Safaricom formed strategic partnerships with organisations such as the Central Bank of Kenya, the Commercial Bank of Africa – for local banking services –and the ATM provider, Pesapoint, to establish ATMs throughout Kenya. The local microfinance company Faulu helped the company to launch the pilot. Additionally, Safaricom received funds from DFID in the UK through its Financial Deepening Challenge Fund (which was established to finance PPP projects that would improve access to financial services). All these made for good external stakeholder support, including engagement in programme design.
Political Commitment Good
The Kenyan government owns 35% of Safaricom and this in assisted Safaricom and Vodafone in establishing a strong relationship with the Central Bank, which was integral in getting the M-Pesa deposits insured, as well as the regulatory approval. The Central Bank insures M-Pesa deposits in the banking system under its Deposit Protection Fund.
The government was actively committed to M-Pesa and the Central Bank’s post-audit endorsement of M-Pesa was also a measure of political support.
Public Confidence Fair
Immediately after the programme’s rollout, despite Safaricom being a trusted brand, public confidence in the project was low, due to a fear of fraudulent activities. When SMS receipts were delayed or lost, customers would often accuse the agents of fraud and quickly complain to Safaricom. This has improved and customers are now accustomed to transacting with agents. Overall, the Kenyan public’s trust gradually has increased as awareness of the positive impacts of the service has grown.
Clear Objectives Strong
M-Pesa’s goals were clearly defined and measurable and have been maintained since its launch:
- To achieve a target of 200,000-300,000 users in Kenya.
- To attain monthly target income of a minimum of KES 40,000 (which means aim of achieving approximately 2,667 transactions monthly or 90 transactions daily).
The idea of a mobile currency originally came from DFID researchers in the UK, who noticed that Kenyans were transferring mobile airtime as a proxy for money and suggested that Vodafone launch mobile currency services in Kenya. A pilot project was rolled out in 2005 to check the feasibility of such a service.
The 2005 clearly established technical feasibility, but there were outstanding HR and legal concerns:
- There was a need for agent training and management.
- One of the key challenges facing Vodafone/Safaricom at this stage was that of financial regulation – as M-Pesa was not a banking service it was outwith financial regulations in Kenya. There were particular concerns in the banking sector that it could be used as for money laundering channel.
However, these regulatory issues were addressed through negotiations with the Central Bank and were seen to be outweighed by the positive user reaction.
The project has an efficient team from different backgrounds, and there is an established hierarchical network of agents within the team. M-Pesa has a clear structure with defined roles and responsibilities, including a training mechanism to ensure competence.
Safaricom had developed a local team to manage M-PESA operations. The team consists of over 20 individuals from a range of relevant backgrounds. The company hired an external agency to manage the agent network, and regularly relies on over 50 staff to train and visit agents. There is a department dedicated to providing training materials sessions.
M-Pesa retail agents are responsible for registering new customers and facilitating cash deposits and withdrawals. Retail agents often play a key role in customer support as they are able to quickly and easily contact M-PESA Customer Care.
There are master agents, ‘airtime wholesalers’, who purchase airtime directly from the operator and manage the retail agents. Master agents create accounts in banks that are located near their retail agents, and the retail agents usually visit the nearest bank branch daily to either deposit or withdraw cash from their account.
There is a Safaricom sales team which manages the master agents and reconciles payments for airtime pickup. Bank branches manage cash and M-Pesa float balances for a group of retail agents but do not have a customer-facing role. However, customers can transfer funds between their bank M-Pesa accounts, usually through ATMs.
There were no established measurement methods for the public impact. The company gauges M-Pesa’s impact based on the broad indicators of the number of annual transactions (currently about 240 million) and the number of registered users (roughly 20 million).
M-Pesa has been well aligned with the requirements of the Kenyan central government and central bank as well as the UK government through DFID.
