Scaling mobile money

Ignacio Mas and Dan Radcliffe, Bill & Melinda Gates Foundation 1
September 2010

Abstract
Retail payment systems require scale to get off the ground and struggle to grow incrementally. This is
due to three factors: (i) Network effects: When it comes to payment systems, the value of joining a
network is directly proportional to the number of people already on it. (ii) Chicken-and-egg trap: In
order to grow, these systems must aggressively attract both customers and cash-in/cash-out merchants
in tandem. Otherwise, merchants will stop offering the service due to low transaction revenue and
customers won’t join the system because they can’t access a convenient outlet. (iii) Trust: Customers
have to become comfortable going to non-bank retail outlets to meet their cash-in/out needs and
initiating transactions through their mobile phones. Until a deployment serves a large number of
customers, people will lack trust in the new system because they know few who can vouch for it.

To overcome these barriers, mobile money deployments need to reach a critical mass of customers as
quickly as possible, lest they get stuck in the ‘sub-scale trap.’ To do this, they need to get three things
right. First, they must create enough urgency in customers’ minds to learn about, try, and use the
service. Second, they must invest heavily in above- and below-the-line marketing to establish top-of-
mind awareness of (and trust in) the service among a large segment of the population. And, third, they
must incur considerable customer acquisition costs (beyond marketing and promotion) to ensure that
their cash-in/out merchants are adequately incentivized to promote the service. Many deployments
around the world have potential to scale, but are stuck in the ‘sub-scale trap’ because their promoters
either under-estimate the investments needed to achieve scale or are reluctant to make these
investments because they can point to only one major success – M-PESA in Kenya.

Banks are not there

An estimated 2.5 billion adults lack access to basic formal financial services. 2 This situation arises
because banks do not find it economically attractive to deploy banking infrastructure and staff bank
employees in poor and rural areas. Branch penetration, for example, averages only two branches per
100,000 people in the poorest country quintile (compared with 33 in the richest). ATMs are even
scarcer, averaging only 1.3 per 100,000 people in the poorest quintile (compared with 67 in the

1
Ignacio Mas is Deputy Director and Dan Radcliffe Program Officer in the Bill & Melinda Gates Foundation’s
Financial Services for the Poor (FSP) team.
2
Financial Access Initiative Focus Note (2009) “Half the World is Unbanked,” prepared in collaboration with
McKinsey & Co. using data from Honohan (2008), the UN Human Development Index, and the World Bank.

1
richest). 3 With no access to formal banking infrastructure, poor households, who have little money to
begin with, are left only with informal financial tools which are often risky, inconvenient, and expensive.
While there is considerable work to be done to develop products that better meet poor people’s
financial needs, financial exclusion is fundamentally a distribution problem.

Changing the economics of retail banking

In recent years, banks, mobile operators, and payment system providers have begun experimenting with
branchless banking models which promise to reduce the cost of delivering financial services by taking
small-value transactions out of banking halls and into local retail shops, where cash-in/cash-out
merchants, such as airtime vendors, petrol station attendants, and shopkeepers register new accounts
and convert customers’ cash into electronic value (and vice versa). One form of branchless banking,
called “mobile money,” seeks to fundamentally change the economics of retail banking in four ways:

First, it piggybacks off widely deployed infrastructure – the retail shops that exist in every village and
every neighborhood and the telecommunications networks that are rapidly being built in developing
countries 4 – to extend financial services to large segments of unbanked poor people. Clients can convert
cash into electronic money (and vice versa) through these retail outlets and then use their mobile phone
to instantaneously send and receive money wherever they have cell coverage. The transaction
information is then communicated back to the telecommunication provider or bank. The customer
needs to visit a retail outlet only for transactions that involve depositing or withdrawing cash.

By leveraging this real-time communications system, neither the scheme operator nor the customer
needs to worry about stores running off with their cash because stores must pre-purchase electronic
value from the issuing bank or mobile operator. Hence, any cash exchanged between the customer and
the retail store is offset by an immediate, opposite transfer of value between the customer’s and store’s
accounts (not the issuer’s). The store and the customer thus engage in an instantaneous spot
transaction and neither the customer nor the bank faces any credit exposure to the store (i.e. the
transaction is settled by the time the customer walks out of the door). 5 And this system can be
propagated cheaply because both customers and stores increasingly have mobile phones of their own.
There is no need to distribute bank cards among poor customers and point of sale terminals among
small shops since the mobile phone is functionally equivalent to these two pieces of equipment. 6

3
Beck, Demirguc Kunt, and Martinez Peria (2007).
4
Mobile penetration in Africa has increased from 4 percent in 2002 to 51 percent today, and is expected to reach
72 percent by 2014 – Wireless Intelligence (www.wirelessintelligence.com).
5
For further analysis on the regulatory implications associated with branchless banking systems, see Tarazi and
Breloff (2010) and Alexandre, Mas, and Radcliffe (2010).
6
For further analysis on the role of mobile operators in promoting branchless banking schemes, see Mas and
Rosenberg (2009) and Mas and Kumar (2008).

