Case study
The potential of mobile financial services:
M-PESA in Kenya
Daniel Jones
December 2008
The potential of mobile financial services: M-PESA in Kenya
2
M-PESA was introduced in Kenya in March 2007, offering
a range of basic financial services

M-PESA was originally a pilot study conducted by Safaricom (a 35%-owned Vodafone affiliate) in
conjunction with the UK’s Department for International Development.

The services currently offered to subscribers include:



the ability to deposit cash into and withdraw cash from their M-PESA accounts via a network of agents

the ability to send money from their M-PESA accounts to any other mobile subscriber

the ability to top up their prepaid accounts or pay their contract bills.
The service is being extended to allow:

payments to merchants

payment of bills

withdrawal from ATMs

social payments

international money transfers.
similar services have also been launched in Tanzania and Afghanistan by Vodafone Group affiliates.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
3
The service has experienced quick and extensive
adoption


40%
35%
30%
25%
20%
15%
10%
5%
0%
8
6
4
2
0
1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08
The value of total transactions per quarter has
also steadily increased, reaching KES9.6 billion
(USD136 million) by 3Q 2008.
The total quarterly value of transactions per
subscriber has decreased over time, however,
falling 50% over one year to stand at KES2600 in
3Q 2008. This is to be expected, as heavy users
are likely to be early adopters of the service.
10
Transactions (KES
billion)
This is an unprecedented take-up rate for such a
service and subscriber growth is still strong
almost two years after launch: between June and
September 2008, there was a 29% increase in
the number of users.
Figure 2: Subscriber penetration and total transaction value of
M-PESA, 1Q 2007–3Q 2008 [Source: Analysys Mason, 2008]
Penetration

By 3Q 2008, over one-third of Safaricom
subscribers had registered as M-PESA users.
Subscriber penetration of M-PESA
Quarterly value of transactions
Figure 3: Value of total transactions per user per quarter,
1Q 2007–3Q 2008 [Source: Analysys Mason, 2008]
KES per users per quarter

9 000
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
0
1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
4
Low cost and ease of use are key aspects of the M-PESA
service
Table 1: Cost of using the M-PESA service at December
2008 [Source: Safaricom and Analysys Mason, 2008]
Cost (KES)
Cost (USD)
Deposit cash
Free
Free
Send money to
registered
M-PESA user
30
0.40
Send money to
non-M-PESA
user
Depends on value of transfer. Usually

Given average transaction values of USD41 in
1Q 2008, the cost of sending money to another
M-PESA user is usually equivalent to just 1%
commission. As shown in Table 1, other charges
are also reasonably low, making the service
attractive in terms of price.

Ease of use also contributes to M-PESA’s
success. There are fewer than 800 bank
branches in Kenya, compared with 4230 M-PESA
agents at the end of September 2008.1 Clearly,
cutting out long journeys to reach a bank will
improve ease of use.

An academic study of Kibera, a settlement with a
population of over 1 million situated 7km outside
Nairobi, found that M-PESA customers used the
service because it gave them access to financial
services without travelling outside Kibera.2
1–4% of total transfer
Cash withdrawal Depends on value on transfer. Usually
by registered
0.5 – 4% of total transfer
M-PESA user
Cash withdrawal Free
by non M-PESA
user
Free
Buy airtime
Free
Free
1
2
Central Bank of Kenya (Nairobi, Kenya), Survey on bank charges and lending rates, June 2008.
Morawczynski, O. and Miscione, G., Exploring trust in mobile banking transactions: the case of M-PESA in Kenya. Available at
http://www.nextbillion.net/files/Morawczynski%20and%20Miscione-%20GATES.pdf
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
5
Trust has been vital for Safaricom’s success with financial
services, and the same will be true for other MNOs
Figure 4: Trust and financial relationships required for mobile
financial services [Source: Analysys Mason, 2008]
Subscriber

Like any other organisation getting into the
business of storing and sending money, an MNO
must be perceived by the subscriber as
trustworthy – or, at least, as reliable as other
financial institutions.

Factors that will affect trust include:
Agent
MNO

the operator’s brand

the credibility of its agents

the proportion of transactions completed
successfully.

Safaricom has a long history in the Kenyan
market, a national brand and its leadership is
perceived as politically credible, putting it in a
strong position to gain the trust of subscribers.

