Mobile money has established itself as a promising tool for changing the landscape of financial inclusion for the underbanked and underserved people in developing countries. In addition to lifting 2% Kenyans out of poverty between 2008 to 2014, mobile money has displayed long-term effects on low-income household savings behavior, their ability to effectively manage negative shocks (job or agricultural loss), make sound investment decisions, and improve risk sharing. For providers, mobile money has changed the standard digital payments landscape to new forms of more data-based financial services, micropayments, and opened avenues for new digital business models. While mobile money is an apparent game changer in the financial inclusion space, is it truly reaching masses at the bottom of the pyramid and fulfilling its growth potential?
The hardest to reach customer group for mobile money providers are those within the lowest-income range, rural areas, and women. Even among existing low-income users, mobile money usage rates are comparably lower. One of the reasons for low usage and adoption rates among low-income customers are transfer fees levied by Mobile Network Operators (MNO). According to research by IGC, flat fees that are applicable on every transaction, regardless of transaction size, such as the $0.05 levied on every mobile transaction in Zimbabwe, have “a disproportionate impact on low-income users and discourage use.” BFA partnered with the Bill and Melinda Gates Foundation’s Financial Services for the Poor (FSP) team to understand how high the mobile money transaction fees are, and this impacts the poor. BFA revisited a study conducted by Innovations for Poverty Action (IPA) that analyzed mobile money fee structures on P2P transactions–cash-in and cash-out–across eight countries with transaction data from 25 mobile payment service providers with fresh data from 2018.
Transaction fees constitute the second-largest contributor to mobile money revenue, representing as much as 20% of total revenues for MNOs, which are also driven by many other factors. Typically, MNOs deploy three types of fee structures: 1) slab-based, with a flat fee charged for transactions within a predefined range, 2) percentage-based, where a flat percentage is deducted from every transaction sent, and 3) free, where users do not incur any costs. This infographic draws insights from a database that consists of individual rate cards, as well as figures comparing fees across different transaction sizes, along with changes in fee structures between 2016 and 2018. As illustrated by Chart 3 and Table 7, in 2016 the majority of fee structures were slab-based and regressive, meaning that customers making smaller-value transactions incurred higher fees compared to larger transactions. By contrast, percentage-based fee structures transactions incurred a flat rate regardless of transaction size that also ended up being regressive for small transactions. Bangladesh is the only country where all top providers have adopted this fee structure.
In East Africa, where gains from mobile money are the biggest, we found an increase in fees across the years. For transfers of $28 or less, the average change in total fees (deposit, transfer, and withdrawal) was higher than in 2016, implying that a majority of providers increased prices or maintained the same pricing structure. One would expect the fees to have risen by small margins; however, fees have increased by double digits for five providers. In East Africa, 3 out of 4 Airtel Money providers have increased fees significantly. In Kenya and Tanzania, these fees have increased by nearly 40% or more. It is interesting to note that Tanzania’s Airtel Money was the only provider to raise fees on transaction values less than $88, and remove fees altogether for higher amounts. By contrast, Safaricom M-PESA in Kenya has decreased its historically high fees by 36%, which brings it closer in line with fees charged across the region.
The current pricing structure by MNOs, according to CGAP is modeled on “traditional remittance pricing models and based on substitutes in the domestic remittance market.” This implies higher values for smaller transaction sizes that are incurred mainly within the informal and domestic markets. This pricing structure makes smaller transactions more expensive, and naturally, deters expansion and adoption of mobile money to the bottom of the pyramid. One of the main drivers of mobile money profitability is reaching scale. Therefore, for MNOs to achieve scale, it makes business sense to invest capital early on to increase adoption of the service, thereby narrowing the regressive pricing structure for smaller transactions. By assuming this long-term vision, MNOs can “expand beyond domestic transfer markets and increase profitability. Furthermore, they could mold their fee structures to incentivize customer behaviors that will help them develop a robust service gradually in the long-run.
Mobile money platforms in India and Indonesia are just about doing that. By offering their services for free, they have captured a sizable portion of their respective markets. The business models of these platforms do not depend on consumer transaction revenue; rather the “free” aspect merely adjusts to other pricing mechanisms, such as merchant discount rates, etc. Perhaps it is time that MNOs rethink their fee structure to allow a majority of low-income customers to avail their services and profoundly benefit from being financially included, resilient and poverty-free. And, it makes business sense to do that!