2
Second, mobile money turns fixed costs (banking infrastructure, staff salaries) into variable costs
(paying merchant commissions based on transaction volume). This dramatically reduces the revenue
threshold needed to establish a viable transactional outlet – revenues no longer have to cover the cost
of building and maintaining a bank branch and paying staff salaries; they only need to be enough to
encourage the shopkeeper to promote the service alongside his other products.

Third, mobile money employs usage- rather than float-based revenue models for reaching poor
customers with financial services. Because banks make most of their money by collecting and
reinvesting deposits, they tend to distinguish between profitable and unprofitable customers based on
the likely size of their account balances and their ability to take on credit. In contrast, mobile operators
in developing countries have developed a usage-based revenue model, selling prepaid airtime to poor
customers in increments as low as 10 US cents, such that each transaction is profitable on a stand-alone
basis. This is the magic behind the rapid penetration of prepaid airtime into low-income markets – a
card bought is profit booked, regardless of who bought the prepaid card. A usage-based (i.e.
transactional) revenue model for financial services for the poor would make possible a true mass-market
approach, where all customers pay for themselves and banks no longer distinguish between profitable
and unprofitable customer segments.

Fourth, mobile money harnesses customers’ tremendous need and willingness to pay to make remote
payments conveniently and securely. For most poor households, especially those in split families where
the head of household works in one part of the country and sends money to his family in another, it is
difficult to move cash over distances. However, once a customer is connected to an e-payment system,
(s)he can use this capability to instantaneously send and receive money from friends and family, store
value, pay bills and monthly insurance premiums, receive pension or social welfare payments, receive
loan disbursements, and make repayments. In short, when a customer is connected to an e-payment
system, her range of financial possibilities expands dramatically.

The state of play in mobile money

M-PESA in Kenya is by far the most successful mobile money deployment. Since its commercial launch in
March 2007, it has been adopted by 11.9 million customers (corresponding to 54% of Kenya’s adult
population and 73% of Safaricom’s subscriber base) and processes more transactions domestically than
Western Union does globally. 7 US $415 million per month is transacted in person-to-person transfers,
equal to 17% of Kenya’s 2009 GDP on an annualized basis. 8 In May 2010, Equity Bank and M-PESA
announced a joint venture, M-KESHO, which permits M-PESA users to move money between their M-
PESA mobile wallet and a prudentially-backed, interest-bearing Equity Bank account. Three months after
the launch of M-KESHO, 455,000 customers have opened accounts (though only 176,000 have been
activated). M-PESA reached this number of clients after five months, so initial uptake of M-KESHO is

7
M-PESA and M-KESHO data are as of July 31, 2010 (www.safaricom.co.ke). Population figures are from the United
Nations (2010) (http://data.un.org/CountryProfile.aspx?crName=Kenya).
8
GDP figure is from the World Development Indicators database, World Bank (July 2010).

3
faster than that of M-PESA. If successful, this tie-up would provide compelling evidence that one can
dramatically expand poor households’ access to savings accounts by scaling a front-end merchant-based
e-payment platform and then connecting banks to that platform.

The experience outside Kenya, however, has not been as spectacular. As shown in the table below, since
the launch of SMART Money in the Philippines in 2003, at least 72 mobile money deployments have
been launched across 42 developing countries. 9

