Enabling Transformative M-Payment Solutions Through Distribution

Given all the hype about m-payments, every bank and mobile network operator (MNO) is attempting to determine what it is that defines a winning m-payments value proposition. Confronted with literally hundreds of technology providers, they might be forgiven for freezing in the headlights as the mobile train appears on the horizon. Alternatively, they may find themselves deciding to buy a ticket for the ride, even if they are still unsure about the destination.

Success stories in both South Africa and across the African continent show that the technology being leveraged by successful operators is not significantly different from that being used by less successful competitors. While a number of important factors, including simplicity, marketing, customer education, pricing and ease of registration clearly influence take-up, the most important factor in cash-based societies is distribution. What is most important to customers or potential customers is whether they will be able to get their money in and out of the system with relative ease.

The M-PESA Experience

M-PESA, one of the leading m-payment offerings in Africa, has performed particularly well in this regard, and this is arguably its key differentiating factor. Seven months after its launch in March 2007, M-PESA had already managed to sign up over 1,200 agents - more than the total number of ATMs in the country at the time, more than double the number of bank branches, and around three times the number of Western-Union(WU) outlets.

By that stage M-PESA had also managed to attract over 800,000 customers, a number which, by September 2009, had increased almost tenfold to 7.99 million.

Cash Versus e-Money

In cash-based societies, individuals are typically uncomfortable with the use of e-money. This is demonstrated by the preference that low-income banked individuals have for withdrawing all of their funds from a bank or ATM shortly after these have been deposited.

The extensive work Genesis Analytics has done in this field confirms that accessibility is a key driver of this behaviour, with individuals preferring to extract maximum cash on each visit rather than having to face a long and inconvenient trip back to the bank or ATM. This behaviour clearly has security implications, leaving customers vulnerable to the loss of funds, and it therefore involves a trade-off between risk and convenience.

Product offerings such as M-PESA are expected to continue increasing the level of comfort users have with e-money, mainly as a direct result of their distribution networks. It is anticipated that, over time, customers will increasingly demand the benefits of e-money services, and will use them to manage the receipt of income, to pay their bills, make retail purchases, send money to friends and family, and to save.

Once this transition takes place, and customers are more comfortable with using their funds in electronic form, distribution will become significantly easier to manage. The service will come to centre on accepting e-money rather than providing cash-in and cash-out services. The cash management issues that agents currently face, and that M-PESA has to deal with, will increasingly become much less of an obstacle.

Users in Africa, however, are still a long way from this point, with cash transactions dominating in every country on the continent. Even in South Africa, with arguably the most developed financial system in Africa, large retailers report that cash still accounts for around 87% of transactions by volume(1).

As long as this situation persists, providers of m-payment offerings will need to focus on getting their cash-in and cash-out capabilities right, which is admittedly not an easy task.

While M-PESA has managed to perform very well in terms of its number of agent outlets, its financial success is less clear. As of June 2009, it had yet to turn a profit, and was reportedly only breaking even on a month-to-month basis(2). Given the commission paid to agents for registering customers, the key to profitability will be lower levels of churn and increased levels of usage. Furthermore, M-PESA should become profitable as the market reaches full capacity, sign up tapers off, and registration costs become relatively less onerous.

Transformative Channels Versus Add-Ons

M-payment solutions are often split into two categories, those that facilitate social transformation by providing a new channel for customers previously excluded from the formal banking system, and those that simply offer an additional channel for existing customers.

In South Africa, both ABSA and FNB have been successful with the introduction of mobile banking, predominantly as an additional channel for existing customers. FNB now has over 1 million active cellphone banking customers, with ABSA reporting similar numbers. These levels of m-banking success have, however, very little to do with distribution.

It is only recently that both banks have taken their offering into the transformative arena by including money transfer services to unbanked individuals, an offering which relies heavily on their distribution networks.

ABSA was first into the market with CashSend, which allows ABSA customers to send money to unbanked individuals via existing electronic channels including ATMs, the internet and cellphones. Recipients can then access the funds at any ABSA ATM, but must withdraw the full amount deposited.

FNB followed suit with Send Money, which is a similar offering, but which allows unbanked recipients to transact with the money they have been sent. They can use their e-money facility to buy airtime, save, do balance enquiries or send money to someone else's cellphone.

As far as withdrawals are concerned, both ABSA CashSend and FNB Send Money recipients can only withdraw the e-money they receive from ABSA and FNB ATMs respectively. ABSA has a particularly good ATM footprint consisting of 9,200 machines, while FNB has 4,300. If distribution alone is the deciding factor for take-up, then clearly ABSA's CashSend would be preferable to FNB's Send Money or any of the other formal products currently on the market, including Shoprite money transfer, MTN Money Transfer, Western-Union and Moneygram.

However, despite the importance of distribution, it is not sufficient to ensure the success of m-payment systems on its own. The entire value proposition, including product and pricing, has to meet customer needs.

In this regard, FNB has made a bold move in terms of pricing, and is levying no service charges until May 2010. The FNB product also has greater functionality than the ABSA product, allowing customers to transact using the e-money they receive, as already mentioned. Factors such as these make it difficult to predict a winner in the e-money race, but do not change the fundamental premise that, unless distribution achieves a critical level, transformative offerings are unlikely to succeed.

The next step for both of these providers would presumably be to enable cash-out transactions on point-of-sale (POS) devices. If this were to be done, the distribution leg would be significantly enhanced, albeit less so in more remote rural areas. As of 2006, there were an estimated 655,000 POS devices in SA, which could be used to bring e-money closer to people across the country(3).

In the medium term, one can reasonably expect greater penetration into remote areas as advances in technology allow for the roll-out of more cost-effective competitors to traditional POS devices, probably in the form of the mobile phone. Before this can be done, however, there are a number of security issues that will have to be resolved.

Distribution and the M-Payment Value Proposition

Distribution is therefore essential to the success of transformative m-payment solutions, but success depends on more than distribution alone.

Ultimately, a winning value proposition needs to be multi-faceted, and needs to include an attractive product offering, appropriate pricing, an appealing brand image, suitable marketing, and customer education programmes.

The fact that an operator does not have an extensive distribution channel in place therefore does not preclude the potential success of an m-payment offering. It does, however, complicate the implementation process, and thorough pre-evaluation of the opportunity is required. Such questions as: "Is there sufficient margin to make the venture worthwhile for both the product and distribution owner?", "Who will 'own' the offering?", "What incentives are required to ensure that each party delivers on their responsibilities?" and "Are there any regulatory requirements that might jeopardise the legality and/or economics of the venture?" will certainly need to be asked and the issues raised by them addressed.

1) FinMark Brief, "The Banking Inquiry, A review of the inquiry panel's report to the Competition Commission and its potential impact on poor South Africans' access to finance", April 2009, prepared by Jenny Hoffmann.

2) moneybiz.co.za/business_in_africa/Safaricom-sees-M-PESA_profit_this_year
Copyright© 2009 Genesis Analytics (Pty) Ltd

3) Euromonitor International, 4Q, 2006 (as cited in MasterCard's presentation to the South African Competition Commission)

Michel Hanouch is a senior associate in Genesis Analytics' banking practice. Michel's areas of specialisation and interest include m-payments, small and medium enterprise (SME) banking, and microfinance. He is currently completing a Masters in Economics degree at the University of the Witwatersrand, and holds both a Bachelor of Economic Science Degree with majors in Mathematical Statistics and Economics, as well as an Honours Degree in Economic Science.

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