In most markets, if you compare the margin that retailers earn from selling prepaid airtime to the commissions that mobile money agents earn buying or selling e-money, you will find that the former is almost always higher than the latter. This makes recruiting mobile money agents from your pool of airtime retailers tough, an issue we discussed in a sidebar in “Building, Incentivising, and Managing a Network of Mobile Money Agents”. But we didn’t confront the more fundamental question: why do operators set mobile money commissions lower than the margin they offer airtime retailers?
At one level, the answer is obvious. The less you pay agents, the more attractive the mobile money business case becomes. What’s more, when operators sell airtime on their mobile money platform, they are effectively switching customers to a lower-cost channel and therefore reduce their cost of goods sold. These savings flow straight to the bottom line.
But of course, there is the agent’s point of view to consider. The return that any retailer earns is a function not just of the margin they earn, but also the volume of goods they sell. That means that you can persuade a retailer to add a lower-margin good to their inventory if they accept that that good will be faster moving.
Safaricom got away with offering retailers M-PESA commissions that were lower than airtime margins because they were able to ensure that agents were busy, which meant that their inventory of e-money and cash was turning over fast. I suspect that the average M-PESA agent in Kenya does an order of magnitude more volume compared to the average airtime retailer, which more than compensates them for the lower margin they earn on each transaction. Safaricom achieved this by closely managing the ratio of customers to agents, never letting the number of agents get so large as to dilute the volume of transactions, and thus the return, of the average agent.
In many markets, however, mobile money agents actually perform fewer transactions per day than airtime retailers do. This implies that the business case for serving as a mobile money agent is worse than for selling airtime both in margin and volume terms. Is it any wonder that agent illiquidity is one of the biggest challenges that face mobile money deployments? Agents have options when it comes to deploying their capital, and if mobile money doesn’t seem like a good one, they’ll invest in something else.
The moral is as general as it is simple. You can find a channel for a low-margin good so long as it will sell fast. You can find a channel for a slow-moving good so long as it is high margin. But trying to find a channel for a slow-moving, low-margin good is doomed to fail.
The good news is that this means operators with an underperforming channel have two different levers to pull to restore agents’ engagement and liquidity. The first and probably best is to increase the volume of transactions that agents perform. The other is to pay agents better commissions. But either will help.