Mobile Money Deployments Launched in Developing Countries Since 2003

Launched 2010 Launched 2009 Launched 2003-2008
# Country Promoter Name # Country Promoter Name # Country Promoter Name Launch
1 Bangladesh Orascom Banglalink 1 Argentina Movistar NaranjaMo 1 Afghanistan Roshan M-Paisa 2008
2 Burundi Econet Wireless EcoKash 2 Brazil Vivo Unknown 2 Cambodia WING Wing Money 2008
3 Cameroon MTN Mobile Money 3 Colombia DDDedo DDDedo 3 China China Unicom SmartPay 2008
4 Chile Entel Cuenta Mobil 4 Cote d'Ivoire MTN Mobile Money 4 Paraguay Tigo (Millicom) Tigo Cash 2008
5 Domin. Rep. Tpago Tpago 5 Cote d'Ivoire Orange Orange Money 5 Tanzania Vodacom M-PESA 2008
6 Egypt Masary Masary 6 Ecuador America Movil 6 Tanzania Zantel (Etisalat) Zpesa 2008
7 Fiji Digicel Mobile Money 7 Ecuador Telefonica Mobile Money 7 Uganda MTN Mobile Money 2008
8 Fiji Vodafone M-Paisa 8 Ghana Txtnpay TXTNPAY 8 Brazil Oi Oi Paggo 2007
9 Ghana Bharti Airtel/Zain Zap 9 Ghana MTN Mobile Money 9 Kenya Safaricom M-PESA 2007
10 India Nokia Money Nokia Money 10 India Eko Eko 10 Kuwait Mpay Mpay 2007
11 India Tata Teleservices mChek 11 India Corporation Bank Green Money 11 Malaysia Maxis M-money 2007
12 Indonesia Telkomsel T-cash 12 India Suvidha Beam 12 Vietnam m-service m-Service 2007
13 Iraq Asiacell Unknown 13 Kenya Bharti Airtel/Zain Zap 13 Bangladesh Grameenphone BillPay 2006
14 Kenya Yu Telecom yuCash 14 Malaysia Celcom AirCash 14 China China Mobile LianLian 2004
15 Madagascar Orange Orange Money 15 Mongolia Xac Bank AMAR 15 Philippines Globe GCash 2004
16 Madagascar Telma mVola 16 Nigeria MoneyBox MoneyBox 16 South Africa WIZZIT WIZZIT 2004
17 Malawi Bharti Airtel/Zain Zap 17 Pakistan Tameer / Telenor easypaisa 17 Zambia CelPay CelPay 2004
18 Mali Orange Orange Money 18 Rwanda MTN Mobile Money 18 Philippines SMART SMART Money 2003
19 Morocco Maroc Telecom MobiCash 19 Sierra Leone Splash Mobile Splash Cash
20 Niger Orange Orange Money 20 South Africa MoPay MoPay
21 Niger Bharti Airtel/Zain Zap 21 South Africa Standard Bank Community Banking
22 Pakistan UBL Omni 22 Tanzania Bharti Airtel/Zain Zap
23 Senegal Orange (Sonatel) Orange Money 23 Uganda Bharti Airtel/Zain Zap
24 Sierra Leone Bharti Airtel/Zain Zap 24 Zambia Mobile Transactions Mobile TX
25 Somalia Somtel Zaad
26 Somalia Hormuud Telecom Zaad
27 South Africa First Natl. Bank Send Money
28 South Africa Vodacom M-PESA
29 Tanzania Tigo Tigo Pesa
30 Uganda Uganda Telecom M-Sente
31 Zambia Bharti Airtel/Zain Zap
Source: GSMA Mobile Money Deployment Tracker and Gates Foundation Analysis

While some deployments have gained early traction in the market, such as MTN MobileMoney in
Uganda, Tameer Bank / Telenor’s easypaisa in Pakistan, and Vodacom’s M-PESA in Tanzania, none have
scaled at (or near) the level experienced by M-PESA in Kenya. This has prompted us to take stock of
where we are in the evolution of mobile money and to sharpen our focus accordingly. We assess the
state of play in mobile money as follows:

9
GSMA Association (2010) “Mobile Money for the Unbanked Deployment Tracker,” available at
www.wirelessintelligence.com/mobile-money.

4
 The State of Play in Mobile Money
• Awareness: The CGAP Technology Program and the GSMA Mobile Money for the Unbanked
(MMU) initiative have been instrumental in generating awareness and interest in branchless
banking through their grant making facilities, market research, convenings, and in-country
technical assistance. One might even argue there is now too much hype, leading to the risk of
unfulfilled expectations. That said, there is still need for considerable investment in research,
learning events, and technical support to build the industry’s knowledge base.
• Proof of concept: Many deployments around the world have shown that customers are ready to
take up the service, the technology works, and stores are qualified and can be motivated to offer
cash in/out services. There isn’t need for additional investment in pilot projects to demonstrate
proof that mobile money can work at small-scale.
• Proof of scalability: As noted above, M-PESA in Kenya has shown that mobile money can be scaled
up to become a self-propagating ecosystem, with customers, merchants, and institutional players
(banks, billers, employers) eager to join the platform in equal measure. 10
• Proof of replicability: Kenya provided ‘fertile grounds’ for branchless banking (and mobile money in
particular) due to many factors, including demand-side conditions (many split families due to
demographics; poor alternatives for domestic remittances), supply-side factors (a dominant
operator with 80% market share; reasonably extensive bank branch infrastructure to support
merchant liquidity management), and regulatory factors (a central bank who took the objective of
financial inclusion to heart). 11 The task now is to determine whether branchless banking
deployments (whether mobile-led, bank-led, or otherwise) can scale in countries where some of
these factors may be weaker.
• Proof of financial service delivery: While we believe that access to a safe and convenient merchant-
based e-payment system increases household welfare, e-payments is not the end goal. We
instead view e-payment systems as the ‘transactional rails’ on which a broader range of financial
services can “ride.” M-PESA today is still largely a payments system. The early success of M-KESHO
suggests that savings and other financial services may be a natural next step once transaction rails
are operating well. But there is work to be done to show that special financial products which take
advantage of the unique features of an e-payments platform can be developed, and that these
products can be marketed effectively to poor people. This can happen either because a scheme
promoter shifts its emphasis from payments to a broader range of services, or because banks
connect to an e-payment platform and assume the roles of product development and marketing
(as in the case of M-KESHO).

