This stuff gets harder to interpret every day. My guess is that Vodafone is integrating the “Visa Wallet + Prepaid” products into what Vodafone has built. This enables banks to accelerate adoption, and to “partner” w/ Vodafone for the defacto stored value account within a given market. This obviously simplifies the regulatory issues. Not a bad plan.. but how can you decipher this from the PR? By integrating the Visa Wallet (ex CYBS) they can also extend beyond POS … So key question to ask here.. WHERE is the stored value card held? In the phone alone?
Subject: In this post I attempt to estimate “critical mass” financial numbers for a mobile money to the unbanked (MMU) service to be sustainable.
4 June 2010
Subject: In this post I attempt to estimate “critical mass” financial numbers for a mobile money to the unbanked (MMU) service to be sustainable.
I’m a few weeks late in publishing this, it just slipped off my radar. Attended the GSMA Mobile Money Summit last month in Rio. Great people in attendance, although the event itself leaved much to be desired. The MNOs had a focused set of meetings on the opening Monday covering “how to work with regulators” which is certainly a key to success. I was struck by the volume numbers in country pilots.. they are so small.
Safaricom released earnings at the beginning of the month. This data coupled with the data from the Mar 2010 Gates foundation report provides insight into the challenges faced by new payment mechanisms in other emerging markets. Market approaches will surely be tested as other countries attempt to replicate the MPESA success. It has taken 3 years, and some very unique market conditions, for Safaricom drive this service into profitability.
- MNOs must reach around 8M users (or around $300-500M per month GDV) to break even
- Bill Payment is key to driving payment volume in emerging markets
- Without a regulatory partnership everyone looses. Phillipines wins prize for best bank, MNO, regulatory partnership in the world.. if you want an example of success talk to Rizza at GCASH.
Safaricom Revenue Data
Safaricom Annual Report shows MPESA “Total Annual Revenue” of 7.56B KES ($93M USD, 9.48M users) for the year. Gross Volume is not published.. but there is other “anecedotal data” to give more color:
- transferred a cumulative Sh405 billion since launch
- US $320 million per month in person-to-person (P2P) transfers
- US $650 million per month in cash deposits and withdrawal transactions at M-PESA stores (Gates foundation)
- Average Sh1.8 billion a day ($670M per mo total). In Earnings release. (does not align w/ number above)
- Grew from 5M to 9M users in 2009
- Interest from $1B+ settlement funds is not included in either Vodafone nor Safaricom’s earnings. Understand there is agreement between CBK and other parties to use for infrastructure, education and microfinance.
- Note: The Gates foundation numbers on P2P and Tran volume seem high.. I’ve never had them before
- Given growth of 100%, assume average 2010 (May-May) volume GDV of 320+650/2 = $485M USD
- Monthly revenue of $93M/12 = $7.75
- Take Rate = 7.75/485 = 160bps (seems about right)
Indian legislators should take a pragmatic look at the mobile money regulation. It will be up to consumers (ie Voters) to demand that the structures are in place to support a sound and fertile market for payment services. The economic growth and poverty imperatives greatly outweigh the justifications for RBI’s current approach.
12 May 2010
I’m just amazed at how groups that have the best interest of the rural poor in mind make life so difficult for those that are in a position to actually help. The bank regulations in India, with respect to mobile money, are particularly restrictive (Or perhaps I should say prohibitively restrictive). RBI is encouraging business models which are attempting to build agent distribution networks via business correspondents (ex Fino with 5,000 agents) and non bank financial companies (NBFCs). It would seem their goal is to disintermediate the MNO networks by giving certain agents the ability to represent the banking network AND MNOs. Note: For those unfamiliar with India, Agents are not employees of the MNOs and perform many other functions (sell many other services).
Two recent reports provide an excellent highlight of the challenges facing mobile money for the unbanked (MMU). The data here confirms that only MNO led initiatives stand a chance of succeeding, and even then at the margin:
The lack of profitability in “payments” is something that banks understand well. (See my previous post and History of Interchange). Payment instruments typically compete on: speed, convenience, cost, risk, reward, acceptance, settlement time… Recurring transactions between businesses and consumers in mature economies take place on very low cost ACH type networks. P2P transactions are historically cash based with costs borne by central treasury. Payment services, physical distribution, regulatory compliance, consumer support are direct costs to retail banking. By restricting all payments to banks (and their agents) this cost must be distributed throughout the value chain. In an MNO led model, this infrastructure largely exists already.
