa [Survey results FSD 2010] Source Reference#6 Modes of transfer Percentage population
Money transfer service Direct into bank by cheque post office money order through bus/ Matatu company By hand sent with family/friends paid in someone's account; who passed it on 9% 11% 4% 24% 27% 58% 3%

* Some people use more than 1 mode of transfer

Exhibit 1(b) How people sent money after the launch of M-Pesa [Survey results FSD 2010] Source Reference#6 Modes of transfer Percentage population
M-Pesa Directly into Bank account By hand sent with family/friends through bus/Matatu company Other 47% 7% 32% 9% 5%

Exhibit 2 Financial Access in Kenya [Survey result FSD 2010] Source Reference# 7 Access to form of service Percentage population Formal banking service Semi-formal banking service Informal banking service Excluded from banking service 19% 8% 35% 38%

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Exhibit 3 Growth of M-Pesa customers and agents [Source Reference#8]

Quarterly data
Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

No. of M-PESA Customer 52453 255708 807917 1560607 2373455 3367192 4420279 5478279 6482118 7387980 8,337,559 9,048,965 9,673,837 11,895,515 13,006,562 13,474,418 14,008,319

No. of Agent Outlets countrywide 355 681 1196 1812 2606 3378 4781 7304 9521 11623 13,999 16,926 18,103 19,502 21,358 24,921 27,988

Exhibit 4 Transaction charges [Source Reference#9]

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14.References

I. II. III. IV. V. VI. VII. VIII. IX.

(William, Georgetown and Tavneet Pg 6) http://www.mit.edu/~tavneet/M-PESA.pdf (FSD Pg.4) http://www.fsdkenya.org/pdf_documents/11-02-14_Mobile_payments_in_Kenya.pdf http://www.ebizcolumn.com/2010/04/m-pesa-adoption-cycle-example-of-two.html http://www.indexmundi.com/g/g.aspx?v=66&c=in&l=en http://www.indexmundi.com/g/g.aspx?v=4010&c=in&l=en (FSD Pg.3) http://www.fsdkenya.org/insights/10-10-13_FSD_Insights_M-PESA_issue_01.pdf (FSD Pg.2) http://www.fsdkenya.org/insights/10-10-13_FSD_Insights_M-PESA_issue_01.pdf (Safaricom)http://www.safaricom.co.ke/fileadmin/M-PESA/Documents/statistics/MPESA_Statistics_-_2.pdf http://www.safaricom.co.ke/index.php?id=255

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