Safaricom established a useful network to launch the M-Pesa initiative in Kenya. The company received technological and funding support in carrying out the pilot and establishing their services. There was strong coordination between all the agents involved in the network. However, there were some problems within the alignment of the customers and the agencies, which were eventually resolved.
Banking partners are the foundation of the M-Pesa service, and Safaricom has secured alliances with all the countries’ major banks, and has an agreement with Western Union for international money transfers.
By Wanda Orlikowski, Alfred P. Sloan Professor of Management, MIT Sloan School of Management and MIT Center for Information Systems Research and Michael Barrett, Professor of Information Systems & Innovation Studies, Judge Business School, University of Cambridge
Effectively doing business in emerging markets is a key issue for organizations: developing countries are among the fastest-growing economic regions in the world. But emerging markets are characterized by volatility and ambiguity as well as considerable uncertainty. They are very different from the mature, developed, industrialized markets that are more familiar to most corporations. As a result, trying to do business in ways that succeeded in developed markets is unlikely to work well.
Using the case of Vodafone’s M-PESA system, this briefing examines the opportunities and challenges of doing business in emerging markets. We describe the success of M-PESA in Kenya and the subsequent disappointment when M-PESA was replicated in Tanzania. We show how emerging markets are likely to be more different from than similar to one another. Thus, companies should consider a strategy of exploration as they attempt to expand within emerging markets.
UK-based Vodafone Group is the world’s second-largest mobile telecommunications company (2013 ROA of 13.2% compared to an industry average of 5.0%). In 2005, Vodafone built a small-scale digital innovation for Kenya – the M-PESA mobile money system (“M” for mobile, and “PESA” for money in Swahili) – that facilitated the transfer of money by mobile phone without a bank account. This application is particularly powerful in a country like Kenya, where some 90% of the population is unbanked. After early difficulties and subsequent learning, Vodafone revised and repurposed this limited innovation, developing in the process the most successful mobile money service in the world, and one that everyone is trying to emulate.
M-PESA was initially developed by Vodafone as a mobile-based, microfinancing application funded partially by the UK Department for International Development to extend financial access to the unbanked populations in East Africa. Managed by the corporate social responsibility (CSR) group within Vodafone, M-PESA was designed for a niche market: microfinancing institutions and their clients. The project was intended to be low-cost, low-key, small in scale, and modest in scope – focused on addressing issues of financial inclusion within the developing world.
Vodafone’s CSR group partnered with Sagentia, a boutique technology development firm in the UK, to develop the application. Developers piloted the application in Kenya with the local mobile provider Safaricom. After running the pilot for a few months, the project team found that rather than facilitating microloan disbursements and repayments, the application was being used for general money transfers by the clients. The team realized there was an opportunity to develop an alternative, broad-ranging money transfer system, and Sagentia and Vodafone consequently modified the initial application to enable electronic deposits, payments, and withdrawals of money via mobile phones.
The redesigned M-PESA system launched in Kenya in April 2007, growing rapidly through uptake and user innovation of new services. Now used by over 17 million Kenyans – which is more than two-thirds of the adult population – it is estimated that annually some 31% of the country’s GDP flows through it.
In 2008, a year after launching in Kenya, Vodafone attempted to replicate this success in neighboring Tanzania, a country that resembled Kenya in many important ways – size of population (40+ million) and main languages spoken (Swahili and English), as well as levels of literacy, unbanked, and mobile phone usage. But M-PESA in Tanzania did not grow on anything like the scale and scope of M-PESA in Kenya (see Figure 1).
Figure 1: Growth of M-PESA in Kenya and Tanzania
Source: MIT CISR
Neighbouring emerging markets: So close, yet so far
Our analysis revealed three reasons why the Tanzanian deployment failed to generate the results accomplished in Kenya.