Closed systems first
History has shown that closed networks form prior to open networks (in almost every circumstance) as closed networks are uniquely capable of managing end-end quality of service and pricing. This enables the single “network owner” to manage risk and investment. How can any company make investment in a network that does not exist, it cannot control, at a price consumers will not pay, with a group that can not make decisions or execute? Answer: Companies cannot, it is the domain of academics, governments, NGOs and Philanthropic organizations.
The success of MPESA, GCASH, Octopus, .. clearly indicates that payments can be decoupled from banking, with sound consumer controls and fantastic consumer satisfaction.
From CGAP (on MPESA)
- Users say it is faster (98%), more convenient (97%), and safer (98%) than alternatives
- 4 out of 5 say not having it would have a “large negative impact” on their lives
As a pragmatist (and capitalist) I firmly believe that the best approach to serving the unbanked in India is supporting a model where at least one entity has an economic incentive to invest. As I have stated previously (see Mobile Money: MNOs will Rule in Emerging Markets and Mobile Money: Emerging Markets/Emerging Models) MNOs operating in closed systems appear to be best positioned for creating a sustainable value proposition to the unbanked in next 2-3 years.
As described in the CGAP reference above, both Fino and Bharti have completed pilots with Eko and State Bank of India (SBI). CGAP’s latest research (Fino Agent Profitability) shows a drastically different agent revenue model for bank led mobile payments in India. From the article:
FINO agents in Karnataka offer no-frill bank accounts from the State Bank of India (SBI). Some agents also sell insurance products. The business case for agents is working, but just barely. The average monthly profit is USD 23.42, far below what we’ve seen with M-PESA (USD 130.26) and Brazil (USD 134.42). Last November, account opening was halted while SBI migrates account data to its own servers, and the average monthly profit dropped to USD 8.08
I would hope that Indian legislators take a pragmatic look at the mobile money regulation. It will be up to consumers (ie Voters) to demand that the structures are in place to support a sound and fertile market for payment services. The economic growth and poverty imperatives greatly outweigh the justifications for RBI’s current approach.
Unfortunate news for the rural poor and unbanked: You will face a chaos of offerings from banks, agents, pre-paid cards, NBFIs, MSBs … the brand that you trust (ex. Bharti) and can most effectively deliver service to you is restrained by your regulator. Question to RBI: what is your objective and who is your customer? Most will agree that consumers don’t want (or need) a traditional bank.
Good news for MNOs: Shackled from serving your customer, you can take some peace of mind knowing that there will be no successful mobile money until regulations adapt and to allow your organization to lead delivery of it. Build it in another country and don’t stop talking about it within India.
Message for NGOs/non-profits: Quit pumping money into trials, and start influencing legislators and the RBI. The REAL risk for India is not loss of control of payments/AML and M4 (money supply), it is constraining growth and pro-longing poverty.
Updated November 10, 2009
Excellent Background Articles:
Success and value breed trust and loyalty. MPESA customer surveys by CGAP point to desire for MPESA to offer interest on balances. The genesis of MPESA’s success is not something that Banks have seen before (in emerging markets):
- Cash replacement (without their control)
- Customer segment – Growth from the LOW end of customers that banks normally serves
Deposit taking, and payments are typically a regulated businesses which banks have excelled. However their past success was serving a customer segment that was far different then what MPESA serves today. Can Banks adapt to the new opportunities service the unbanked in emerging markets? Will new Micro Finance Institutions (MFI) emerge as the principle banking entity? Will MNOs seek approval to offer financial services separate from Banks or MFIs?
In Kenya, the explosive growth of MPESA has put both regulators and banks in a very awkward position. It was originally launched as a money transfer business, and has emerged as an effective cash replacement with an annual transaction volume of over 10% of Kenya’s GDP. Consumers have unexpectedly embraced MPESA, and regulations have had a challenging time adapting (or anticipating) the vector in which it has grown. The regulatory challenge now is “connecting” the MPESA network to the “banking” network and evolving the: regulatory authority, regulations and controls around it.
