Drivers of Mobile Money Profitability

28 April 2011

This post is the second in the series on “Five Business Case Insights on Mobile Money.” In the first post, we shared with you a detailed presentation on the five insights. Here we explain further the first three insights.

How to think about the overall revenue potential?

(1) Mobile money contribution may be small compared to current Mobile Network Operator (MNO) total revenue but could be important for future revenue growth. We believe few operators will ever meet the high expectations they have for mobile money. 80% of respondents to our survey last year expected mobile money to comprise 10% of total MNO revenue within five years of launch. 10% is small but we don’t think it is something to sneeze at. For a number of mobile network operators, like MTN Ghana, 10% of overall revenue easily exceeds their current non-voice revenue from SMS and other services (see the presentation for similar data).

However, our view is that it is highly unlikely any mobile money implementation is on track to meet these expectations of overall revenues within a five year time frame. This is not an entirely gloomy picture. It is simply a matter of recalibrating expectations.

First, when it comes to the mobile money business generating positive cash flows, the expectation of mobile money managers could be met. For instance, GSMA MMU projects that MTN Uganda is on track to be cash flow positive within three years and some news reports recently suggest that they might be exceeding those original expectations.

Second, we think that for a number of MNOs, mobile money and mobile financial services may just be the largest single source of overall revenue growth. Some analysis done by AfricaNext shows that M-PESA’s contribution to revenue growth exceeded 30% even though its contribution to overall revenue was 10% . So mobile money could be invaluable to future revenue especially when Average Revenues Per User (ARPU) in voice continue to fall as mobile markets mature. Across Africa, Airtel’s arrival has further precipitated a severe price war in voice.

Obviously, the story does not end here. For instance, broadband growth could easily bring the kind of revenue growth MNOs are seeking. Why bother with mobile money then? We think this is why MNOs need to think long-term about their role as a financial services and e-commerce provider in what is becoming an increasingly electronic commercial landscape in developing countries. MNOs could position themselves to be at the center of this landscape and in many markets, especially in Africa, they are in a very good position to do so.

(2) Mobile money success is highly dependent on the existing size of the MNO’s voice customer base. There is a belief among MNOs that mobile financial services can drive voice subscriber growth. In a number of markets, new entrants in the voice business or MNOs with small market share have launched mobile financial services with that expectation. It is possible that mobile financial services may help retain customers, as it appears to have done for Safaricom in the face of increasing competition in the core voice business in Kenya. However, offering financial services has not proven to be a source of subscriber growth.

The hard pill to swallow is that customers of mobile financial services will come mainly from an MNO’s existing voice base. The size of that voice base is even more critical if the strategy is to get to a critical mass of adoption in the wider payments market (more on that in our third and final post).

The implication then is that in markets like Senegal, Mali, Mexico, Niger (and of course Kenya) where a single MNO holds a dominant position, those MNOs are in position to make the biggest land grab in mobile financial services. On the other end of the spectrum, where the voice customer base is fragmented, like in Ivory Coast, Tanzania or Brazil, the path to success is not clear cut. MNOs may consider improving their odds through strategic partners, which may involve working with each other. MNOs can build the road together — the mobile payments infrastructure — but then compete on the services that use that infrastructure.

What are the most critical business case drivers?

(3) Direct profit from mobile money depends on growth in “electronic-only” transactions, i.e., more transactions per deposit. There are three basic drivers of direct profit for mobile money. First, the obvious key driver of direct revenue is growth in active customers. In fact, high inactive customers mean that more transactions are expected from each active customer for the business to turn cash flow positive. In most cases, MNOs pay their technology platform providers on a per customer basis which, along with the upfront licensing fees, can add up to a grim picture when most customers are inactive. But it is not sufficient to have active customers. To see rapid growth in profits, MNOs need growth in transactions per month per active customers. We believe transactions per month per active customer for M-PESA Kenya may have more than doubled in three years.

Second, mobile money implementations are more likely to increase direct profit if their cost structure changes as the service grows. The cost structure should ideally turn from fixed marketing costs towards variable agent commission costs, which are costs that are directly tied to revenue generation from transactions. In our estimates for M-PESA Kenya, the share of commissions paid by M-PESA to its agents in the overall cost structure must have gone from roughly 10% in year one, to over 60% in year three.

While there are other key drivers of direct profit growth, our view is that the most significant driver is ultimately going to be electronic transactions per deposit (“electronic-only”) because of a simple combined effect: less use per transaction of cash-in/cash-out at commission-based agents, which is the lowest margin earning part of the business, and more use per transaction of the electronic platform, which is the highest margin earning part of the business. We estimate that M-PESA Kenya earns an estimated 18% weighted average gross margin on agent-based transactions compared with almost 100% gross margin on electronic-only transactions. In our estimate, M-PESA Kenya’s “electronic-only” transactions grew 35% faster than agent transactions.

Growth in electronic transactions per deposit or cash-in presents a tantalizing outcome – less need for cash handling agents over time, which is the most expensive and operationally the most challenging part of the business. But how do we drive more transactions per deposit? Of course, the obvious answer is to have more electronic uses for the deposit. In fact, we think that even for M-PESA Kenya, the reason why we saw increasing transactions per deposit was not because people were sending domestic remittances to a wider range of recipients, but because they were doing other types of transactions. We believe that a large share of these other transactions were in fact small business merchant payments. We will expand on this wider payment opportunity further in our third and final post in the series.


- Kabir Kumar & Toru Mino


Submitted by Aseged Habtemariam on
Mobile banking in Africa is a good opportunity to consider the market and economic, I think same challenges, for example local language and especially calender in Ethiopian context

Submitted by Xiaofeng Hua on
Looking forward to seeing evidence that increased “other types of transactions” are “small business merchant payments” by a significantly large # of active subcribers.

Submitted by Anonymous on
Cant wait to see why you believe the “other types of transactions” are in fact small business merchant payments as well. I was just pondering how we could effectively measure the potential size of the small business merchant payments market compared to the domestic remittances market in a country like Uganda so that we can more lobby for better rates from an informed point-of-view.

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