Cost of Mobile Money Transactions: Penalizing the Poor

M-Pesa, Orange Money & Yu Cash Fees

Current mobile money fees are too expensive for the low end.

Mobile money has the potential to dramatically impact and improve the lives of those living at the “bottom of the pyramid” (BOP).  Mobile money is considered safer and more convenient than carrying around idle cash and it also builds a financial record that can be incredibly valuable in obtaining credit for investment opportunities or to handle a crisis.  However, mobile money’s promise isn’t being fulfilled today.  The current tiered mobile money fees in Kenya make it cost-prohibitive for the BOP to conduct the vast, vast majority of their transactions using mobile money.

Let’s take a hypothetical day in the life of a Kenyan member of the BOP.  That hypothetical working day[1] may include a small payment for breakfast, 2 or more small payments for round trip of public transport (if they can afford it), purchase of the goods that they will sell during that day, and then 2 or 3 small purchases from different vendors for that evenings meal (e.g., spinach from one, flour from another, etc.).  That’s 6-7 payments for a typical low income Kenyan.  (Many people are surprised to hear that poor people conduct more transactions than wealthier people, but it’s true[2].)

Now, it’s safe to assume that those transactions are relatively small – say an average of $1.  At those levels, M-Pesa and other mobile money platforms are simply way too expensive: the M-Pesa fee at $1 is $0.12 which is a 12% fee!  It gets worse – any transactions between $1.25 and $437 is a flat fee of $0.37 which is fine if you’re making transfers above $20 (as the fee as a percentage is only 1.85%) but since the vast majority of transactions are far below that, the fee is painfully high.  I’ve put together a graph (above) showing the 3 main mobile money platforms in Kenya with amounts and fees translated into US dollars (for ease of interpretation) and their associated transaction fee as a percentage.

To compare: in developed countries like the US, using an electronic form of payment has a transaction fee of between 1 and 2 percent; in Europe it can be even much less than that due to regulation.

All of this to say: M-Pesa and the other mobile money platforms are much too expensive currently for the BOP to use on a regular basis.  These mobile money platforms serve an incredibly valuable service (long-distance money transfer).  Before M-Pesa money transfer was an insecure, slow and expensive proposition (mostly people sent cash via bus drivers or some other informal means).  However, for mobile money to make its next step, to replace cash in every-day life here in Kenya, the mobile money platforms are going to need to reduce their fees substantially.

In my mind transaction fees need to be 3% or below to begin to compete with cash in a meaningful way and unlock the full potential of mobile money – what do you think?

[1] The CIA Factbook estimates 2010 Kenyan GDP per capita of $1600 (in 2010 USD) which works out to $4.38 per person.  This is going to be fairly skewed for the BOP who likely earns much less than the average, especially for a country like Kenya that has a relatively large income disparity.  Given that it’s a per person number, however, it undercounts a bit given the relatively large size of Kenya’s non-working population (students don’t earn anything but are still included in the per capita denominator).  For ease of the hypothetical, I avoid a specific amount but believe that $3 net per day is probably about right.

[2] Portfolios of the Poor, a highly recommended book, demonstrated that the poor tend to have a much larger cash turnover than richer people.



Filed under M-Pesa, Mobile Operators, Uncategorized

6 responses to “Cost of Mobile Money Transactions: Penalizing the Poor

  1. There are real costs that need to be removed before we will see dramatically lower fees. The biggest is cash. As long as these transfers involve cash handling at either end, these costs will remain.

    These are still the early days, the beginning of the product lifecycle, which is when prices are at a premium. With time will come scale (which can reduce costs), a richer enabling environment (which may or may not directly reduce costs but which adds value) and more regulation (which adds cost).

    For BOP users I believe subscription fees may be a way toward somewhat lower transaction costs.

    • Thanks for the comment, Joel. It’s true that there are real costs that need to be covered — but I don’t think that cash management is a big one for the carriers here in Kenya. They have outsourced the cash management almost entirely, first to the agents that do cash-in and cash-out (the “front line”) and second to the banks who act as super-agents and provide agents with cash or e-float depending on the need. In return the agents and super-agents get some amount of commission for providing the cash services; but Safaricom’s actual cash management costs are low or practically negligible.

      The transaction cost that I’m focused on is for the P2P transaction or what could be come the “payment” transaction. That 30+ Kenyan shillings ($0.375+) M-Pesa earns on every P2P transaction is almost entirely margin for Safaricom. The commissions paid to agents are almost entirely covered by the additional fee that customers pay when they withdraw their cash from the system.

      In any case, I agree that it’s very early days and that increased scale and competition (especially competition!) will bring lower costs. I’m eagerly looking forward to it.

  2. It is high chance for airtel to venture the market of microfinance by advertising and promoting me2u services.I believe there is enough potential opportunity to be utilized.

  3. Why is it that Kenya is obseved expensive in communication services compared to its neighbouring poor countries? I wish to serve moer economically will earn moer profit for the gorvernment to sastain its citizen and economy. Therefore i pray the ministry concerned through CCK will look into it and adjust as per need.

  4. Pingback: M-Pesa’s Revised Tariffs | Mobile Money Exchange

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