Scenario 1 assumes that overall payment demand remains static, but consumers shift their P2P transactions from cash to digital payments to the same degree as in Kenya, where 70% of all transactions are currently electronic. Similar growth in all countries in sub-Saharan Africa would increase region wide P2P payment revenue by 60%-70%, from $1.6bn to $2.7bn. Corresponding digital payment revenues would rise from $6.6bn to $7.7bn. Importantly, this represents only an initial step toward the digitisation of payments and focuses only on a single use case.

Looking beyond P2P payments, Scenario 2 extends the Kenyan profile to other types of payments – primarily wages and payments for goods and services made by business and government entities. In this case, total revenue for electronic payments in the region would grow by 50%-60%, to between $10bn and $11bn annually. This implies, for example, that combined payment revenue in Nigeria would grow from $0.6bn to $1.3bn and in South Africa from $1.5bn to $1.9bn.

Scenario 3 goes a step further by assuming that the number of P2P payments will also grow as a result of economic growth, lower transaction costs, and the added convenience of digital payments. In Kenya, survey data show that the number of P2P remittance senders grew by 215% between 2006 and 2009, probably the result of M-Pesa’s rapid deployment. If the region’s P2P electronic payments were to grow similarly, its electronic payment revenue would exceed its baseline by about 50%, reaching $15bn to $16bn. In Nigeria, for example, the analysis estimates that revenues would climb to approximately $1.8bn a year.

Digitisation can spur growth in related sectors

Broad acceptance of digital payment platforms also benefits stakeholders beyond the payment industry. In Kenya, for example, many startups are attempting to incorporate M-Pesa as part of their entrepreneurial business models. One small business uses it to help parents make timely school fee payments, while another uses it to establish informal savings groups. Even nonpayment organisations are finding ways to use the new payment infrastructure. For instance, Bridge International Academies, a low-cost, for-profit educational franchiser, found that M-Pesa could help it obtain real-time financial data, which enabled it to become more trusting of franchisees and reduce record keeping.

Governments also gain when adopting digital payments, which not only reduce their payment costs but increase transparency. And the public ultimately benefits, too, when tax revenues grow concurrently with the increased documentation, transparency, and overall economic growth that accompany digital payments.

When digital payments take hold, as they did in Kenya, consumers eventually profit from the related savings. The cost of making remittances via M-Pesa is about half that of other formal domestic remittance services. Moreover, customers can instantly send payments from their mobile phones instead of travelling an hour or more to distant bank branches. Many customers in sub-Saharan Africa need bank services but simply live and work too far from a branch office.

Equally important is that electronic payments bring financial services to vast numbers of unbanked and under banked families. They dramatically reduce transaction costs, greatly increase customer convenience, and minimise the need for expensive physical infrastructure, including branch networks.

Implications for payment providers

Sub-Saharan Africa presents a number of opportunities for bank and nonbank financial service providers, mobile operators, and others seeking new markets. An important first step in considering these markets is understanding the common financial flows in a typical household in sub-Saharan Africa – flows that differ significantly from those seen in more developed markets. Here, fund sources tend to be as diverse as wages, crop income, remittance payments from family members, government payments, and even public donations. Typical expenses include food, utilities, school fees, health needs, basic retail purchases, and purchases associated with various life-stage ceremonies, such as weddings, funerals and holidays.

Understanding where these flows are concentrated will enable the development of more effective market-entry strategies. For instance, a bank’s relationships with employers, government agencies, and agricultural entities might best position it to digitise private and government wages, or farm payments. And mobile operators with far-reaching airtime networks might do best in the P2P payment arena.

The region’s small and medium-sized enterprises (SMEs) also send and receive a wide variety of payments. They receive payments from customers, middlemen, and government agencies, while making payments to wholesalers, employees, landlords, and service providers. Notably, most of these are still paid with cash. SMEs are recognised as an important market segment given their higher payment volumes. And being at the centre of customer and supplier networks, such enterprises can stimulate adoption both up and down the value chain.

There are also indirect benefits of mobile payments to consider. Mobile operators, for example, have noted that churn rates for mobile-money users are significantly lower. And by incorporating data from payment flows and other nontraditional sources into credit models, institutions can significantly reduce loan losses. Mobile operators could do likewise for post-paid customers. Similarly, the flows discussed in our estimates exclude retail and several other types of transactions that could also be captured by early movers as markets continue to develop and could generate multiples of the revenue represented by the use cases discussed here.

Launching mobile payments in new markets is seldom easy. In developing economies, one of the greatest challenges is providing convenient options for cash deposits and withdrawals. ATMs, point-of-service devices, and agent networks must be conveniently located throughout a community. The up-front investments this requires can be substantial, but they are necessary to provide a solid foundation for future growth.

Clearly, there is significant latent demand for digital payments in many markets of sub-Saharan Africa, and widespread consumer acceptance of mobile-communications technology is highly encouraging. For players that are able and willing to move in the near future, there are also opportunities to win important first-mover advantages.

Jake Kendall leads the Research and Innovation initiative within the financial Services for the Poor team at the Bill & Melinda Gates Foundation. Robert Schiff is a principal in McKinsey’s San Francisco office, and Emmanuel Smadja is a consultant in the Washington DC office.