Five business case insights on Mobile Money 2011
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Five business case insights on Mobile Money 2011

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Five business case insights on Mobile Money 2011 Five business case insights on Mobile Money 2011 Presentation Transcript

  • Five business case insights on mobile moneyApril, 2011
  • Five business case insights on mobile moneyHow to think about the overall revenue potential?1. Mobile money contribution may be small compared to current MNO total revenue but could be important for future revenue growth2. Mobile money success is highly dependent on the size of the MNO’s voice customer baseWhat are the most critical business case drivers?3. Direct profit from mobile money depends on growth in “electronic-only” transactions, i.e., more transactions per deposit4. There are indirect benefits of mobile money to MNOs, but these only become significant when mobile money reaches scaleHow should MNOs think about scale and profitability?5. To capture long-term profits beyond domestic transfers, mobile money implementations will need to “leave money on the table” in the short term Note: This report was informed by CGAP’s Mobile Money Expectations Survey, CGAP M-PESA profitability analysis, CGAP/Dalberg analysis of mobile money business case, CGAP/BFA/AfricaNext research on external market effects on mobile money, and other published data/research 2
  • 1. Mobile money contribution may be small compared to current MNO overall revenue but could be important for future revenue growth 3
  • Mobile money is expected to be cash flow positive within 3 years oflaunch and represent 10% of total MNO revenue within 10• Mobile money is expected to be cash flow positive within 3 years – 43% of respondents to the Mobile Money Expectations Survey believe their implementations will be cash flow positive in under 3 years – These expectations match some actual experience: (1) CGAP analysis estimates that M-PESA Kenya reached positive cash flows in year 3; (2) GSMA MMU estimates that MTN Uganda will reach positive cash flows in year 2 or 3• Mobile money is expected to be 10% of overall revenue in 3-5 years – 80% of respondents to the Mobile Money Expectations Survey expected mobile money to comprise 10% total MNO revenue within 5 years of launch – Even at 10% of total revenue, mobile money can comprise up to 100% of current non- voice revenue MM as 10% of Non-voice (2009 revenue) Voice Revenue Overall Revenue Revenue Airtel (India) $713,948,148 $6,523,750,959 $713,264,421 Globe (Philippines) $119,401,482 $609,983,230 $614,942,421 MTN (Ghana) $81,755,100 $760,609,292 $56,941708 4
  • M-PESA has exceeded these expectations, but most others are not ontrack to reach 10% of total MNO revenue in 3 years• M-PESA Kenya revenue surpassed USD 94 million by year 3, equal to 9% of Safaricom’s total annual revenue• CGAP estimates that other mobile money services are not on track to meet these direct revenue expectations – Even MTN Uganda, considered a success in many ways, is not likely to meet those revenue expectations Mobile money revenue compared with expectations (year 3 as % total MNO revenue) 12% 10% 8% 6% 4% 2% 0% Expected Rev from Mobile M-PESA Rev (Actual) MTN Uganda MM Rev Major African MNO MM Money* (Projected)† Rev (Projected)‡ *CGAP Mobile Money Expectations Survey, † MMU research 5 estimates including indirect benefits, ‡CGAP research estimates
  • Even with diminished revenue expectations mobile money is a key source of new revenue growth for MNOs as voice margins fall • While direct contribution of M-PESA to Safaricom revenue was 9% in year 3, M-PESA’s contribution to revenue growth exceeded 30%Core business revenues for MNOs have been This makes mobile money revenue increasinglydeclining precipitously across markets… important for MNO growth Declining MNO ARPU, 2005-2010 40% % contribution of M-PESA to 30 Safaricom revenue & revenue growth* 35% 30% 25 25% 20 20% USD 15 15% 10% 10 5% 5 0% 2008 2009 2010 0 Africa Americas Asia/Pacific To Incremental Revenue Growth To Total Revenue *Based on analysis by CGAP/AfricaNext 6
  • 2. Mobile money success is highly dependent on the existing size of the MNO’s voice customer base 7
