M-Pesa’s Revised Tariffs

Yesterday I woke to exciting news: Safaricom had lowered the minimum size of an M-Pesa transaction and had lowered the tariffs on the smallest transaction tiers. I’m sure that M-Pesa users throughout the country will roundly welcome this news.

And it is exciting. As many on Twitter noted and Peter Gakure-Mwangi noted on thinkm-pesa.com, this opens up the potential for micro-payments at the low end. That’s something that M-Pesa has historically not appeared to be interested in – the addition of the 50 KSH to 100 KSH (about $0.60 to $1.20) tier originally included a tariff of 10 KSH ($0.12). That fee was ridiculous – 10-20% of the transaction amount. But these new fees are much more reasonable, ranging from 5% – 30% (and the higher end of that is a result of bringing the minimum transaction size down even further to a minute 10 KSH). Five percent, while not cheap, is at least in the right ballpark. I’ve argued that it needs to be closer to 2-3% – but this is at least a step in the right direction.

The biggest problem that I see with the fee structure more broadly is that it’s horribly complex. The Safaricom website shows 19 distinct pricing tiers representing various prices for various types of transactions – transfers to another M-Pesa user, transfers to a non-M-Pesa user, and cash withdrawals. Let’s focus on the M-Pesa-to-M-Pesa transfer – then it’s a bit simpler, but there are still 7 different pricing tiers:

























So why maintain this level of complexity? Why should the cost of moving 4,999 KSH be so vastly different than moving 5,001 KSH? Who could possibly keep 7 pricing tiers straight, much less 19 when the other types of transactions are included? (Also, why did the new tier get rid of the convention wherein the minimum starts with X1 – shouldn’t it be 51 to 100 instead of 50?)

My proposal would be: make it simple. Make it so simple that everyone knows exactly what is being charged for every transaction. Get rid of tiers altogether. Here’s one idea:

  • In-network transfer fee: 1%
  • Out-network transfer fee: 2%
  • Cash-withdrawal fee: 3%

There are a bunch of ways this could be slightly modified[1], but I think that its elegance is in its simplicity.

Finally, will these new pricing moves lead to wholesale adoption of M-Pesa at the micro-payment levels? No. Three and five Kenyan shillings is still a huge fee to pay when you’re making numerous small-size purchases during the course of a day. I always think of the “matatu”[2]test – could I see someone paying for a matatu ride (generally 20-50 KSH) with this fee in place? I don’t see that happening – cash is too ingrained, it’s cheaper. But this is an important step to get people thinking about using M-Pesa for more of their transactions – and even if it only happens at the margin right now, it was smart of Safaricom to take a step down this path towards broader usage.

[1] You could add fee caps so that people aren’t paying 700 KSH on a 70,000 KSH TX if needed; you could continue to have a minimum transaction size so that you don’t go below a fee of .1 KSH.

[2] Matatus are the 14-passenger form of public transportation most commonly used to get around Nairobi and beyond. They are a force of nature, a bit dangerous and incredibly efficient.



Filed under Uncategorized

Payments: The More Things Change…

There have been a number of interesting pieces on payments in the last few days. Farhad Manjoo wrote a thought-provoking piece on PandoDaily about how new innovations in payments are really just a thin veneer on top of the global credit card infrastructure. The front-end might be changing but the pipes are still the same. Erik Hersman piled on pointing out that while things may be business as usual in the US and Europe, those parts of the world without credit card infrastructure (especially Kenya) are seeing real innovation. And Tim Harford one-upped them both by reminding us that cash is still around and won’t go peacefully into the night on an ice floe.

These pieces serve as an opportunity to step back, to take a look at where payments are today and where they might be going.

First I would like to take a look at Manjoo’s post. His core premise is that credit cards are incredibly efficient and ubiquitous today and that supposedly-new payment technologies are really just new customer experiences built on top of the existing credit card infrastructure. Fair enough. But let’s break this down – first, what value exactly does the credit card infrastructure provide? Why is it a platform that has become so ubiquitous?

