Mobile financial services – often called mobile money – are a high priority for many mobile operators, financial institutions, technology firms, and governments. In regions where financial inclusion is limited, such as sub-Saharan Africa, mobile money promises a lower cost, more scalable alternative to traditional banking.
Yet despite high interest levels in the markets of sub-Saharan Africa, there have been few success stories to date. This is partly the result of uncertainty about whether Kenya – where M-Pesa has become one of the few mobile-money success stories – is unique or the potential for mobile payments in other markets is similarly robust. To cast light on the opportunity, this article attempts to quantify some of the many high-potential payment flows in this rapidly evolving region and to estimate the associated revenue pools.
Primed for mobile payments
In most of sub-Saharan Africa, only a small percentage of upper-income households enjoy the convenience of card-based, online, mobile banking and payments, while most consumers still pay with cash. One study shows that more than 90% of retail transactions in parts of Kenya remain cash based, and Gallup’s survey of 11 countries in sub-Saharan Africa found that more than 80% of adults there have made bill payments or remittances with cash. Given the lack of digital payment penetration, consumers, banks and governments in sub-Saharan Africa are still bearing the high cost of cash payments – costs associated with manual acceptance, record keeping, counting, storage, security and transportation.
A lack of mobile technology is not the major obstacle to increasing mobile-money penetration in the region: two-thirds of adults in sub-Saharan Africa currently use mobile phones. And in Kenya, mobile-payment penetration is at 86% of households. However, the payment-digitisation gaps between Kenya and other nations in sub-Saharan Africa still vary widely. Nonetheless, regulators in many markets are paving the way for e-money and the entry of nonbank operators. And business models and systems for electronic remittances – both domestic and international – have already been well tested in other markets around the globe. Together, these factors should make it easier for digital payments to leapfrog the costly development of formal banking by introducing advanced mobile systems. Why then have many payment players hesitated to venture into these seemingly high potential markets?
As with most new business ventures, limited information is available about the nature and size of markets, the investment required, the risks involved, and, most important, the nature of customer needs and preferences. New research and market analyses can help in reducing that knowledge gap. The findings presented here are the result of a new study that looks at 44 nations in sub-Saharan Africa and incorporates data recently collected by Gallup (with support from the Bill & Melinda Gates Foundation). The analysis examines remote domestic consumer payments in individual markets in sub-Saharan Africa to identify significant cash payment volumes made through informal channels. These transaction flows represent a large untapped market for mobile providers. And they are especially relevant because it is easier and less costly to make those payments electronically than with cash.
To better understand the region’s market status and opportunities in digital payments, the research team closely examined new data for several major payment categories, including person-to-person (P2P) payments, government-to-public payments, bill and formal-obligation payments, wages, and payments for goods and services. These represent early-use cases in which the benefits of digital payments considerably outweigh those of cash, thus making it likely that digital payments will rapidly win consumer acceptance. Unsurprisingly, P2P payments are the largest category, given the many migrant workers and informal networks of families and friends, who are often the primary source of family financing.
A key feature of the Gallup survey was that it did not just focus on formal payment options (such as banks, money transfers, or mobile devices) but also asked about payments made in cash through informal channels. This allows us to estimate latent market demand for digital services.
To estimate the market potential on a national basis, the researchers first examined the trends underlying Kenya’s rapid transition to mobile payments. These were then applied to each country’s raw data to create baseline reference points that were subsequently used to develop individual market projections. Those projections were made assuming the following scenarios:
1. P2P payments are digitised across other sub-Saharan African countries, matching Kenya’s current penetration rate for long-distance digital payments (70%).
2. Other types of long-distance payments (e.g. wages, government-to-public) are digitised to Kenya’s current level (70%).
3. P2P payments maintain the 70% rate of digitisation (as in 1, above) and the total transaction volume grows at the same rate as seen in Kenya between 2006 and 2009, during the early expansion of M-Pesa.
We consider these scenarios conservative relative to overall market potential. Scenarios 1 and 2 assume no growth in P2P payments (despite better options probably becoming available). Moreover, all of the scenarios ignore incremental revenue from other types of payment flows, such as retail and revenue generated through new business models that a more ubiquitous and robust digital payment system would enable.
The Gallup data show that, currently, an average of 54% of adults in sub-Saharan Africa make one or more long-distance payments in a given month, totalling approximately 5bn transactions annually. The total volume of these flows is approximately US$760bn, and 50%-60% of the transactions are in cash. With a conservative estimate of revenues at 2% of volume, this results in annual revenues of about $6.6bn from electronic payments.