Consumer need. Kenya had a long tradition of rural to urban migration, with members of a household moving to the cities to work and regularly sending money back to their families. Most Kenyans do not have a bank account, so money was traditionally carried home by traveling back to the rural areas, a costly and risky means of moving money. Consequently, there was a crucial need for a safe, secure, and reliable mechanism for transferring money over large distances. M-PESA filled this void. It was launched with a clear and simple marketing campaign – “Send Money Home” – that resonated powerfully with a pressing consumer concern.
In Tanzania, the message of “send money home” did not resonate. In contrast to Kenya’s tradition of urban migration, Tanzania’s experiment with socialism followed a “villagization” policy that created far less rural migration to the large cities, and much less need to “send money home.” The compelling value proposition for a mobile money transfer system proved harder to identify and articulate.
Infrastructure. Safaricom in Kenya was the biggest network provider (at 70% of market share in 2007) with a very large distributed agent network ready, available and able to start selling M-PESA services. Growth in the agent network has kept up with growth in usage of M-PESA – expanding from 350 to 28,000 retail outlets in four years. Current estimates have the number of M-PESA agents at over 40,000.
At launch of M-PESA within Tanzania, the local network provider – Vodacom – was not a major player, with only 41% of subscriber market share. It had a smaller infrastructure and a considerably lower number of agents (numbering some fifty retail outlets operated through five national retailers) who were largely concentrated in the cities.
Regulatory environment.Kenyan regulators were open to financial innovation because of the low level of bank penetration. As a result, they worked closely with Safaricom, learning from the early experiences of M-PESA and formalizing regulations later. As one commentator put it, their policy was that “regulation should follow innovation.”
In Tanzania, the Central Bank was similarly interested in financial inclusion and approved the service without stringent regulations. However, it lacked a close relationship with the local mobile provider (Vodacom), and thus required more monitoring because of concerns about the risk of money laundering. Furthermore, in contrast to Kenya, Tanzania lacked a national ID system, which precluded the use of a readily available unique personal identifier for registering and authorizing M-PESA transactions. Signing on to and using the M-PESA service in Tanzania proved to be a cumbersome and time-consuming process.
While these important differences in local conditions help to explain some of the variation in M-PESA results, they reveal a more consequential underlying lesson: different strategies toward the digital innovation resulted in different innovation practices and outcomes in the two emerging markets.
Exploration vs. replication strategies in emerging markets
In Kenya, Vodafone followed a strategy of exploration(see Figure 2 for a comparison of strategies). It ran pilots, partnered with local companies, and learned from what was working and what wasn’t. When it found that the initial concept did not work well on the ground in Kenya, it was willing and able to abandon initial assumptions and shift strategy. Vodafone’s collaboration with Sagentia and Safaricom allowed the development of a more general application and service infrastructure for the Kenyan context. Together these companies worked with the Central Bank to establish the reliability and security of the technology platform and they ensured that agents in the network were adequately trained and had in-store support, thus affording customers a consistent, dependable, and easy-to-use service experience throughout the country.
Figure 2: Two different strategies toward digital innovation in emerging markets
Source: MIT CISR
In Tanzania, Vodafone followed a strategy of replication. Rather than sending developers to Tanzania to run pilots and learn from practices in the field, it reasoned that the neighboring countries were similar on many levels, and having refined M-PESA over the past year in Kenya, decided to manage the implementation process from Europe. As a result, it did not realize that “sending money home” would not resonate with Tanzanian consumers; it was unable to recognize that the different size and concentration of the agent network within Tanzania would require different training and support; and it did not develop trusting or collaborative relations with the regulators. Choosing to reuse the Kenyan marketing and education materials, Vodafone failed to discover what might have become the indispensable “killer app” within this emerging market.
While markets in developed countries share many common features, markets in emerging countries often have more differences than similarities. In such conditions, a replication strategy may not be an effective option as it does not allow the experimentation, iteration, and adaptation needed for learning and leverage. Thus, while digital innovations offer a powerful opportunity for doing business in emerging markets, they require a strategy of exploration.
Republished with permission from theMIT Sloan Center for Information Systems Research.