10
For further analysis on the factors which led to M-PESA’s success, see Mas and Ng’weno (2010).
11
For further analysis on the country factors which contribute to a deployment’s success or failure, see Heyer and
Mas (2009). For further analysis on the regulatory treatment of M-PESA, see Alliance for Financial Inclusion (2010)
“Enabling mobile money transfer: The Central Bank of Kenya’s treatment of M-PESA”

5
Speed to Scale

A fundamental characteristic of mobile money systems is that they struggle to achieve scale
incrementally. This is due to three factors: (i) Network effects: The value to a customer of a payment
system depends on the number of people actively using it – the more people on the network, the more
useful it becomes. While network effects can help a scheme gain momentum once it reaches a critical
mass of customers, they can make it difficult to attract early adopters when there are few users on it.
(ii) Chicken-and-egg trap (2-sided market): In order to grow, mobile money systems have to attract both
customers and stores in tandem. It is hard to sell the proposition to customers while there are few
stores to serve them, and equally hard to convince stores to sign up while there are few customers to be
had. Thus, schemes need to drive both customer and store acquisition aggressively. (iii) Trust:
Customers have to become comfortable going to non-bank retail outlets to meet their cash-in/out needs
and initiating transactions through their mobile phones (or other point-of-sale device). The best way to
build trust in the system is to reach critical mass quickly so that existing customers become the prime
mechanism for drawing in new customers.

At first, all these elements work against a deployment. The benefit to a customer of joining the system
is minimal when few others are connected (network effects) and the merchant network is not
sufficiently dense and geographically dispersed to meet their (and their recipients’) cash-in/out needs.
Meanwhile, merchants remain reluctant to tie-up scarce working capital investing in electronic float 12
because they don’t yet see enough demand from customers (chicken-and-egg trap). And customers lack
trust in the system because they know few people who can vouch for the service. We’ve termed this
period the ‘sub-scale trap’ – when a deployment has launched but remains stuck at a sub-scale level of
customers, with all these elements working against it. Most mobile money deployments around the
world are stuck in this trap.

It’s not all doom and gloom, however. Once a system reaches a critical mass of customers, all these
elements start working in its favor. Customers want to sign up because their friends, family, and
employers are already sending and receiving money through the system. Meanwhile, stores eagerly
apply to become cash-in/out merchants because they see its money-making potential; customers
eagerly join the system as outlets open up in their neighborhood; and existing customers start pulling in
new customers by showing their friends and family how to use it. And the first deployment in a market
to reach this critical mass of customers has a distinct first-mover advantage as the challenger will have
difficulty peeling off customers from a well-established payment network. M-PESA is the only mobile
money deployment that has reached this tipping point where the system became self-propagating. 13

12
Merchants must keep a stock of cash and electronic value on hand so they can meet customers’ cash-in/out
needs. Hence, they must invest in working capital before they can start processing customer transactions.
13
In FY2010, M-PESA generated $94 million in revenues, equal to 9% of Safaricom’s total revenues
(www.safaricom.co.ke).

6
The upshot is that mobile money deployments need to get from zero to critical mass as quickly as
possible, lest they get stuck in the sub-scale trap. To do this, they need to get three things right: (i) they
must create enough urgency in customers’ minds to learn about, try, and use the service; (ii) they must
invest heavily in marketing to establish top-of-mind awareness of the product in a large segment of the
population; and (iii) they must incur considerable customer acquisition costs (beyond marketing and
promotion) to ensure that their cash-in/out merchants are adequately incentivized to promote the
service. These are the topics addressed in the rest of this paper. Appendix 1 includes a list of key
business model elements that help drive scale. While this list is not exhaustive, it may provide a useful
starting point for evaluating the scalability of a mobile money deployment.

What is a ‘critical mass’ of customers?

Identifying when a deployment reaches a self-sustaining critical mass of customers is difficult. As a
benchmark, we suggest that a scheme has demonstrated scalability and sustainability when it meets
two criteria. First, it has at least 10 times the number of cash in/out outlets (i.e. branches) of any bank
in the country. This indicates that the deployment offers a compelling value proposition to customers
based on physical proximity to a transactional outlet. And, second, the scheme is able to generate at
least 50 transactions per outlet per day. This suggests that merchants are motivated to promote the
service and the retail channel will propagate organically, based on a demonstrated effect from
successful merchants (50 transactions at around US 10 cents commission per transaction would
contribute $5 of daily revenue to the store).

1) Why should I? Identifying the pain point

From a customer’s perspective, mobile money is a screwy system. It asks poor customers, many of
whom have never interacted with a formal financial institution, to get comfortable with three totally
new elements: going to a local shopkeeper to meet their cash-in/out needs; initiating transactions
through their mobile phone; and trusting that their payments are processed accurately by the bank
and/or mobile operator at the back-end. Faced with this complexity, the customer has every incentive to
hold off on trying the new service until their friends and family have first tested it and deemed it safe.
Delays like this pose a direct threat to the viability of a system that must reach a critical mass of
customers quickly. To overcome this barrier, schemes should tailor their marketing and messaging
campaigns at promoting the “Wow Factor” – the service which solves such a big cash pain point for
customers that they are willing to try this screwy new system today.