  • For Purchasers:
    • Security – carrying less cash leaves less to be stolen.
    • Short-term loan – credit lines enables you to spend money you don’t yet have.
    • Convenience – carrying less small change is nice and you don’t have to worry about carrying sufficient cash for large purchases.
    • Rewards – credit cards can earn you miles, cash back, points, etc.
  • For Merchants:
    • Security – having less cash in the till to be stolen.
    • Agency – less cash handled by employees results in less internal loss; with credit cards there are receipts and records to track each payment.
    • Data – rich customer and sales data, probably not very well leveraged today.
    • Basket size – credit cards might encourage customers to spend more.
    • Parity with other merchants – very few merchants are willing to lose a sale because the customer wants to pay with credit, so they feel compelled to offer it as an option.
  • For Banks:
    • Scale – credit card networks eliminate the need for bi-lateral agreements between banks everywhere.
    • Settlement guarantee – credit card networks provide certainty that the merchant bank will receive payment.

That’s a lot of value that credit cards bring to the main 3 constituents in a purchase transaction. And each of those items is probably worthy of a post on their own.

But for now, let’s move to the main point of Manjoo’s article – that new payment innovations are mostly just superficial front-ends on top of the credit card infrastructure. That’s true – today. But it doesn’t mean that will necessarily be the case tomorrow. The big question here comes down to: where will the store of value exist? Today, it’s largely in two places – bank accounts and credit cards. Bank accounts we’re all familiar with, but they’re not optimized for payments – they’re optimized more for savings. Credit cards, on the other hand, are really just post-paid stores of value – Visa gives me $2500 of value to spend with my commitment that I’ll pay it back at some point[1]. The big question is whether there is room for a new store of value in our lives. Paypal has tried and succeeded to an extent – but I’m not aware of data showing how much money people actually load into their Paypal account for easy (and cheaper) spending elsewhere[2]. Dwolla is trying to do essentially that same thing – by encouraging you to load your money into their store of value account from your other store of value account (bank account) so that you can use it to pay for things (with more security). Likewise, Square (Card Case) could do this as well. Same with Apple (iTunes), Amazon (Amazon Payments) and Google (Google Wallet).

Interestingly, in the US, Starbucks may be the farthest along in creating a new store of value account.

Looking outside the US, M-Pesa in Kenya is perhaps the most successful new stored value account the world has seen since credit cards. It’s enormous: 14.9 million registered users[3] out of a population of roughly 40 million people. To put that in perspective, that level of penetration would represent 115+ million people in the US, more than Paypal and probably in the neighborhood of Apple and Amazon – but as an entirely new stored value account, not as a simple credit card front-end. That’s massive.

All this to say, Manjoo’s right that credit cards are by far the biggest source of stored value for payments in the US today (next to cash that is). And he’s right that today’s payment innovations are more about new front-ends that leverage that credit card store of value – which is a valuable thing on its own[4].

But I’m more optimistic than Manjoo that there’s potential for change and innovation in stored value accounts in the future. M-Pesa has showed us that it can be done. Getting to critical mass is definitely a major challenge and so riding the credit card infrastructure until you have good penetration is an efficient approach – and one that most of the major players are taking today. Once that critical mass is obtained, the potential for bigger disruption is ripe – but they’ll have to deliver more value than the trusty credit card infrastructure does today.

[1] Pretty genius, actually. Instead of making me load my credit card with value from my bank account, credit cards let me spend, spend, spend and then have me transfer value from my bank account after the fact.

[2] A lot of Paypal’s payments are just facilitated credit card payments, as Manjoo points out.

[3] Latest official statistic as of November, 2011 has 14.9 million registered users (http://www.safaricom.co.ke/fileadmin/About_Us/Documents/Half%20Year%20Results%20September%202011.pdf).

[4] Credit cards leave a lot of untapped value on the table. Information is perhaps the biggest – it took a service like Mint for us to be able to get that information into a format amenable to analysis and visualization.