Successful services are likely to be run by
incumbents, rather than new entrants, unless the
new entrant brings with it a strongly credible
brand.
Trust relationship
Direct financial relationship
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
6
Safaricom has marketed M-PESA, but knowledge of the
service has spread virally

Marketing for the M-PESA service was initially very simple. The proposition to subscribers was to use the
service to send money home, for example, from towns to rural areas.

This simple message was key in attracting subscribers to the service. As the number of available services
increases, Safaricom is starting to market them. This should drive up growth in the average usage of the
service.

The marketing channels it uses include radio advertisements and billboards. The ever-expanding network
of agents also play a role in introducing subscribers to the service and have an interest in doing so,
because of the commission they can earn.
According to Nick Hughes, Vodafone Group’s Head of Mobile Payments, knowledge and take-up of the service has largely
spread virally, rather than as a result of a strong marketing drive. “We have marketed the service, but not as much as you’d
think,” Hughes said. This is not unexpected, given that the service initially involved solely person-to-person transfers. Each
transaction involves two parties, and non-users can be sent money via M-PESA, raising awareness of the service and
significantly increasing its adoption.
© Analysys Mason Limited 2008
7
The potential of mobile financial services: M-PESA in Kenya
Particular features of the Kenyan market have helped
Safaricom’s service to take off
Regulation
Small banking sector
MNOs seeking to implement
mobile financial services may face
the challenge of having to comply
with financial regulations.


In Kenya, Safaricom has been
allowed to go ahead with M-PESA
without regulatory intervention, so
far.


It is likely that Safaricom will
experience some regulatory
intervention in the future, but the
fact that the service was allowed to
launch without any such barrier has
allowed it to flourish.


The Kenyan banking sector has
fewer than 800 outlets. This
compares with 4230 agent outlets
for M-PESA.
The relatively small size of the
banking sector has increased the
popularity of M-PESA because the
Safaricom service is much more
convenient for many subscribers to
use.
Kenya is, therefore, a more
suitable market for the service than
countries with a more-developed
financial sector.
Large market share

Safaricom has an 80% share of the
Kenyan mobile market.

Given such a significant market
share, the fact that M-PESA is only
available on one network does not
put the service at a great
disadvantage.

Mobile subscribers able to use the
M-PESA system can also send
money to those not registered as
users, although these transactions
are more expensive.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
8
Safaricom’s ARPU has increased, although agents take a
significant share of this
Table 2: Estimated effect of M-PESA on Safaricom’s ARPU
[Source: Analysys Mason, 2008]

The effect of M-PESA on Safaricom and
Vodafone Group has, according to Nick Hughes,
Head of Mobile Payments at Vodafone Group,
been felt more through subscriber retention and
acquisition, than through the uplift in ARPU.

Our calculations, based on typical commission
rates for transactions, assume that an average
commission of 1% is taken from subscribers for
each transaction.

Assuming that the ARPU of M-PESA users was
similar to that of typical Safaricom subscribers,
this implies that M-PESA usage will increase
ARPU by about 5%.
3Q 2008
Average number of M-PESA
subscribers
3 673 750
Total transaction amount
KES9.6 billion
(USD136 million)
Average quarterly transaction
value per user
KES2613 (USD37)
Commission rate
1%*
ARPU from M-PESA
KES26 (USD0.37)

Safaricom’s blended ARPU
KES503 (USD7.10)
M-PESA ARPU as a proportion
of Safaricom’s blended ARPU
5.2%
However, Hughes identifies agent’s commission
as the largest operational expense of M-PESA,
suggesting that a significant fraction of the
revenue generated is kept by the agent. Despite
this, Hughes estimates that the service will be
NPV-positive two years after launch.
* Estimated rate.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
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Subscriber acquisition and retention has been a major
benefit of M-PESA



Although ARPU generated from value-added services, such as mobile payments, is the most obvious way
in which an operator may benefit, such services can also attract subscribers.
Safaricom’s share of the Kenyan market increased from 76% to 80% in the 12 months to September 2008.
With over one-third of its subscribers now using the M-PESA service, and given the clear importance of
financial services to subscribers, there is no doubt that it is a factor in reducing churn and attracting new
subscribers to Safaricom.
Now that forms of payment other than person-to-person are becoming possible through M-PESA, it is likely
that M-PESA will allow Safaricom to differentiate itself in the enterprise segment.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
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Operators must take care to create a product offering that
overcomes potential barriers to success

The example of M-PESA in Kenya shows that operators in growth markets can successfully take advantage
of gaps in the provision of financial services to their existing subscriber bases to boost ARPU and to
deepen the relationship with the subscriber.