Domestic payments as a driver of early adoption and usage

In many environments, the promise of instantaneous remote payments offers the needed “wow factor”
to get people to try a new mobile money service: “Last week I paid 5% to a hawala agent to send money
from Delhi to my wife and kids in rural Bihar. It took five days to get there and, last year, an agent ran off

7
with the entire amount. And this advertisement tells me I can send my money instantaneously, for less
than 5%? That’s something I want to try today!” That’s the wow factor.

The customer’s mental calculation hinges on several underlying factors which make remote payments
(especially domestic remittances) a good foundation on which to build mobile money propositions:

First, as indicated above, domestic payments address a key pain point of people living in a cash
economy. The need for domestic payments is often large, whether it is spurred by migrant labor
remittances, entrepreneurs’ commercial transactions, or bill payments. And it is particularly difficult for
poor people to move cash over distances. M-PESA, for example, bet that the best way to get people to
try out the new system was to promote the benefits of being able to instantaneously ‘send money
home’. They surmised that, once customers are using the system, they will eventually work out the
value of using the system to store balances. Safaricom also bet that customers would be able to quickly
compute their willingness to pay for instantaneous e-payments, based on the typical costs they incur
when making payments through existing channels, in terms of charges (official fees plus informal
charges and bribes), access costs (the cost of traveling to/from the nearest payment outlet plus
foregone wages due to time spent traveling and queuing) and the probability of mishaps (delay or
outright loss). 14

Savings, on the other hand, does not have that kind of immediacy. Families that have stored cash under
their mattress for generations may not see an immediately compelling need to move some of their
savings into a new service that they don’t quite understand. Some may also feel they have more
workable informal alternatives (money guards, ROSCAs, ASCAs) for storing money than for sending and
receiving money. Hence, they may have a harder time convincing themselves of the need to move their
informal savings into the new system.

Second, because mobile transfers can be conducted in real time, the security of the system can be
verified instantaneously in a way that is not possible with savings. Customers can make an electronic
transfer and immediately validate that it was processed securely by calling the other party to confirm
receipt. With this possibility of immediate feedback, customers do not need to understand how the
service works – they need only check that the payment went through. It takes much longer to build trust
around savings services because savings is an inherently inter-temporal service. A customer can check
her savings balance day after day, but she never knows whether it is truly safe. Thus, starting with
payments allows customers to build trust by completing several basic transfers. And, gradually, this trust
can be extended to savings and other inter-temporal products.

Third, starting with payments allows scheme operators to direct scarce marketing dollars towards a
more easily addressable segment – remittance senders. These are more likely to be richer, more
financially aware, more urban, and more exposed to a wide array of mass marketing media such as TV

14
For further analysis on M-PESA’s service design, see Mas and Morawczynski (2009) and Mas and Radcliffe
(2010).

8
and billboards. Under this ‘follow the money’ marketing logic, early messaging can be crafted to target
the most frequent senders (domestic migrants, daily wage laborers), who can then be relied upon to
draw their poorer, more rural circle of payees into the service.

Fourth, domestic payment systems can be integrated into (rather than displace) households’ existing
informal savings and insurance networks. We see financial services operating at three levels:
1. Among a social circle of someone’s friends and family (intra-family loans, ‘parking’ money with a
trusted neighbor, migrant remittances)
2. Among informal financial service providers (pawnshops, moneylenders, deposit collectors)
3. Among licensed financial institutions (banks, microfinance institutions, credit unions). 15

While there are strong arguments for shifting financial services from the informal to formal (from 2 to
3), we mustn’t neglect the importance of preserving and possibly enabling the social network which
connects households (level 1). This remains the most basic level of financial protection for poor families.
An efficient domestic payment system can improve people’s ability to manage their financial lives by
extending the reach of these social networks to friends and family who are more distant. Rural families,
for example, can call on more distant relatives in times of need and labor migrants can better time their
remittances to suit the needs of their families back home. 16

Fifth, as clients conduct electronic transactions, they develop a financial transaction history that can
potentially be used to evaluate credit risks and to up-sell other high-value financial services, such as
savings and insurance.

Of course, every market is different and what works in one context may not work in another. It’s
incumbent upon the scheme operator to conduct market research to understand what service solves
such a big pain point that potential customers are willing to try the new system today.

