If a movie were made about financial inclusion, chances are mobile money fees would be cast as the villain. The cost of paying with mobile money is often viewed as a barrier, a tariff or a tax on the poor working to keep services from those who need them most. The same logic suggests that these fees are something to be minimized wherever possible, contained and ideally stamped out. But mobile money pricing, like Bruce Wayne or Peter Parker, has a secret identity, making it a potential hero in disguise. Mobile money fees can also help to build and sustain healthy digital financial services markets.
Pricing can encourage the healthy use of digital financial services
Pricing can take many forms. Its shapeshifting power makes it a useful tool for providers that are looking to advance financial inclusion. Development practitioners often use the term “pricing” to refer only to person-to-person wallet transfer tariffs (i.e., the cost of sending money from one wallet to another). But mobile money pricing can mean much more— even for transfers between two individuals. For example, tariffs for over-the-counter (OTC) transactions facilitated by an agent typically differ from those for wallet transactions. Transfers across networks in markets with interoperability may also carry additional surcharges. And the price consumers pay for a transfer also includes the cost of cashing in and out. Costs can occur along the full life-cycle of a transfer, with different pricing structures encouraging different consumer behaviors.
For example, M-PESA in Kenya is often believed to have the highest transfer prices, due in part to its competitive position in the market. This may be true at a certain transfer amount and when considering only the transfer tariff commonly thought of as "pricing." However, it is important to recognize that M-PESA's fees for the average wallet transaction are weighted more heavily toward the cost of transfer than toward cash-out (60/40). When you consider the full remittance cycle and all its costs, including cash-out, providers in nearby Tanzania charge almost twice as much. They simply weight the cost more heavily toward withdrawal (15/85). Why? Providers in Tanzania did not always weight their models so heavily toward cash-out. The change was part of their plan to combat rogue “direct deposits” — transactions in which customers add money directly to other customers' accounts to avoid paying mobile money transfer tariffs. By taking advantage of pricing’s shapeshifting qualities and moving pricing toward cash-out, Tanzanian providers minimized the incentive for senders to circumvent the system.
And this is the first way mobile money pricing may secretly be a financial inclusion hero. By giving providers a way to manage sender/receiver dynamics, mobile money pricing can help keep customers inside the bounds of formal models. Informal transfers may appear financially attractive to customers in the short term because they often cost less; but in the long term, these methods can threaten the viability of business models, discourage wallet use and increase prices as providers try to make up for lost revenue.
Pricing can promote wallet use and financial inclusion
Pricing models can also be protagonists by encouraging product choices that build inclusion. Providers in Pakistan and Ghana have differentiated the prices for OTC transfers and wallet transfers (either by increasing the price of OTC or decreasing the price of wallet) to steer customers away from OTC transactions, toward wallets. Providers in these markets believe wallets will be more profitable in the long term, even at a lower price, due to customer loyalty and opportunities to sell wallet-related services, such as digital credit and savings.
While mobile money users are not as price sensitive as one might expect, CGAP research suggests that changes in pricing can help shift customers from OTC to wallet transactions. The use of wallets promotes inclusion by encouraging users to store money digitally and by improving their access to additional financial services, among other reasons.
Superhero or supervillain?
One could still argue that customers might be better off if all these transfer fees just went away. A number of products, such as PayTM’s Prepaid Payment Instrument service in India and Equity Bank’s Equitel in Kenya, are trying to do just that. It is important to note, however, that neither provider’s business model depends on consumer transaction revenue. PayTM and Equity are expanding the revenue equation to rely more on merchant transactions (PayTM) and cheaper lending capital (Equity). (It is also worth noting that PayTM is not permitted under its prepaid payment instrument license to offer cash withdrawals and that Equitel transfers to other providers carry a surcharge.)
Within the fee-based business models of most mobile network operator's mobile money offerings, pricing is an important tool for controlling products and promoting the healthy use of mobile money. Within models that seek to offer “free” transactions, pricing does not disappear; it just shifts into other shapes, such as merchant discount rates.
And like any good superhero, it lives to fight another day.
That's a nice analogy
The Transaction Fee in payment systems has several roles:
#1 To support the infrastructure( administration, security, maintenance and improvement),
#2 To generate profit for shareholders; the difference of the revenue collected & #1 above, &
#3 To drive customer acquisition(zero deposits) & create customer lock-in(expensive withdrawals & crossover transactions). This is where the villainhood lies.
#1 is a hero-factor, #2 is neutral( contextual) #3 is 'villainy', so i guess it's a tie between hero and villain without contextual analysis.
Take Mpesa, a quick look at tweets mentioning 'mpesa charges' show a negative sentiment.
So much so that a P2P transfer on Mpesa in Kenya is expected by the receiver to include the transaction fee('Tuma na ya kutoa'), which in turn makes it more expensive because even the withdrawal fee is included in the transaction payload which changes the transaction band.
E.g to send KES 1000 costs KES15 but to send KES1027 jumps the cost to KES 25. A quick solution would be to allow sender to pay a lesser fee for the withdrawal to be deducted with the transfer fee from sender.( a less quick solution would involve user culture change which is harder)
Payment providers should adopt cannibalizing of transaction fee to enhance their merchant payments services thus disincetivising cash C2B payments( a big reason for needing to withdraw cash is that users prefer to pay merchants in cash ).
Thanks for your comment, Sadique. All are interesting points, which also highlight the complexity of pricing as a field of study. - Will