Filed under Platform

I’ve Moved – But I’m Still Here

It’s been a busy few months as my wife and I have moved from Kenya back to the US. We’ve settled in the Bay Area so if you’re in the neighborhood, drop me a line.

I still plan to write about the exciting innovations in payments, both those happening here in the US and those in places like Kenya. My experience in Kenya should provide a nice lens through which to look at developments in the space and I hope that you join me in the conversation!


Filed under Uncategorized

In-Store Payments with M-Pesa: Uchumi Experience

M-Pesa Buy Goods Confirmation SMS

M-Pesa has a menu item that gets little use today: “Buy Goods.”   The Buy Goods functionality is meant to facilitate in-person, in-store payments.

Background: In-store payments in Kenya are dominated by cash, with credit/debit cards representing a very distant minority.  Card adoption and usage has been stifled by multiple factors, but chief among them are:

  • Fractured infrastructure: There is very little interoperability between the largest banks in Kenya and as a result each bank rolls out its own fleet of point of sale (POS) devices.  If you’ve ever paid attention while doing a card transaction at a large restaurant or hotel, you will have noticed that the merchant often has an array of bank-branded POS devices; these provide service for “non-branded” cards (cards that are Equity-only, without a Visa or MasterCard logo, for example) and/or enable the merchant to re-direct payments to the cheapest available option that month.  Downsides to this situation include inefficient deployment of POS devices (multiple per merchant) and fragmented merchant liquidity (due to their need to have merchant accounts at an array of banks).
  • Cost of infrastructure: POS devices are expensive, easily costing $300-500 for basic models.  Given the number of merchants in Kenya (easily over 100,000) and the high proportion of those that are informal or very small, this cost is not recoverable by either the merchant or the bank through transaction fees.
  • Low value transactions: Average transaction sizes for daily payments are very low, far lower than in developed markets.  These lower transaction values make the standard card association pricing (which includes a flat fee plus a percentage of the transaction) prohibitively expensive.

The consequence of these factors is that you will find card-processing POS devices only at merchants that process high-value transactions, largely for foreign tourists or wealthier Kenyans.  And those merchants will have an array of costly terminals.

M-Pesa’s Buy Goods: M-Pesa has attempted to address in-store payments with its Buy Goods functionality.  It’s currently very limited in its availability – the merchants that support it are 2 supermarket chains (Uchumi and Naivas) and a higher-end collection of retail stores (all owned and operated by Deacon’s).  These stores also already have card POS terminals, so it’s not exactly expanding their acceptance options in a revolutionary way.  But given that mobile phones are close to ubiquitous in Kenya, M-Pesa has the potential to become the standard for e-payments in those retail environments that do not have either the turn-over or high value transactions to support a full POS.

Buy Goods Experience: Given that potential, how does it work in practice?  Short answer: pretty well.

We don’t shop at the eligible stores that often and the stories I’ve heard were of cashiers pleading with customers not to use the slow Buy Goods system while the long line of impatient customers clamored for better service.  But on a recent trip to Uchumi to restock our Tusker and Alvaro supplies, I was determined to find out whether the stories were true.  In the beverages area, there was a free (and rather bored-looking) cashier – the perfect opportunity to try out Buy Goods without any pressure.

As I walked up, I asked “Can I pay with M-Pesa?”  The reply came back quickly if not confidently, “Yes, if it’s working.”

While I piled my sturdy glass bottles onto the counter, he made a quick phone call using his cell phone: “M-Pesa inafanya kazi?” – “Is M-Pesa working?”  He turned back to me, beaming with pride: “Yes, it’s working.”

After ringing up all of my items, he showed me the screen and walked me through the steps of paying through Buy Goods.  M-Pesa à Buy goods à Till # à Purchase Amount à M-Pesa PIN.  I received the confirmation SMS promptly, within 10 seconds or so.  The cashier then asked to see the confirmation # provided in the SMS and matched it against the only M-Pesa confirmation # on his screen; he clicked it and then asked to see my ID to see if my name matched.  Finally, he printed out a receipt and had me sign it.