From e-payments to a full service banking channel

As noted above, while access to a safe and convenient e-payment system may increase welfare, e-
payments is not the end goal. We instead see the propagation of an efficient e-payment network as an
efficient means for delivering a fuller range of financial products to poor households. M-PESA followed
this “payments first” product sequence. Over time, as more and more people joined the system to make
payments, M-PESA started integrating the platform with a range of institutional partners including
banks, utility companies, employers, and government institutions. And, as mentioned earlier, Safaricom
and Equity Bank recently launched M-KESHO, an interest-bearing savings account issued by Equity Bank

15
For further analysis on the informal and semi-formal financial services used by poor households in developing
countries, see Collins et al (2009).
16
For further analysis on the ethnographic evidence of M-PESA’s impact on informal social networks, see
Morawczynski and Pickens (2009).

9
but marketed as an “M-PESA Equity account.” This permits M-PESA users to move money between their
M-PESA m-wallet and their Equity Bank account and to cash-in/out of their accounts at specially
designated M-PESA outlets. We expect M-KESHO will drive higher savings balances than are currently
stored on M-PESA because: (i) it will now be possible to market savings services (which Safaricom wasn’t
able to do on its own for regulatory reasons), and (ii) it pays interest, albeit at a low rate (0.5%-3.0% per
annum).

In short, M-PESA provides compelling evidence that efficient payments can provide the building blocks
of financial services – deposits, loans, and insurance contracts are no more than an agreed sequence of
payments over time. This is prompting a rethink on the optimal sequencing of financial inclusion
strategies. Where most financial inclusion models have employed “credit-led” or “savings-led”
approaches, mobile money proposes a third approach – focus first on building the payment “rails” on
which a broader set of financial services can ride.

2) Creating buzz and building trust in a new system (Marketing Pull)

As mentioned earlier, from a customer’s perspective, mobile money is a screwy system. Even after a
scheme promoter has identified the ‘wow factor” that will help drive adoption, it must somehow
introduce an entirely new product category to a market that has little experience with formal financial
services. And it must do so quickly to ensure that cash-in/out merchants receive enough transaction
commissions to continue to promote the service.

The best way to build trust in (and establish top-of-mind awareness of) this system is through aggressive
above-the-line (TV, radio) and below-the-line (stage plays, banner ads) marketing campaigns. The TV
and radio advertisements signal that the service is legitimate (not a ‘fly-by-night’ operation), while the
road shows and banner advertisements explain the product’s benefits, demonstrate how to use it, and
tell customers precisely where (s)he can avail of the new service. Over time, as people become more
aware of the service, TV and radio can give way to basic store branding at retail outlets, supported with
a few large billboards. And, as customers become familiar with how to use the service, it becomes less
necessary to support hands-on outreach activities. In short, after an initial ‘big push’ investment in
marketing to reach a critical mass of customers, a scheme’s marketing expenses begin to taper off as the
system begins to self-propagate.

A key driver of M-PESA’s success was Safaricom’s early investment in above- and below-the-line
marketing (as much as $10 million) during the first two years of its deployment (helping it reach 6.2
million customers at the two-year mark). To overcome the significant trust and awareness barriers
associated with the new service, it invested aggressively in promoting the M-PESA brand until network
effects began to turn in its favor as new customers begat more customers. 17 Over time, Safaricom was

17
A survey of 1,210 users in late 2008 revealed that 70% of survey respondents claimed they had first heard about
M-PESA from advertisements, TV or radio. Financial Sector Deepening Trust (2009).

10
able to scale back its marketing spend as the system became self-propagating, relying predominately on
word-of-mouth advertising.

3) Greasing the Channel (Merchant Push)

Establishing top-of-mind awareness of the new service is only half the battle. Retail cash-in/out
merchants perform the all-important customer-facing functions that determine a deployment’s success
or failure. Because mobile money is an intangible service in a store that is cluttered with physical goods,
merchants need to actively promote mobile money or customers won’t know it is available. Moreover,
new customers may require some initial handholding until they are comfortable using the service. Retail
merchants must therefore be willing to spend time performing first-line customer care. And merchants
must tie up precious working capital in order to maintain sufficient stocks of cash and e-money for
conducting cash-in/out transactions.

Retail outlets will not perform these costly and time-consuming functions unless they are adequately
compensated for doing so. Hence, schemes must incur considerable customer acquisition costs (beyond
marketing and promotion) to “grease” the merchant channel. Safaricom, for example, pays its channel
US ~$1.07 per customer registered. 18 While these commission costs have cost Safaricom a hefty $12.7
million to-date, they provide a powerful customer acquisition incentive for stores, especially during the
early days of a deployment when there are few customers and (hence) relatively little transaction
commissions to be had. Also, by giving merchants some initial cash-flow before they start earning
significant revenues from transactions, scheme operators mitigate some of the initial risk borne by
merchants who must tie-up precious working capital to maintain sufficient stocks of cash and e-value.

