Pay As You Go Financial Services

Thanks to Dave Birch, of Consult Hyperion, for the link to this fascinating paper by Ignacio Mas and Dan Ratcliffe on the success of M-PESA, the African payments system whose mission is to lower the cost of access to financial services. There are great insights for serving both the 'unbanked' as well as bank and other financial service customers. And given how grumpy we tend to be with our banks, it's revealing that the UK’s Department for International Development was instrumental in funding M-PESA's initial development by Vodafone and others.

As previous research for the UK's Financial Inclusion Taskforce (archived here) demonstrated, the challenge of financial inclusion is not how to draw low income earners into the existing banking system, but how to make financial services more useful, convenient, cost effective and faster. And that seems best encapsulated in 'pay as you go' models, since you 'know where you are' in terms of cost and usage/availability which is in itself convenient. M-PESA makes an interesting case study because virtually all M-PESA's 9 million pay as you go users rate the service better than the alternatives on these factors. And that's not only the view of low income earners. The Mas & Ratcliffe report says M-PESA users are more likely to have a bank account than non-users, as well as being wealthier, more literate, and better educated.

Here are some more stats from the report, as at January 2010:

• "16,900 retail stores at which M-PESA users can cash-in and cash-out, of which nearly half are located outside urban centers.
• US $320 million per month in person-to-person (P2P) transfers.
• still under two P2P transactions per month.
• US $650 million per month in cash deposits and withdrawal transactions at M-PESA stores.
• The average transaction size is around US $33, but Vodafone has stated that half the transactions are for a value of less than US $10.
• US $7 million in monthly revenue (based on the six months to September 2009).
• 27 companies use M-PESA for bulk distribution of payments. Safaricom itself used it to distribute dividends on Safaricom stock to 180,000 individual shareholders who opted to receive their dividends into their M-PESA accounts.
• Since March 2009, there are 75 companies using M-PESA to collect bill payments from their customers. About 20% of the electric utility's one million customers pay through M-PESA.
• two banks are using M-PESA as a mechanism for customers to either repay loans or withdraw funds from their banks accounts."

While M-PESA has been marketed very well, the report suggests the real key to its rapid, widespread adoption and frequent use is the decision to launch with a low cost mobile payment infrastructure, rather than a savings or credit product. This allowed the business to follow the usage-based pre-paid mobile airtime model, so that each transaction was profitable from day one, and no potential customer or transaction size was excluded as 'unprofitable'. It's free to register, pay money in, and there's no minimum balance. Now that so many people are on the system generating income, it's easier and more cost effective to respond to their demand for other suitable financial services and functionality.

Banks, on the other hand, "tend to distinguish between profitable and unprofitable customers based on the likely size of their account balances and their ability to absorb credit." I'd suggest that not only does this mean banks need to limit their customer base and rate of service adoption, but having made so many assumptions about the services to be provided and customers who might want them, it also becomes ingrained that banks must control the product rather than allow customers to shape the services they want. For example, MetroBank's launch strategy seems to assume you want the same type of banking services and delivery channels, but with merely longer branch opening hours, free coin-counting and immediate in-branch card delivery. Hardly the "revolution" it claims, compared to what's happening in Kenya, or even in the UK...

The success of M-PESA prompts comparisons with PayPoint, and how it's pragmatically solving parking payment problems using a mobile platform (see PayByPhone). And it's consistent with the adoption of pre-paid cards, amongst which the Oyster card and O2 payment card are interesting examples. Away from payments, and at the higher end of the market, the pay as you go approach is reflected in Zopa's person-to-person lending fee structure: borrowers pay a one-off upfront fee with no charge for early repayment, and Zopa lenders only pay a servicing fee based on the amount they have lent out at any one time.

There's definitely a future in pay-as-you-go financial services.