It’s often said that mobile money is a brand new business model. Neither traditional value-added services offered by mobile network operators nor financial services offered by bricks-and mortar-banks are very helpful as models when trying to think through the economics of mobile money or the strategic dynamics that govern the industry.
But we do have some clues about how mobile money markets will evolve. Mobile network operators and other providers that offer mobile money services are, structurally speaking, offering platforms that allow users to interact with each other, forming a network. And it turns out that such platform-mediated networks are plentiful in our world. To take an example that’s close at hand, Microsoft Word, which I’m using to type this paragraph, is a platform, created (and monetised) by Microsoft, that allows me to share documents with any other user in the world who also has Word installed. Analogously, a mobile money service like M-PESA in Kenya is a platform which allows users to transact financially with each other.
Why is this important? Well, platform-mediated networks behave in surprising ways. Sometimes they grow explosively; other times-as network operators and banks in many markets have learned-it can be tough to generate substantial customer adoption of mobile money services.
That’s in part because the growth, or stagnation, of platform-mediated networks is affected by network effects.
Network effects apply when the users of a given network care about how many other users are in the same network. Positive network effects are evident when users of a network want more users in the network with whom they can interact. In networks with positive network effects, the membership in the network gets more and more valuable as the network grows.
Strong, positive network effects can catalyse explosive network growth. Successful social-networking like Facebook are a good example of this. The same can be said of M-PESA. As the number of people in Kenya using M-PESA grows, signing up becomes more and more attractive to non-users, as the circle of people to whom they could send or from whom they could receive money expands. This encourages more new joiners, which accelerates the cycle.
However, the explosive growth of M-PESA has not been replicated anywhere else in the world, despite more than one hundred deployments. Why don’t network effects catalyze explosive growth every time? The answer, you may be surprised to read, has to do with penguins. Imagine a group of penguins at the edge of an ice floe, looking hungrily into the water at their feet. However, none of them jumps in to find fresh fish for dinner. What holds them back? The prospect that in addition to dinner, a killer whale might lurk below as well, waiting to devour the first penguin to dive in. In the face of uncertainty, none wants to jump in. So all go hungry.
Most readers of this blog will readily identify how this little parable applies to mobile money. In many markets today, potential users of mobile money services act rather like penguins. They know about the service, but they don’t sign up, often because they’re worried about the security of their money. And with no one, or few, users of the service to signal “come on in, the water’s fine!”-no one signs up.
And here we come to the pernicious role that network effects can play. A mobile money service gets more and more valuable to potential users as the number of current users grows. But conversely, a mobile money service with few users is not very valuable, so there’s little incentive for new users to join. Economists call this trap ‘excess inertia,’ or the ‘penguin problem’. And it has been the death of many, many platform businesses. Apple, the American computer company, isn’t dead, but the failure of the Mac operating system to move out of its niche and into the mainstream is attributable to the penguin problem. Likewise, the business models of many of the internet start-ups of the late 1990s were predicated on signing up large numbers of users to platform-mediated networks; when they didn’t, the companies folded (and the tech bubble burst).
The takeaway for mobile network operators that have launched or are going to launch mobile money services is that it can be very difficult to sign up early adopters to your service, since they won’t have many other potential transaction partners. But don’t worry: there are ways to overcome the penguin problem, and to ‘tip the market’ in your favour. We’ll explore these techniques in a series of three posts over the next few days.
Part 2: Subsidize early adopters
Part 3: Market segmentation