Because store revenues are dependent on the number of transactions they facilitate, operators must
also carefully manage the ratio between merchants and customers, lest they depress individual
merchants’ transaction revenues. When operators recruit too many merchants before launch, there
won’t be enough business to go around, causing merchants to defect. This can create a vicious cycle
which can quickly jeopardize a deployment because, when merchants stop holding float, customers
become frustrated because they can’t find a liquid outlet. And, as customers stop conducting
transactions, the remaining outlets defect as their transaction volumes start to drop. To avoid this
unhappy scenario, scheme promoters should carefully maintain a balanced growth in the number of
outlets relative to the number of active customers, resulting in an incentivized and committed merchant
base. 19

18
Safaricom initially paid customer registration commissions entirely up front. They now split the commissions —
50% when a customer signs up and the other 50% after the customer makes her first deposit — to ensure that
stores are incentivized to sign up customers who are more likely to conduct transactions.
19
For further analysis on how to build a merchant network, see Davidson and Leishman (2010).

11
 Converting Airtime Intermediaries into Mobile Money Intermediaries:
A Problem of Incentives
It has become standard practice to say that mobile operators’ core asset in building mobile money
systems — in addition to their well-known brand, large customer base, and control over key network
resources — is that they have extensive retail channels for selling airtime. But to what extent can
they ‘push’ mobile money through this channel? The evidence is not encouraging. We are not aware
of any case where, in the early stages of a deployment, an operator successfully engaged its airtime
wholesalers to promote mobile money. To be precise, mobile operators (including Safaricom) have
succeeded in placing the mobile money product alongside their prepaid airtime cards at retail stores,
but to do this they enlisted parallel channel intermediaries either directly or by hiring a third-party to
set up this channel. These dedicated intermediaries then identified, trained, and managed the
network of cash-in/out outlets (many of which also sell airtime). If mobile money appears in the same
stores as airtime cards, it may not be because the same distribution channel is being exploited;
rather, it may be an ‘artifact’ stemming from the fact that most stores sell airtime anyway.

The main reason mobile operators have failed to engage their airtime wholesalers for mobile money
is that mobile money commissions tend to be significantly lower than airtime commissions and
customer demand for mobile money is not yet proven. Also, airtime intermediaries may sense that
the new product bears the seeds for cannibalizing their airtime sales because, if it becomes
successful, people will top-up their airtime directly from their mobile account rather than from
scratch cards. And, finally, airtime intermediaries need only manage their down-stream outlets’ e-
value balances, while mobile money intermediaries must manage their down-stream’s e-value and
cash balances. Given all this, the airtime intermediary may opt to stick with what it knows and sells
well.

Does this obliterate the mobile operators’ supposed channel advantage in building mobile money
systems? No – it just makes the opportunity less directly graspable than was assumed in the early
stages of the industry’s evolution. While mobile operators may not be able to convert their entire
airtime channel, they still have an advantage relative to most other players in that they thoroughly
understand the channel logistics around the product (most of which carry over from airtime), as well
as the needs and motivations of the various channel players. But they still face the challenges of
identifying a set of ‘hungry’ players who are keen to promote mobile money and constructing the
right set of incentives for them.

Ensuring a consistent customer experience

Of course, it’s not only about merchant commissions. Given the newness of these systems, customers
need to have a good, consistent experience every time they walk into a retail point. This helps build
trust and gives customers a consistently positive view of the service. This requires building a dense,
multi-layered distribution channel which can effectively perform the following activities:
• identifying, screening, and training new shops;

12
 • providing the necessary store signage and maintaining ongoing delivery of promotional materials;
• supervising store activities and ensuring consistent application of brand guidelines;
• enabling stores to periodically rebalance their stocks of cash and e-money; and
• distributing commissions across stores.

These are challenging tasks as they have to be done at the same time across a large number of
geographically disperse outlets. The logistical challenge is compounded as the number of outlets grows.
Much has been written on this topic and we will not repeat that analysis here. 20 For the purposes of this
paper, suffice to say that scheme operators need to invest heavily in recruiting, training, and monitoring
their retail cash-in/out networks, especially during the initial roll-out when the service is new to both
merchants and customers.

Concluding Thoughts: Getting to Critical Mass

How then should a scheme promoter design an investment strategy that will help it avoid the sub-scale
trap? Once a scheme has completed technical trials and gained confidence in the deployment’s long-
term business model, it must dive into the deep end, making big early investments in marketing,
merchant commissions, and mechant training in order to overcome the three barriers which threaten
these systems — network effects, chicken-and-egg trap, and lack of trust in the new system. Otherwise,
the positive networks effects associated with payment systems never kick in.

A key ingredient of M-PESA’s success was Safaricom’s heavy investment over the first two years of its
deployment in platform costs, customer acquisition commissions, TV and radio marketing, and
aggressive merchant acquisition and training. Safaricom hasn't released any figures on its investment in
the M-PESA roll-out, but it may have been as much as $25 - $30 million over the first two years. In other
words, Safaricom didn't grow M-PESA through tepid, incremental steps because, when it comes to
mobile money, incrementalism likely leads to failure. After small pilots involving less than 500
customers, Safaricom launched M-PESA nationwide, making heavy up-front investments so it could
reach a critical mass of customers in a short time-frame. Many deployments have potential to scale, but
are stuck in the “sub-scale trap” because their promoters either under-estimate the investments needed
to achieve scale or are reluctant to make these investments because they can point to only one major
success – M-PESA.

