Safaricom’s M-Pesa Kadogo: What is the Bigger Picture?

Ronald Webb, Director Financial Services Safaricom
Ronald Webb, Director Financial Services at Safaricom

In the release of their HY 2017 financial results for the period ended 30th September 2016, Safaricom also announced the launch of M-Pesa Kadogo. With M-Pesa Kadogo, the firm scrapped all charges related to both mobile money transfer and Lipa Na M-Pesa for transactions below Kshs. 100/=. In making the decision, the telco chose to forego Kshs. 500 Million it earned from these transactions annually. We sought to understand M-Pesa Kadogo from the product to the thinking behind it and sat down with Ronald Webb, Safaricom’s Director of Financial Services.

According to Ronald, M-Pesa Kadogo was informed by Safaricom’s etho of transforming lives and was also a business decision. “As a company, we felt the need to power the kadogo (small) economy and make an impact to the lower end of the transaction chain. These are individuals transacting Kshs. 100 and below and their transaction attracting extra costs, means you impact their finances,” he says of the decision.

“…there is a smaller number of transactions in the lower end. The volume of transactions then peaks up as the value increases…”

“The business knew for sometime that small transactions on M-Pesa were expensive and therefore not relevant and affordable for people in the Kadogo economy”. From a business angle, Ronald says “If you look at the distribution of transactions across different values, there is a smaller number of transactions in the lower end. The volume of transactions then peaks up as the value increases. It then peaks up higher than that and plateaus at the very high end,” he says. “Eliminating these costs for people who do not use the service then made a lot of sense.”

Make M-Pesa as Cheap as Cash

In the announcing of M-Pesa Kadogo, Safaricom also lowered the lowest permitted transactions to Kshs. 1 from the previous 10 bob. This applies to both person-to-person cash transfer, merchant service and pay-bill transactions (consumer to business transactions). The goal for the company is to make M-Pesa as friction-less as cash in this segment. In essence, M-Pesa is competing with cash transactions, where 94% of all transactions in Kenya take place via cash. “Dealing with cash has an implicit cost and risk to it. Our goal is to make M-Pesa as cheap as cash. The best way to achieve this is to make it simple for those who use cash a lot to transact using our M-Pesa platform”, he says.

In making the decision, Safaricom studied history of billions of transaction and Ronald says depending on the business sense, they might lower the barrier of entry further in the future.

Thinking about it, individuals avoid using M-Pesa for these lower tier transaction owing to the cost factor involved. Ronald says the telco is carefully analyzing how much penetration and activating is taking place around this new initiative. “An ideal situation would be a Mama Mboga able to order for groceries from the market and pay for the same via M-Pesa, have the goods delivered to her by the Boda Boda guy and she pays via M-Pesa and once customers make a purchase, they can directly send her cash via M-Pesa, making M-Pesa the engine of the lower end customer.

Will M-Pesa Kadogo Cannibalize M-Pesa?

“..Safaricom is watching the consumers to see if there is change in behavior especially with multiple repeat transaction. If necessary, they will set in velocity controls..”

M-Pesa Kadogo is an interesting decision as the company is foregoing Kshs. 500 Million in annual revenues. The product is also subject to exploitation from some customers who may opt to make a huge transaction in small chunks of below 100/=. We sought to understand how the company would deal with such instances.

“Our goal is financial inclusion and with this product, we are giving a vote of trust and confidence in the Kadogo economy. We want to make it easy for those in the low end to easily transact while at the same time lowering the barrier of entry for transactions which would have been performed via cash”, he says. “There is immense value to derive going forward and its a necessary play for us”.

On the transaction side, Ronald says that they are watching the consumer to see if there is change in behavior especially with multiple repeat transaction. If necessary, they will set in velocity controls, where if sending several times to the same user will be in the net of velocity control. However, there are yet to effect any changes to limit transactions.

A few years back, Safaricom rolled out Lipa na M-Pesa merchant service that includes the tills and pay bills phases, allowing a consumer to complete transactions via the service. Why not try the same with the Kadogo economy? “With the merchant service, we engage in rigorous know-your-customer, where they have to have licenses, fees, registration, bank accounts and other credentials. This means the barrier of entry for the low end merchant is quite high”, he says. “With free person to person transfer, many traders can use the service for their business and as they continue to grow, they have the ability to sign up for Lipa Na M-Pesa merchant service and we shall let them do it”, he says.