  • Pre-existing MNO market share key to mobile money successSafaricom Kenya had dominant position in the Pre-existing voice market share importantmost concentrated mobile market among all for 4 main reasons:MNOs implementing mobile money in Africa 1. The vast majority of mobile money Relative fragmentation in African customers are likely to come from voice base. mobile money markets (HHI*) 0.6 2. Mobile money by itself has not been shown 0.5 to be a powerful tool for voice customer growth and acquisition, so it is even more 0.4 important to start mobile money with a large pre-existing customer base 0.3 0.2 3. Successful payment systems require a critical mass of adoption in order to succeed. 0.1 Large pre-existing customer base important to reaching adequate level of adoption 0 Q2 2007 – Q4 2010 4. Dominant position in a market usually Average (all Africa) Kenya Ghana Uganda means greater power and control over airtime Mali Cote dIvoire distributors, which can be important to getting Tanzania Senegal an agent network scaled up effectively South Africa * Herfindahl-Hirschman Index: measure of market concentration 8
  • Mobile money launched in environments with critical mass of voicesubscribers• Overall mobile penetration was at least 20 percent but no more than 60 percent at the time of the first service launch in select pioneering mobile money markets• First movers had at least 30 percent voice market share at the time of launching mobile money 90% 80% Safaricom – M-PESA 70% SMART Philippines 60% – Smart Money Market Share 50% Orange Money Cote-d’Ivoire 40% Globe Philippines – GCash MTN Mobile Money Cote-d’Ivoire 30% Zain - Sokotele 20% Zain - ZAP 10% Yu - YuCash 20% 40% 60% 80% Market Penetration First mover 9
  • Modeling exercise showed that revenue potential is greatest for thelargest MNO in a market, even when it is not the first mover• Because existing voice market determines adoption of mobile money, even if the second largest MNO moves first, it will likely make less than the largest MNO launching second• Largest MNO could secure 60% more in revenue when second entrants come on its heels (2-7 months)* Value of mobile money over first 18 months by % total MNO customers registered $ NPV 1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% % MM uptake First mover alone First mover with second entrant Second mover, T0 Second mover, T18 *Based on CGAP/BFA modeling exercise voice market factor influence on MM success 10
  • MNO market structure determines mobile money success factors and strategyCONCENTRATED MARKET: FRAGMENTED MARKET 1: FRAGMENTED MARKET 2:dominant MNO captures most partnerships are key to success second mover among largestvalue as either 1st or 2nd mover but limited revenue must be split MNOs has chance to catch up Single dominant player No dominant player, 2 market leaders with Desc. Desc. with a number of much Desc. multiple players with similar market shares smaller MNOs similar market shares Dominant player could Unlikely that any single Ability of mobile money to capture significant value player could capture take hold in this market in direct transfer revenue significant value from and capture significant and indirect revenue as money transfer business value is uncertain Strategy Strategy Strategy first or second mover Success determined by Smaller players unlikely to which MNOs are able to Among the 2 market capture significant value form successful leaders, second mover from MM, even if they partnerships to expand still has a good chance to partner with other small reach of MM catch up players implementation 11
  • 3. Direct profit from mobile money depends on growth in “electronic- only” transactions, i.e., more transactions per deposit 12
  • Looking at M-PESA Kenya case, revenue grew 6.6 times faster than costs between years 1 and 3 causing huge leap in profits*M-PESA Kenya EBITDA grew from USD - 6.6 times faster revenue growth compared10 to 30 million between years 1 and 3 to costs in the same time period $120.0 Revenue $35.0 $100.0 $30.0 $94.5 $80.0 $25.0 M-PESA Estimated EBITDA 158% $20.0 $60.0 (millions USD) $15.0 692% $40.0 Millions USD $10.0 $36.6 $20.0 $5.0 $4.6 $- $- Yr 1 Yr 2 Yr 3 Yr $(16.2) 1 Yr 2 Yr 3 $(5.0) $(20.0) $(10.0) Breakeven at 5.3 million $(40.4) customers assuming Yr $(40.0) 150% $(15.0) 2 avg transaction numbers & breakdown $(63.2) $(60.0) 81% Notes: $(80.0)- EBITDA estimates do not include M-PESA Management personnel or G&Acosts Costs-EBITDA for FY08-10 are based on our low-end cost estimates *From M-PESA Profitability Analysis by CGAP based on publically available data 13
  • There are 3 main drivers behind this level of direct profitability growthfor mobile money 1. Growth in overall transactions/customer Direct profit 2. Change in cost structure away from fixed drivers marketing costs towards variable costs 3. Growth in ratio of “electronic-only” transactions to agent-based transactions Indirect profit drivers 14