20
For further analysis on how to build and manage a scalable merchant network, see Davidson and Leishman
(2010) and Eijkman, Kendall, and Mas (2010).

13
 Appendix 1: Key Business Model Elements that Drive Scale
Element Hypotheses
Identifying the pain point- Remote payments is the optimal
"gateway" product because it (i) has the highest customer
willingness to pay (and more importantly to try) because it
solves an immediate pain point for customers, (ii) helps
Early revenue build trust in the system because customers can verify in
driver real-time when their transaction has been successfully
processed, and (iii) draws into the system more urban, tech
savvy, and cash-flush early adopters who are more easily
marketed to and who can encourage remittance receivers to
register.
Heavy marketing (pull)- To reach a critical mass of
customers you need (i) a strong brand to build trust in the
system, (ii) a clear, simple message focused on the primary
need the service is addressing, (iii) a national above-the-line
marketing campaign (TV, radio) to establish top-of-mind
Breaking the
awareness among large segments of the population, and
chicken & egg
(iv) below-the-line marketing activities like canopies and
problem
street plays to educate customers on how they stand to
benefit from the service and how to use it.
Greasing the channel (push)- To reach critical mass, scheme
operators will have to incur substantial customer acquisition
costs (beyond marketing and promotion).
Agent selection- The optimal stores for promoting an
mobile banking scheme are (i) located in areas where
people transit/congregate, (ii) have the financial capacity to Ongoing management- How will the scheme ensure consistent customer experience across stores, in terms of
Active maintain adequate liquidity, and (iii) are seen as
channel trustworthy in the community.
management Consistent customer experience- Channel managers must screening, enrollment, training, supervision, liquidity management, distribution of agent commissions) across its
conduct ongoing onsite supervision of agents to ensure
consistent customer experience throughout the agent
network.
Capacity - The operational team should be laser-focused on
solving a major customer pain point and have a thorough
Execution understanding of the business model and critical factors for
capacity success.
Top-level commitment - Key internal decision-makers must
be fully committed to building the scheme at scale.
Questions
Willingness to try- What is the pain point being addressed and how immediate is that need? Will the system rely
primarily on remote payments (e.g. domestic remittances; bill payments) or proximity payments (paying for bread at
the local store)?
Willingness to pay- Does the pricing correspond to the pain points (highest price = biggest pain point)?
Size of the need- Is there a ready pool of payments (remittances, bill payments, G2P payments) that can drive
considerable transaction volume through the system (>50 transactions per agent per day)?
Barriers to adoption- Does the service encourage take-up and usage of the system by permitting free registration,
free deposits, and charging no monthly fees (while charging on transfers and withdrawals)?
Building customer trust- Does the service provide an instant and tangible confirmation of the transaction (e.g. a
confirmation SMS, written confirmation in an agent log)?
Ambition level- How many customers and agents does the scheme plan to register in 6 months, 1-year, 2-years?
Brand relevance- Is the scheme promoter's brand well-known among the target population? What is it known for?
Clear, simple message- What is the scheme's marketing message? Is it clearly connected to a pain point?
Heavy up-front marketing- What is the scheme's marketing plan in the first year (e.g. direct marketing to individuals;
above-the-line marketing to large segments of the population)? What is the marketing budget per target customer?
Greasing the channel- What is the scheme's customer acquisition strategy (e.g. through agents only, third-party
sales forces, existing customers)? What does the scheme pay agents for new customer acquisitions? What
commission rates do master agents and sub-agents receive for transactions conducted, and how do these compare
to airtime commissions?
Barriers to sign-up- What steps are required to sign up a new customer (e.g. KYC reviews, documentation, time
delay, SIM swap, remote versus on-site KYC)?
Agent selection- What criteria will the scheme promoter use to select cash-in/out agents? What steps are required
for an agent to register (application form, KYC, training, cash bond)?
pricing, store branding, and customer service (e.g. monthly on-site supervision)?
Channel management roles- How will the scheme divide channel management functions (agent identification,
channel partners?
Liquidity management- How will the scheme ensure that stores maintain adequate cash and e-value balances (e.g.
directly through bank branches, through master agents, other methods)?
Feeling for the business- Can the team easily answer all the questions listed above? Can they justify significant
departures from the M-PESA model? What other schemes have they thoroughly analyzed?
Top-level focus on marketing/channel ramp-up execution- Is there a dedicated team working on the project? Are
key internal decision-makers (i.e. those with control over budgets and the channel) committed to ensuring proper
execution of the scheme's early stage marketing and channel ramp-up activities.
Readiness to invest- In orders of magnitude, how much time and money do key decision-makers expect to invest in
the scheme before reaching break-even? Do they have detailed financial projections?
14
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