The following is a guest post we’re pleased to share by Salah Goss and Clara Veniard from the FSP program at the Bill & Melinda Gates Foundation

We often hear that M-PESA was able to scale quickly because it targeted an unmet need: urban to rural remittances.  Safaricom based the initial launch of the M-PESA service on the ‘send money home’ proposition because a large proportion of split families in Kenya needed a way to send money to relatives in rural areas but had few ideal options to do so.

In many markets, however, such a clear unmet need does not exist.

The Philippines is a prime example of this. Even though mobile money providers have been in the market for over ten years, they have struggled to gain market share in the face of well known and well established payment providers.  Knowledge and usage of mobile money services are low with less than 4% of users of all payment service providers reporting usage of mobile money services and awareness of four mobile money products ranging between 28% and 46%, even though more than 70% of users have access to a cell phone.

Our study focuses on the demand side of domestic payment services: bill payments and money transfers

In 2010, the Bill & Melinda Gates Foundation launched a study with Bankable Frontier Associates to understand the demand for domestic payment services in the Philippines and to identify potential opportunities and unmet needs for mobile money providers to target.  The study found the Philippines is an active and mature payment market, with a myriad of payment providers, including payment centers, banks and pawn shops to choose from. Only 28% of respondents reporting they make no payments and most Filipinos are aware of and using multiple service providers.

In our study, we focused on three primary types of domestic remote transactions mobile money has the potential to target: bill payment, money transfers, and loan payments.  Bill payments are most common and are used by 55% of the population.  They are followed by transfers (used by 33% of the population), and loan payments (used by 16% of the population).  We did not explore access to financial services, although 29% of respondents claim to be saving at home or in banks, or other potential drivers of mobile money that have had success in other countries, such as public transportation and online purchases.

In this paper we use the results from the study to explore five alternative and almost equally used channels for bill payments or money transfers. Pawnshops are the preferred channel for money transfers, with 29% of Filipinos citing the leading pawnshops (M Lhuillier and LBC) as the main payment service provider in the last twelve months.  Payment centers are used to pay bills by 21% of Filipinos while bank transfers are the prefer method for 17% of Filipinos for both money transfers and bill payment. Informal transfer options are the primary method for money transfers and bill payment for 15% of Filipinos.  Alternatively, 13% of Filipinos pay their bills directly or are direct payers.

Existing payment channels are good but far from perfect

In order for mobile money to take off in competitive markets like the Philippines, providers will not only need to identify a high potential target opportunity, but also ensure their ability to effectively serve the market’s needs relative to the competition.  We have identified user pain points in the following areas when paying a bill or conducting a money transfer: speed of delivery, trust and reliability, price, and customer service.  Consumers in the Philippines have access to a number of channels that may provide either speed, trust or good customer service but none of them is ideal, leaving room for a service that gives customers more of what they value.

For bill payments, customers can pay in a bank or payment center.  Both options have their short comings: although banks are trusted (especially with large amounts), they suffer from long queues, unfriendly and limited staff.  Payment centers are cheap and closer to home than a biller’s office, but also suffer from long queues and delays to credit customer payments at the biller.  In addition, neither banks nor payment centers are widely accessible, especially in rural areas.  In fact, 32% of users reported they would be willing to pay PhP 50 (US$1.50) for bill payment services that do not require them to leave their home.

For money transfers, customers have the option of using banks,” big brand” money transfer services, pawnshops or informal channels.  Pawnshops are the most popular given their ubiquity, trusted brand and speed (if picked up at the pawnshop) but the most popular pawnshops, M Lhuillier and Cebuana, are not completely customer friendly.  M Lhuillier has long queues, strict verification and unsafe locations and Cebuana has high fees.  The larger transfer companies like Western Union and LBC have high attrition rates due to high fees and other problems.  LBC, for example, offers door-to-door service, but it can be slow and their customers complain that their neighbors know when money is delivered.  Consumers also complain about the stigma of entering pawnshops.  Banks offer security, privacy and trust for larger transfers, but are not always accessible.

Although alternative channels are not perfect, mobile payment providers find it difficult to convince consumers to try a mobile payment service as evidenced by low usage figures (4%) compared to other payment options.  According to our study, users of one type of payment providers tend to be sticky.  Our survey conducted among users of payment services found that fewer than 10% of one-time users have stopped using a service.  They also tend to think their payment service is the best, providing high scores on trust, convenience, speed, security, fees and customer service.  Users say they would utilize a new payment service in addition to their current service, rather than in lieu of it.

Some segments are still not served by formal providers

Mobile payment providers also have an opportunity to target market segments not served by formal providers such as personal direct payers and users of informal service providers.

33% of the population still pays for their bills and loans directly at the biller’s office, and do not use other intermediaries such as banks or payment centers.  The vast majority of personal direct payers (75%) indicate that they trust only themselves to deliver payments, although 57% agreed that paying bills would be easier to do via a third party.  Perhaps by tackling the issue of trust, mobile money operators can convince these potential customers, who tend to be male, to try their services for the convenience they can offer.

Users of informal service providers may also be a potential market niche.  25% of all users use informal service providers on a regular basis for smaller, regular transactions.  These users tend to be rural and poor women who generally make bill and loan payments intra-island.  In fact, these users in rural areas rarely pay bills or loans through formal service providers, and when they do, they use the leading pawnshop.  Although informal options are low cost, they suffer from delays, the sender has no automated confirmation of when the money arrives, funds can be stolen, and unanticipated costs may arise (such as tips or paying for food or petrol of the deliverer). Similar to a country that does not have many formal payment options, such as Kenya pre-MPESA, providing an alternative to the existing options can meet a need that resonate strongly.

Lower value transfers are an untapped opportunity

Mobile payment providers may also have an opportunity to facilitate lower value transfers between family and friends that occur informally and that higher cost channels (including pawnshops) cannot profitably serve.  Our study found that 52% of Filipinos receive money from friends and family (either as a loan or a remittance) in the event that they need to make a purchase or pay a bill but do not have enough money.  The rest seek money from alternative sources: 15% will do something to earn the money themselves, 12% will wait for their salary and 10% will go to an ATM to withdraw cash. Filipinos also regularly send or receive money, for emergencies, daily household expenses, education, bill payment, or business expenses.  Sweeping these low value transactions through mobile money services would mean a significant increase in their volume of transactions as well as customers. In addition, 33% of all users said if they could make cross payments between mobile money schemes, then they might find this persuasive enough to try them.

Next steps for mobile money providers

During the last ten years, mobile money providers in the Philippines have struggled to gain traction in the market.  They compete against an active payment market with numerous strong alternative channels for bill payments and money transfers.   However, these alternatives are far from ideal, according to customers themselves, and niches exist in the payments market that have not been targeted.

Mobile money providers have an opportunity to attract customers away from existing payment options, persuade customers to use their services in addition to their current payment provider or to target segments that are not currently served by formal payment providers, such as personal direct payers and users of informal service providers.  In addition, they may have an opportunity to capture lower value transfers..  The challenge faced by mobile money will be to encourage customers to try their service and to convince them through early trials of the superior value of the service.  The extent to which they will succeed in doing so will depend on the investment mobile operators are willing to make in strategic marketing, getting their fee structures right and creative partnerships with banks and others that may add value to the customer experience.

You can download the full report from the BFA website.