  • Growth in overall transactions per customer is important to mobile money profitability growth • Growth in transactions per registered customer comes from growth in ratio of active customers to inactive customers and growth in transactions per active customersHigh inactive customer rates mean each active Rapid profit growth comes when not only thecustomer must generate large amounts of ratio of active customers increases, but eachrevenue for mobile money to see profits active customer also transacts more Operating Costs per Active Customer M-PESA Kenya growth in Technology Marketing SG&A Customer Service transactions/customer/month 6.0$16.00$14.00 5.0$12.00 4.0$10.00 $8.00 3.0 $6.00 2.0 $4.00 $2.00 1.0 $0.00 0.0 50% Active 10% Active 1% Active Yr 1 Yr 2 Yr 3 15
  • Mobile money profit increases as cost structure shifts away from fixedmarketing costs towards “revenue-generating” costsM-PESA Kenya cost structure changes Variable Agent Set-up Agent Management Customer Service Technology Customer Acquisition Marketing Agent Commission 100% Agent CGAP estimates that marketing & 90% Commission customer acquisition* costs more than 80% halved between FY 2008 and FY 2010 70% Marketing Agent as a percentage of total cost Commission 60% 50% 40% As customers and transactions have Customer Marketing Acquisition grown, agent commissions have 30% Customer Acquisition surpassed all other cost types 20% • agent commissions are variable Technology Technology 10% costs directly tied to revenue generation 0% Yr 1 Yr 3 16
  • Direct profit growth largely attributable to growth in ratio of “electronic-only” transactions to agent-based transactions• Growth in “electronic-only” transactions means customers are performing more transactions for each deposit at the agent Change in Tx/Customer/Month • In our estimate, M-PESA Kenya 6.0 “electronic-only” transactions grew 5.0 35% faster than agent transactions Electronic- 1.9 only value 4.0 transactions 1.4 • “Electronic-only” transactions are Balance 3.0 inquiry cheaper. In our estimate, M-PESA 2.0 0.7 earns an estimated 18% weighted Agent transactions (cash in/out) average gross margin on agent- 1.0 based transactions compared with 0.0 almost 100% gross margin on Yr 1 Yr 2 Yr 3 electronic-only transactions 17
  • 4. There are indirect benefits of mobile money to MNOs, but these only become significant when mobile money reaches scale 18
  • There are 2 main drivers of indirect profit stemming from mobile money Direct profit drivers 1. Airtime purchased through mobile money reducing cost of sales Indirect profit drivers 2. Use of mobile money reducing customer churn rates 19
  • Airtime cost of sales and churn are primary cost drivers for MNOs, making them the main targets for indirect benefits from MMSelling airtime direct to consumers through Churn (or the percent of customers anmobile money can save MNOs over 20% in MNO loses every month) is rising, costingcost of sales in scratchcards MNOs millions in lost revenue Airtime sales thru Airtime sales thru scratch-cards mobile money Global MNO churn rate, 2005-2010 3.40% MNO MNO 3.20% Card printing Airtime sold direct 46% increase in to consumer 3.00% 5 years Airtime dealer 2.80% Top dealers buy at up to 20% discount 2.60% 2.40% Small retail shop 2.20% Customer Customer 2.00% Probably more important as indirect impacts of Churn reduction could have very significant mobile money from reductions in airtime cost benefits for MNOs, but very difficult to attribute of sales are easily measured causal effects of mobile money on churn 20
  • Indirect benefits can represent up to 50% of overall benefits to theMNO from mobile money Estimated Direct and Indirect Profits Estimated Direct and Indirect Profits from MTN Uganda (from GSMA) from another major African mobile money implementation 7% 7% 31% 62% Retained ARPU from churn reduction Airtime distribution savings Direct revenue Uplift in voice/data usage 21
  • …but indirect benefits are only significant when mobile money reachesa large proportion of total MNO voice customers• Comparing averages suggests that mobile money reduces churn… – Analysis of a major Africa mobile money service shows subscribers churn 60% less than general subscribers (2.18% versus 5.71% monthly churn) – Safaricom churn has remained flat since M-PESA launch, but as competition has increased in the same period M-PESA may have prevented increase in churn• …but more than 20% of the voice customers may need to be using mobile money to see a meaningful impact on revenue – Registered users in most markets are under 10% of subscriber base unlike 77% for Safaricom in Kenya and 17% for MTN Uganda Cost savings from reduced churn increases linearly with % of MNO customers utilizing MM 4.0% Cost savings as % total MNO rev. Almost 60% of total 3.5% MNO customers 3.0% must be registered 2.5% for MM before 2.0% indirect benefits 1.5% from churn 1.0% reduction surpass 0.5% 2% of MNO 0.0% revenue % total MNO customers registered for mobile money 22
