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How does Mobile Money work? Tanzanian case study

Technology now plays a significant part in the expansion of the innovation process microfinance is going through, of which mobile money is the most diverse option. On Tuesday, 6th of November, Claire Alexandre, head of commercial strategy of M-PESA Vodacom, gave a talk about their operations in Tanzania, at the Standard Chartered Bank office in London. M-PESA is a well-known mobile money transfer service developed by Vodacom, which first began its operations in Kenya, but has recently expanded to Tanzania and India. In the case of Tanzania, Vodacom launched M-PESA in 2008 and today has over 40% of the market share of the mobile money industry with around three million active users.

Through the M-PESA story in Tanzania, Alexandre’s presentation explained how mobile money services function on the ground and their scale of business. Mobile money services work best in environments dominated by cash, because they give an alternative to cash to the unbanked people. In Tanzania, for example, only 13% of the population have access to financial services and own a bank account. For this, mobile money allows them access to a wider range of services and providers and, essentially, enhances financial inclusion by working closely with those who work in the semi-formal and informal sectors.

So how does mobile money work? In the case of M-PESA, the person who wishes to send money has to have a Vodacom account to open an account. Once the account is open, you can go cash in at a M-PESA retail point. Once funds are available in your account, you can begin to make transfers to people who do not necessarily own a M-PESA account through your mobile phone. In order to collect the money, the recipient goes to cash out at a nearby M-PESA retail point and pays commission on it. The minimum value one can transfer is an equivalent to two pence and fees differ according to the sum sent but Alexandre claims that the highest fee is around 10%.

The target audience for this money transfer system, is the ‘bottom of the pyramid’ who own a mobile phone, because this type of service closes the rural-urban gap by adapting to national migration patterns and facilitates the money transfer process between unbanked people who live far away from each other.

That said, whether this service reaches out to the most excluded is debatable, since, although mobile phone usage is significant in Tanzania, Vodacom’s reception covers about 70% of the national territory and local people claim that those who would benefit the most, such as the farmers, remain excluded.

A great portion of M-PESA money transfers are peer-to-peer, but demand is also growing from businesses. The most popular peer-to-business money transfers are organised by the mobile providers themselves. Their customers pay airtime from their phones. In addition, Alexandre says that they have received proposals for agricultural business projects and that also salaries and government disbursements can be paid using this model. In fact, whether M-PESA is used between people or businesses, the main strength of this payment method is that it increases productivity, because people can now avoid long queues to pay for electricity, tax or satellite TV.

One would assume that the creativity lies in the technology, but, Alexandre pointed out that the key is in the distribution network. In Tanzania, Vodacom has over 30,000 retail points spread across the country; including the other mobile money operators, there are well over 70,000. To reach scale in this business, Alexandre says the provider has to grow distributors at the same time as the client base. When selecting distributors, Vodacom makes sure to bring on board established businesses, requests documents and licences, have them invest in the business beforehand and go through a process of due diligence. Most importantly, Vodacom dedicates time and resources to extensive training programmes for distributors, which helps prevent fraud and money laundering.

When Alexandre was asked how M-PESA makes sure liquidity is maintained in such wide distribution systems, she said that it is their biggest challenge, but that liquidity is managed by having these distributors pre-buy the electronic money and making sure the transactions are in real-time, with no need for distributors to keep cash for long. Training, again, is a key component and distributors also receive commission for every transaction as an incentive to keep their accounts in order.

Due to the big cash in & out component, one wonders if this is a cash-driven business after all. However, Alexandre said that is not the case, because services such as M-PESA give electronic value to money owned by the unbanked for the first time and also gives the means to a larger population to have access to more services, which contributes to the growth of businesses in the long-run. Alexandre said mobile technology helped to speed up the electronic transfer of funds and assisted in developing some small and medium enterprises. In fact, she claimed that if the Central Bank of Tanzania were to follow transactions of mobile money they would see about 2 to 5% influence on their GDP.

Today a new ecosystem of mobile transfers has developed in countries like Kenya and Tanzania where there is competition amongst various mobile providers who offer regular promotions, price changes and new types of services. Aggregators have also started to operate as intermediaries. Similar to other services that involve small amounts of money, the fees that M-PESA customers are charged are unclear and can become high, so it would be better if competition, or involvement of the Central Bank could bring the prices down.

Alexandre concluded by saying that the M-PESA model is a disruptive business but that Vodacom will remain to be an enabler and not a provider of financial services. For the future she hopes to build more partnerships to give customers access to a wider range of services. This presentation made clear how this mobile technology can facilitate operations for a variety of agents, whether they are savings and credit co-operatives (SACCOs), microfinance institutions (MFIs), regulators, retailers, investors, NGOs, banks, governments or entrepreneurs.

It is clear that MFIs can benefit from learning how M-PESA trains a vast numbers of local staff, since it is often challenging to recruit the right people and train them in a way that they become responsible and self-reliant, despite the lack of regular supervision. In all, it is fascinating how the mobile providers were quick to understand that this is a volume game and created a functioning money transfer system by using the basis of their own mobile industry, reaching a scale of business that financial service providers alone could not reach.

Ayako Iba

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