Mobile money substitutes and the basis of competition

April 27, 2010 | Mobile Money | Global | Neil Davidson

In a recent post, I discussed how demand for different services shapes the success of mobile money deployments, and suggested how these conditions might vary across markets. Today I want to address another crucial determinant of the success of mobile money deployments: the competitive landscape.

In every country, mechanisms for bill payment, money transfer, and storing money have existed long before the advent of mobile money. When mobile money services are introduced, customers compare the new option with existing alternatives. There are five key attributes that customers consider when evaluating a new money transfer service: its convenience, speed, safety/reliability, ease of use, and cost. Importantly, customers rank these attributes in different ways: some care a lot about one feature, others about another.

Operators need to be sure that their money transfer service will be superior to existing options in the marketplace along at least one of these dimensions: it should be more convenient, or cheaper, or faster, or more reliable, or easier to use. A new offering doesn’t need to beat the competition along all of these dimensions in order to be successful: given that not all customers value the same thing, simply offering a service that is superior along one dimension will inspire customers for whom that feature is most important to switch to mobile money. And indeed, since the design process for any service usually involves making tradeoffs between these attributes, companies usually have to pick and choose which attributes they will optimize and which they won’t.

Nevertheless, the amazing thing about M-PESA in Kenya is that Safaricom managed to design a money transfer service that outshone the competition along all five of the relevant dimensions. Before M-PESA was launched, Kenyans employed a variety of mechanisms for sending money: bus companies and matatu drivers, the post office, banks, and traditional money transfer houses all offer money transfer services, and many people would simply ask a friend or family member to carry cash by hand. But in a survey of M-PESA users in September 2008,

* 98% said M-PESA was faster than other money transfer services

  • 96% said M-PESA was more convenient than other money transfer services
  • 98% said M-PESA was safer than other money transfer services
  • 96% said M-PESA was cheaper than other money transfer services
  • 99% said M-PESA was easier to use than other money transfer services

I would argue this helps to explain M-PESA’s appeal to such a large swath of Kenyan society (40% of adults, at last count). Safaricom was able to win customers regardless of which attributes they prioritized, because M-PESA outshone the competition along every dimension – in part because the service was so good, but equally because the competitive alternatives were so weak.

What does this mean for operators in other markets? Three things, I think:

1. Operators must analyse existing alternatives to any potential service (whether it is p2p payments or something else) they might offer by mobile money. They need to know exactly how reliable they are, what they cost, how convenient they are, how long they take, and how easy they are to use.

2. Operators need to realistically assess whether they can offer a service that will beat the competition in all of the key attribute areas. Our experience suggests that it will not always be possible to beat all competitors along every dimension as Safaricom did in Kenya: in some markets, pre-existing money transfer options are better than they were in Kenya. But this need not deter operators. What’s important is to design a service that does beat the competition on the attributes that will resonate with target customers.

If, say, the national postal service offers a popular money transfer service in its branches that is cheap—i.e., so cheap that a mobile operator would be unable to match the price while still turning a profit—but slow and inconvenient, operators should try to find a service design that optimizes for speed (which is one of the natural features of mobile money transfer) and convenience (by focusing on a large agent network).

3. Operators need to understand the preferences of their target customers. In the scenario I describe above, it would be important for an operator to make sure that there is a critical mass of consumers who would value speed and convenience enough to pay a bit more before going to market—lest they be unhappily surprised to find no such willingness to pay.

The last thing to note is that this methodology applies as well to bill payments and other mobile money services as it does to money transfer. For any service that can be offered on a mobile money platform, there will be competition—and understanding that competition is the first step to beating it.

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