Can Mobile Money Be “Free”?

Blog Series

In this final post in the series “Five Business Case Insights on Mobile Money,” we explore how making mobile money “free” could lead to greater profits.

“Free” doesn’t mean no one pays.

CGAP wants the financially excluded to get access to mobile financial services. To suggest that MNOs make mobile money “free” may then come across as self-serving. On the contrary, making money in mobile money and making it “free” are compatible.

“Free” is a business model. In his book, Chris Anderson describes different “free” models including: (1) direct cross subsidies where one product sold to the customer subsidizes another sold to the same customer; (2) the three-party or “two-sided” market where the service itself is free and a third-party such as an advertiser pays; and (3) freemium where most customers get the basic product for free but some customers pay more for premium features or as frequent or “power” users. Some people have compared freemium to airline pricing: everybody is going to the same place but some people pay more to do more while they travel (see here, here and here for more on freemium among internet and Web 2.0 businesses).

How would “Free” work with mobile money?

Freemium makes most sense for network effect businesses. Offering a basic service for free drives scale and, as many use it, the value of the service to existing and new users goes up. While network effects are less important for domestic transfers, they matter for a wide variety of commercial and personal payments which MNOs ultimately want for mobile money but cannot capture easily in a direct way.

MNOs can follow a freemium model where they capture value from those customers who transact more or use premium services — including more commercial, institutional and bulk payment users — while allowing everyday small value transacting users, both commercial and personal, to transact for free below a certain daily limit.

Pricing this way would be different from how MNOs are pricing now, which is largely modeled on the traditional remittance pricing model and based on substitutes in the domestic remittance market. On average, this kind of pricing makes it more expensive for consumers to transact at smaller values, which may make it harder for MNOs to scale past the domestic transfer market. A sizeable share of the transactions between merchants and consumers in the informal economy are likely to be smaller than average remittance values, making many of those transactions expensive with current remittance pricing schemes. In most mobile money schemes, low value transactions end up costing 5x more than an average remittance transfer. Additionally, while domestic transfers happen across distances where the cost of moving cash is high, most small commercial transactions happen face-to-face where the cost of cash is much less tangible, reducing willingness to pay.

How could “Free” lead to greater profits?

“Free” would lead to greater profits because offering everyday small value transactions for free (or even lowering them) would drive greater adoption and allow MNOs to scale past the domestic transfer market. In most markets, the volume of those every day commercial transactions is likely to be at least 10x the size of domestic transfers (for additional data see slides 24-33 here). If an MNO can generate revenue from just 10% of the everyday commercial payments market by giving up revenue from domestic remittances (“leave money on the table”), they would already be handling a greater volume of transfers than they would with a remittance focused proposition.

The larger customer adoption gained through lower pricing can have exponential effects on corporate and institutional payments. In the case of M-PESA Kenya, corporate and institutional accounts increased explosively once the service had reached 7 million registered customers, but had grown at just a trickle before reaching that level of scale (see slides 24-33 here). Moreover, indirect benefits of mobile money – cost savings on airtime or retained ARPU from churn reduction — become significant drivers of profitability only at greater levels of adoption (see slides 18-23 here). In our estimate, almost 30% of total MNO customers must be using mobile money before indirect benefits from churn reduction surpass 1% of MNO voice and data revenue. Safaricom now sells more than 20% of total airtime through M-PESA, which we estimate to represent a cost savings of up to USD 19 million over scratch-card sales.

MNOs are pursuing domestic remittances because they seek to replicate the success of M-PESA Kenya. It is true that domestic transfers fueled initial adoption for M-PESA Kenya, but even in their case a sizeable chunk of transactions today are likely taking place beyond the domestic transfer market. Soon to be released recent financial diaries research highlights the growing use of M-PESA for business transactions, especially outside of urban centers. Anyone who has spent even a few days in Kenya in the last couple of years will notice that M-PESA is supporting a wide variety of transactions beyond domestic transfers. There is also similar evidence from other implementations. A 2010 study by Ali Ndiwalana et al found that approximately 30% of MTN’s mobile money users surveyed in Uganda were already using it to make or receive payments for goods and services with roughly 10% doing it on a weekly or daily basis.

Freemium pricing makes sense when MNOs realize that their mobile money business is not like a traditional remittance business. They are looking to monetize a large variety of payment transactions, not just domestic remittances. Their goal is not to earn a fee for a single transaction type but to rapidly acquire consumers onto a single transactional platform to draw value from network effects and earn from a variety of transaction types.


- Kabir Kumar & Toru Mino



24 August 2012 Submitted by Anonymous (not verified)

Any comparison of M-PESA with other deployments as being a norm adds to confusion and sets unrealistic expectations. The socio economic structure of Kenya, its population, the size of the country and the substantially more advanced nature of its economy are all underlying reasons for M-PESA’s success. In filling a void, in which ordinary people were exploited by expensive and inefficient, informal systems and very much open to risk, M-PESA provided connectivity, proof of delivery and efficiency.

One can look at other deployments and see where these criteria are lacking.

Underlying this is the demand in Kenya to be paid NOW!, which in other less economically active countries, could be acceptable tomorrow, next week or even next month.

To accelerate adoption, all mobile money offerings need to deliver connectivity, proof of delivery, and efficiency. This will lead to adoption and deliver sustainability which FREE services, of whatever type may not.

The drivers for financial inclusion have to be International and Domestic Remittances, wage payments, goods and services payments and access to credit/micro-finance. The replication of a Kenya model is unlikely to be successful and the success of M-PESA is unlikely to be repeated, unless similar economic criteria to those prevailing in Kenya at the time exist.

The consumer needs value for money that addresses their needs, which is what mobile money providers and other essential partners need to get together to deliver.

24 August 2012 Submitted by Anonymous (not verified)

Great article! Especially nowadays with the demand for such mobile providers (to whom you have to pay almost nothing) increasing, there is more and more wondering how they make money at all. It left me thinking too. But since I read this post, it’s starting to make sense somehow.

I’m not from US, but it’s also happening all around the world, I guess.

Thanks again, I’ll almost certainly reread to have even more thoughts provoked.

24 August 2012 Submitted by Anonymous (not verified)

Making P2P free can have some great benefits, but it still doesn’t make the service free for users. Merchants / Agents still need to get paid for Cash-In/ Cash-Out, and this will either need to come from the customer’ pocket or the operator. If the customer is paying, it’s no longer free. If the operator is paying, they will rapidly bleed money as agents push through a huge number of (potentially fraudulent) transactions.

The ultimate way around this is problem is to make the mobile money as useful as cash. Now the M-Pesa is over this tipping point, people are more and more willing to leave money in their wallets, so the need for cash-in and cash-out will reduce. But for services that are still in their infancy, pay-per-use will trump free.

Thanks for the great article, though, very thought provoking.

Add new comment