M-Pesa is a phone-based peer to peer money transfer service launched by Safaricom, Kenya’s largest telecom provider, in 2007. According to a Kenyan government report published from 2012, just five years after launch, there were 19.5 million mobile money users in Kenya (representing 83% of Kenya’s adult population), transferring ~US $8 billion per year (~24% of Kenyan GDP).
Banks and telecoms around the world have initiated hundreds of mobile-money deployments in the past six years attempting to replicate M-Pesa’s widespread adoption, but with limited success. Only a handful of these initiatives have even reached sustainable scale.
Although some of M-Pesa’s initial success could be attributed to a uniquely favorable context for mobile-payments (strong customer need, welcoming regulatory environment, support from banks, strong brand awareness of Safaricom), its rapid and sustained growth was only possible due to a thoughtful operating model design, particularly regarding M-Pesa’s “agent network.”
Let’s have a look at what M-Pesa is, how it works, and the key operating model decisions Safaricom made to ensure M-Pesa’s long-term success.
What is M-Pesa and how does it work:
Customers who sign up for the M-Pesa service can convert between e-cash and real cash (these are called cash-in / cash-out transactions), and can transfer e-cash from their account to that of another account holder via SMS.
Cash-in / cash-out operations take place at one of many designated M-Pesa retail outlets, also known as “agents”. These agents are not employed by Safaricom, but are simply retailers / regular businessmen and women that are ‘authorized’ to trade e-cash for real cash.
M-Pesa creates economic value for Safaricom in two primary ways:
- Revenue from transaction fees that Safaricom collects via the agent during cash withdrawal operations and transfer operations (depositing money into mobile wallet is free).
- Reduce Safaricom customers’ churn, improve engagement, lifetime value etc.
Safaricom pays commission to its “agents”, usually on a monthly basis, based on metrics such as transactions per branch, customers per branch, and quantities transacted, etc.
Because it takes agents a couple months to ‘ramp up’ at their branch by attracting M-Pesa customers and convincing them to start transacting, the business model of M-Pesa incurs significant up-front costs and is one of the reasons many mobile-money deployments fail in the early days.
Mobile-Money becomes profitable only when it goes viral. According to a McKinsey report, to make mobile money for the unbanked commercially viable, operators and telco’s like Safaricom “must sign up 15 to 20 percent of the addressable market.”
Operating Model and Key Decisions
1. Grew agent network same pace as customer base
Given the up-front costs of acquiring agents, it is tempting for mobile money providers to want to take short cuts and minimize the agent-to-customer ratio. However, this does not set an individual agent up for success.
If Safaricom were to recruit too few agents, customers would find M-Pesa difficult to use and difficult to access.. On the other hand, if there were too many agents, many of them would not be able to generate enough business to cover the cost of managing their e-cash and cash liquidity. As a result, they would stop maintaining their electronic money float and cash balances.
M-Pesa’s success lies in the fact that they grew their agent network at the same pace as their customer base, keeping transactions per agent per month steady at around 1,000 / agent / month.
2. Invest time and money in recruiting agents with the right skills and incentives.
Safaricom realized early on that they could not use their pre-existing airtime dealers as agents, since the airtime dealers were disincentivized to sell mobile-money. Mobile money would cannibalize offline airtime purchases since consumers would start topping up their phone airtime online / via the mobile money app instead of showing up to the Agent’s stall.
So, they set out to create their own Agent network. They talked to mom-and-pop stores and retailers to determine level of education, conversation ability, business acumen, and once they recruited an agent, they offered training on customer service, how to manage liquidity with cash and e-cash, etc. Even post-hiring, Safaricom continued to monitor agents through site visits once every two weeks at each branch.
3. Geographically spread out agents to ensure proximity to consumers.
According to a McKinsey report on Mobile Money, proximity of nearest agent makes a significant impact on transaction volumes. “When a cash agent is more than 15 minutes away, mobile money has relatively little appeal, and customers use it once or twice a month. But when the agent is less than 10 minutes away, usage rises to 10 times a month—and for those within 2 minutes of an agent, to 30 times a month.”
Safaricom spread its agents out across Kenya so as to truly enable network effects and enable Kenyans to send e-cash to their family members and friends even if they did not live in the same geography.
4. Hub-and-spoke for Agents and Super-Agents
By 2012, Safaricom had over 40,000 agents. Rather than interacting directly with each of these agents, the company selected some agents to be “super-agents” which would have higher e-wallet sizes and therefore would buy greater e-cash from Safaricom up-front and then sell this e-cash to other sub-agents in their geography. This way, Safaricom kept its operations lean and only had to transact with the few superagents, who would in turn transact with sub-agents who would transact with the end-customers.
The super-agents became the hubs, the sub-agents became the spokes, ensuring ‘last-mile delivery’ of e-cash services to M-Pesa end-customers.