This post is written by Ryan Falvey, SBI Manager, ADC Strategy & Execution Group.
Recently a client asked SBI’s Strategy and Execution Group for assistance in helping them understand the strategic implications of developing a mobile money solution. To help describe the costs, risks, rewards and opportunities associated with mobile money, we developed the graphic below. In particular we wanted to highlight, for those who are not familiar with branchless and mobile solutions, why so few mobile money programs have been successful and the importance of developing and maintaining strategic focus.
As one can see below, the curved line represents the financial cost and returns associated with a mobile money program (negative at first, positive eventually) with the straight line serving as a hypothetical breakeven point. Labels which are red represents costs, green represents revenue drivers, black text represents break-even activities and the blue captures some of the terminology – I believe originated by our friends at the Bill and Melinda Gates Foundation – to describe the pitfalls that many programs have encountered. A more detailed explanation can be found below.
Capital expenditure – mostly IT – improvements and enhancements are commonly thought of as a major driver of costs. In reality, they are typically quite small. My colleague Malith Gunasekara estimates that capex is, at most, 15% of the overall project costs. Instead, what we have seen from projects is that the real drivers of costs are training, education, and marketing. These costs start immediately as the institution has to hire and train staff and recruit agents.
These costs are quickly compounded by a need to train and educate agents on the product offer and transaction process, while also engaging in mass marketing. Mass marketing as a major cost this early may sound surprising – and many interventions have failed to take this into account. However, a robust and energized agent network often requires this as the agent needs to know that they are signing up for something that is going to be successful and profitable for them. Remember, these agents are business people: they want to see that their partner in this endeavor is serious and, as such, they want to see the sponsor invest marketing dollars that is commensurate with their investment (which is often substantial). As such, from almost day one, the sponsor is likely spending significant sums on marketing.
Next, the system needs transactions. One of the more common ways to get activity on the network is through government to person (G2P) transactions. Unfortunately, these transactions often provide extremely limited margins. Why? Because the government is already doing these transactions somehow and the new mobile money system cannot be significantly more expensive than the alternative. Also, at this point, the sponsor needs to make significant expenditures for both mass marketing and agent and consumer education to ensure that payment recipients understand how the new system works. Consumer education is especially important as it’s often not immediately obvious why a consumer needs a new payment option or – in the case of financial institutions – a bank account. Meanwhile, the agent wants to start getting paid for all of this time learning about this system and advertising his offer. However, since we still don’t have many transactions, agent commissions quickly become a major cost.
This dynamic, the need to develop a network – and customers – while simultaneously rolling out product on that network, has been called the “chicken and the egg problem” and is one of the reasons why many networks have ended up in “Death Valley.” This is the dynamic where fixed costs have been spent on building the network, the variable costs are very high with marketing, education and commission expenses but there are still not the transactions, accounts (and revenues) necessary to support the network. And much like the famous Death Valley in California which was littered with the skeletons of those pioneers who tried to shortcut the hard work and planning on their trek to California, the mobile money Death Valley is littered with the failed programs of telecom operators, banks and others who tried to roll out inadequate solutions to a complex problem, without proper strategic focus, planning and investment.
So how does a sponsor begin to climb out? Unfortunately, there is not a one size fits all solution. Every project must respond to the unique regulatory, competitive, demographic and cultural constraints of their home country. However, the solution is almost always some combination of person to person (P2P) transactions, new accounts, partnerships with traditional competitors, and person to business transaction (P2B).
Most mobile money projects have focused on rolling out P2P payment solutions as soon as they receive the regulatory approvals necessary. In fact, for many projects, P2P transactions have been the only product envisioned. (This is perhaps one of the reasons why so many mobile money solutions end up never escaping Death Valley.) However, to successfully attract these transactions, sponsor organizations often have to spend significant sums in customer incentives to open and transact on accounts, educate customers on the utility of these transactions (usually through significant below the line marketing at agent locations) and conduct mass marketing campaigns.
To gain traction for mobile money solutions – especially those solutions offered by mobile money operators – sponsors have attempted to expand P2P transactions to include P2B transactions very early by targeting large businesses or those businesses that play a critical role in the value chain. The idea is that if they can convert these large businesses and the transactions they generate onto a mobile money network, this will create a trickle-down effect whereby smaller businesses sign up for the program because their biggest customer is on it. In our experience, this has not worked. Personally, I believe that small businesses will be resistant to accept mobile payments until customer demand forces them to change businesses practices. After all, despite the significant expenses that cash can create for a business, it does have a very valuable property in that it is hard to track and tax (a quality that is quite obvious to anyone who has ever owned a small business but is occasionally lost on development professionals).
This is one of the reasons that it is often not clear to small businesses and individuals why a cashless solution is superior to cash payments. Unfortunately, larger businesses and those further up the value chain have little capacity to bridge this education gap. Hence, solution providers need to work closely with agents and other stakeholders to provide this educational service.
One way to provide this educational service is to encourage account opening. By opening up traditional deposit accounts on mobile payment networks, providers can provide branchless banking solutions that create stickiness on their networks by offering a valuable service (a safe place to store money and financial inclusion). These solutions also create more opportunities for consumers to get comfortable with concepts such as e-wallets and formal financial services. For sponsor organizations, these accounts also create a second source of income in the form of deposits or “float” (customer cash that is left on the network).
At this point in the project lifecycle, sponsor organizations typically hope to bring other financial institutions and third parties onto their networks. These agreements – often with traditional competitors – allow sponsors to really grow networks to scale by growing transaction volumes and increasing the profitability of networks that have already seen significant capital investment. These new accounts also create the type of consumer comfort – and demand – that encourages businesses to accept P2B payments. These payments create significant transaction volume, lead to widespread awareness and acceptance of mobile money and often generate significant float or deposits that sponsors can use to reduce their cost of capital and increase profitability.
Getting to this point requires a strategy that allows an organization to stay focused on the long term while remaining responsive to changing market conditions. However, as we recently explained to the client who engaged SBI to help them develop such a strategy, it must be accompanied by complete institutional focus to achieve the strategy. This combination of strategy and focus will allow the institution to keep employees motivated as they engage regulators, develop agents, inform and educate customers, develop products, make investments and, if successful, avoid Death Valley.