In 2005, Kenya drafted the Deposit Taking Micro Finance Bill which was past at the end of 2006.
In addition to supporting traditional MFIs, the Act made it possible for non-banks to participate in deposit taking as an MFI (in the future), and now the first “non-bank” MFI has been accepted (just 3 months ago in June 09).
It remains to be seen whether an MFI license will be granted to MPESA, to extend its money transfer license. A more likely route will be for (multiple) MFIs to be approved to source funds from MPESA (MPESA as payment network)
The Philippines may provide the best example for MNO/Bank collaboration in mobile money. GCASH in the Philippines is the mobile money solution from MNO Global in conjunction with Bank of the Phillipines (BPI).
Last year Global and BPI partnered in the creation of a new microfinance provider: Pilipinas Savings Bank
The Philippines was one of the first countries to develop a comprehensive law in support of MFIs. In 2000, Philippine regulators acted in response to the updated General Banking Law which mandated recognition of microfinance as a legitimate banking activity. Regulators developed a unique set of rules and regulations MFIs as the updated Law declared microfinance as a flagship program for poverty alleviation.
Bank as Depository Institution
Before tackling the issue of Deposit taking in Kenya, let’s discuss the issues surrounding existing (non MFI) banks servicing MPESA customers. Having spoken to several of the key parties in Kenya, the business issues surround: who “owns the customer”, who is assuming the risk (“money transfer” v. bank ) burden for this connection. For purposes of example, let’s take the KYC requirement in Kenya (as in most countries) a customer sighting (by a bank employee) with valid ID. Kenya has had problems with counterfeit IDs
How should regulators proceed? Bank infrastructure in many parts of the country is immature. There are over a million people that would need to go through the KYC process, most of which do not have an identity card (separate from issues in article above). Should regulators relax the KYC burden? Should money transfer agents be allowed to operate under MFI regulation? In my post below, I’ve outlined a few of the regulatory approaches
I would certainly like additional feedback, but my understanding is that regulators are taking a concurrent track: Updating the MFI regulations (originally designed in 2005), updating the “Money Transfer” regulations as covered within the General Banking Act, approving MFIs to source funds from MPESA (services on the MPesa Network) and defining a new regulatory scheme for mobile money which would touch both banking and telecommunications regulations. Vodafone’s regulatory experience here will likely prove to be a tremendous differentiator in future markets, as their ability to field a team capable of partnering with regulators further enhances their creditability.
(A very broad summary of the issues, apologize in advance for the gaps.) From a Bank perspective, concern is justified over MNOs ability to create a liabilities business. Banks should have the right to compete for these deposits, with a level regulatory playing field. From a MNO perspective, banks have not served these customers in the past. For MPESA, the Banks interest in this segment arose after the MNO developed it. The banks should pay for this “customer acquisition” and servicing, and the MNO should be able to offer products and services that support customers.
MNO Deposit taking
There are currently 3 separately regulated parties that are positioning to provide interest bearing accounts: Money Transfer Services, MFIs, and Banks. Emerging markets have invested significant resources in defining MFI regulations, however these were drafted prior to the success of services like GCASH and MPESA. The CGAP data in Kenya clearly shows customer “interest” (pardon the play) in using MNO services beyond that which a “money transfer agent” is licensed to perform. However accelerating the attractiveness of these money transfer services, by providing interest bearing accounts, may further exacerbate an already challenging regulatory situation. I would expect to see regulators requesting that MNOs open up/partner with traditional banks (as the depository institution) prior to approving MNOs as an MFI, or enabling traditional MFIs to compete. Interoperability between these licensed entities must be addressed. This view flows out of MNO incentives (e.g customer ownership, high fees for cash out) and current agreements with bank(s) with regard to settlement of funds. With that said, I would expect very little success for traditional banks attempting to provide this service, as it does not align to their business model. A model which will likely succeed is MFIs access to “non-traditional” payment services, as both MNOs and MFIs are nimbal and able to adapt quickly here and support their existing business model. See Western Union example below (in India)
The challenges that MPESA faces, while challenging, are extremely exciting as it represents the “Phase 2” success of mobile money in emerging markets. Just look at the rate of change in issues facing service in Kenya today, compared with 18 months ago