MNOs must, however, be aware of the factors that have led to the success of the M-PESA service and of
what could inhibit the launch of similar services by other MNOs.
Potential barriers to adoption

Lack of trust in the MNO as a financial services provider

Prohibitive cost of the service outweighing the benefit of
the ease of making transactions

Other financial services are as easy, or easier, to use
How can barriers be overcome?

The MNO must be a recognised and credible brand in
order to gain the subscriber’s trust. If the MNO is not in
this position, a partnership with a financial service
provider may be the best option

The service must be priced so as to encourage a large
number of low-value transactions, so that subscribers use
the service regularly

Countries where traditional banking institutions are few
and far between are the best environments for MNOs to
create agent networks offering better access
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
11
A large agent network is vital and MNOs are in a good
position to exploit their existing distribution networks

One of the key success factors for M-PESA in Kenya has been the large number of agents that users can
go to in order to make deposits or withdrawals.

By September 2008, M-PESA had 4230 agents, while there were fewer than 800 bank branches. Safaricom
was able to leverage its existing distribution network of over 8000 agents to build up the network of
M-PESA agents, although only those with significant cash flows were suitable.

Distributors for M-PESA include:


retail outlets

all Post Office Savings Bank branches

petrol station chains

other existing agents in the distribution network.
Already having distribution networks in place, MNOs are generally well positioned to offer value-adds such
as financial services, which require a large distribution network for success.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
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The paucity of banking in other countries presents
opportunities for MNOs
Table 3: Abundance of bank branches in selected countries, per
100 000 population [Source: Journal of Financial Economics3
and Analysys Mason, 2008]
3
Country
Branches per 100 000 people
Uganda
0.53
China
1.33
Kenya
1.38
Nigeria
1.62
Russia
2.24
Kazakhstan
2.47
Egypt
3.62
Pakistan
4.73
Saudi Arabia
5.36
United States
30.86
France
43.23
Beck, T., Demirguc-Kunt, A, and Martinez Peria, M. S. (2007),
‘Reaching out: access to and use of banking services across
countries’, Journal of Financial Economics, Vol. 85(1), pp. 234–266.

Kenya is not unique in having few bank branches
for the size of its population, but banks are more
plentiful per head of population in many other
developing markets.

Other large growth markets with low ratios of
bank branches to population include: China,
Nigeria, Russia, Kazakhstan and Egypt; in
Pakistan and Saudi Arabia, bank branches are
three to four times as numerous as in Kenya,
compared to the size of the population (see
Table 3).

If a mobile payments solution on the scale of
M-PESA in Kenya were rolled out in one of these
markets, even in one with four times as many
bank branches as Kenya, it would offer twice as
many mobile payment agents as there were bank
branches.

This suggests that there is potential for
successful mobile financial services in many of
the world’s largest growth markets.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
13
Other operators are now seizing the opportunity to launch
mobile financial services





Recently, France Telecom announced that it had begun a pilot of the ‘Orange Money’ mobile payment
service in its Ivory Coast subsidiary.
The service allows users to:

deposit and withdraw cash

transfer money

top up their phones

pay electricity bills

buy goods and services.
Tariffs for usage are higher than M-PESA’s in Kenya, the lowest commissions on withdrawals being 3%.
This is likely to give France Telecom the ability to make higher margins. The effect of the higher charges on
adoption has yet to be seen, as the pilot of the service has only just started.
As with M-PESA, non-subscribers to the service are able to receive payments, although in this case only
subscribers to the Orange network (38% of the market at the of 2007) can benefit.
MTN is reportedly piloting ‘MTN Mobile Money’ in three West African operations, has extended this to
Uganda and will shortly extend it further to Rwanda.
© Analysys Mason Limited 2008
The potential of mobile financial services: M-PESA in Kenya
14
Conclusions

Operators in many growth markets should take note of the potential opportunities offered by mobile
financial services.

There is potential for these services to lead to an improvement in subscriber acquisition and a reduction in
churn for an operator, as the first launch within a country offers a valuable and unique service.

It is important for operators to understand the factors that drive adoption, including a lack of existing
banking facilities, the extent of the agent network, pricing, trust and ease of use.

In the right setting, and if the service is implemented appropriately, the benefits are such that adoption can
spread virally throughout the subscriber base without the need for heavy marketing, lowering opex costs.

Other countries that lack financial services provision and in which there are opportunities for mobile
financial services to be successful include some large growth markets, such as China, Egypt, Nigeria,
Kazakhstan and Russia.
© Analysys Mason Limited 2008