And that was it.  I walked away without having dug into my pocket for cash and dealing with coins.  Uchumi had less cash to mess around with.  Success.

While it worked smoothly, there are several facets of the transaction that could be improved.  A sign could display the purchase process so that I wouldn’t depend on the cashier for instructions (and risk entering in the wrong till #).  I also don’t see the need for either the ID check or the signature – the M-Pesa confirmation # should suffice.

But overall an interesting experience with M-Pesa in-store payments.  The next time I’ll try it with a full line of hurried people in line behind me and see if it goes as smoothly… or if I get booed out of the queue.

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Converting Counterfeit

Fake Kenyan Shilling notes displayed on the wall of an M-Pesa cash merchant

Cash merchants provide a unique and excellent opportunity for counterfeiters to convert fake money into real cash.  While grocers and retail clerks have to remain on the watch for counterfeit currency, cash merchants must remain even more vigilant – imagine, as a counterfeiter, that instead of buying goods with fake money, you could instead buy real money.  In essence that is what occurs at a cash merchant – you hand over money (real or fake) and immediately it is replaced with electronic money of equal value; you can then go to a cash merchant later and withdraw it into real cash.

I saw these fake notes at an M-Pesa cash merchant recently – they were high quality, I certainly couldn’t tell that they were fake!

It was interesting to see that people would go to the expense and work of counterfeiting 200 Kenyan Shilling notes – that’s roughly the equivalent of USD $2 at current exchange rates.  That’s quite the contrast to the US where I understood $100 and $20 bills were the most counterfeited.

I wonder if the cash merchant networks train their staff on how to identify counterfeit notes – or,  is that left entirely to the cash merchant?

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Withdrawing Mobile Money at Equity ATMs

How to withdraw from M-Pesa at an Equity ATM

Equity has been at the forefront of providing our customers and all Kenyans with opportunities to access and manage their money.  One of the things that I was reminded of in a recent visit to an Equity branch was the ability of mobile money users to utilize Equity ATMs to withdraw money from their stored value accounts (e.g., M-Pesa and yuCash).

Above and below are the posters that are on the wall in the ATM area.

The posters demonstrate how enabling this type of functionality requires collaboration and integration between the mobile network operator and Equity.  For both M-Pesa and yuCash, it’s 4 steps on the phone and 4 steps on the ATM.

Interestingly, it’s slightly more expensive to withdraw cash from M-Pesa via ATM than via agents at the lower value tiers and it’s slightly cheaper to withdraw via ATM than via agents at the higher value tiers.

Given that agents are often reported to have huge challenges with liquidity, Equity ATMs provide a compelling option for Kenyans looking to withdraw cash from both M-Pesa and yuCash.

How to withdraw yuCash at Equity ATM

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Filed under Equity, M-Pesa

Cash Merchant Branding

One of the main differences from the US that you notice about Kenya (and other countries in Africa) immediately when driving around is the vigor with which building paint jobs are converted into advertising opportunities.  Driving along main roadways, one is treated to a colorful collection of brightly-painted and branded stores and shops.   It’s not that these shops are painting their own brand on their exterior – instead, the major national brands pay to paint the exteriors of local restaurants, shops, and hotels.

That provides a colorful backdrop for the growing proliferation of cash merchant[1] brands, painted walls and signage everywhere you turn.  It’s been a few months now, but a trip to Kisumu provided a great example of the many cash merchant brands and their varied executions.

Without further ado, the pictures:

[1] Moving forward, I will refer to any outlet that serves cash-in/cash-out services as cash merchants.  Recent legislation in Kenya has clarified that what we’ve all been calling agents (such as M-Pesa ‘agents’) are actually cash merchants.  Full agents are differentiated in that they can provide additional financial services such as loans, insurance, etc.


Filed under Airtel Money, Equity, M-Pesa, Tangaza, yuCash