  • …but indirect benefits are only significant when mobile money reachesa large proportion of total MNO customers• Cost savings from airtime sales through mobile money are highly dependent on the scale of the mobile money business – 25% of total MNO airtime must be converted from scratchcard sales to mobile money sales before cost savings surpass 2% of MNO revenue Airtime sales cost savings increase linearly with % of airtime sold through MM 10.0% Cost savings as % total MNO rev. 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% % total airtime sold through mobile money – 20% of total Safaricom airtime was sold through M-PESA Kenya in its 3rd year of operation, but other MNOs have not matched this growth rate 23
  • 5. To capture long-term profits beyond domestic transfers, mobile money implementations will need to “leave money on the table” in the short term 24
  • To capture long-term profits beyond domestic transfers, mobile moneyimplementations will need to “leave money on the table” in the short term None of these pricing strategies above preclude what MNOs need to do operationally to create a successful mobile money business, i.e., agent network management, marketing etc.
  • Volume of everyday small business or merchant transactions are likelyto be at least 10x the size of domestic transfers 1. As is typical of most developing countries, in Kenya, medium and small scale enterprises make up 90% of enterprises and account for over 20% of GDP. Everyday small business or merchant transactions 2. In India consumer to business payments are far more than 10x the volume of domestic transfers ~ at least 10x in volume Domestic transfers 26
  • Current mobile money pricing aims to maximize profits from domestictransfers, but hinders growth into the merchant payments marketFor a large domestic transfer MM pricing islow, but for smaller payment sizes the cost At a basic level, pricing that makes transacting at lower transaction sizes moreis prohibitive expensive will make it harder for low-income customers who in many markets are likely to Estimated total cost of MM transfer be the larger share of customers as percent of transfer volume 12.0% This pricing will make it harder to scale in 10.0% 10.9% domestic transfer but will also make it harder Lower value to drive growth in small business or transactions merchant payments 8.0% 5x expensive • Avg. transactions between merchants and 6.0% consumers are smaller than domestic transfers, making many prohibitively 4.0% expensive with current pricing schemes • Domestic transfers typically happen across 2.0% 2.5% large distances where the cost of moving cash is high. Merchant payments happen 0.0% face to face where the cost of cash is less USD 10 Transfer USD 61 Transfer tangible, reducing willingness to pay From CGAP Branchless Banking Pricing Survey 27
  • This short-term focus may hinder customer adoption from ever reach “tipping point” scale to capture small merchant paymentsMerchant payments require a “tipping Pricing to maximize P2P profit may preventpoint” scale of adoption to be valuable: a mobile money service from ever reaching this level of scale • Merchants need to see lots of consumers using a payment system and consumers need to see lots of merchants Price Illustrative P2P Demand Curve Consumers max profit price Anchor product Tipping point scale Scale for anchor Customers Merchants product max profit 28
  • Similarly, the volume of payments between consumers & institutions(gov’t & corporations) dwarf those from consumer to consumerIn India, payment flows between consumers and In Kenya M-PESA, while exhibiting massivegovernment are 40 times the size of total payment growth in the P2P space, has likely captured lessflows from consumer to consumer than 7% of the total Kenya payments market India payments landscape 60000 Kenya GDP times estimated velocity of money (1.63) 50000 40000 Millions USD 30000 20000 10000 0 Total Kenyan payments Total M-PESA transfers market (2009) (FY2010) 29
  • MM implementations will only be able to capture institutionalpayments once they reach a “tipping point” scale of consumers• M-PESA Kenya corporate accounts for disbursing and receiving payments to consumers grew exponentially once M-PESA reached 7 million customers M-PESA corporate account growth related to end customer acquisitions 12,000,000 350 300 10,000,000 M-PESA registered customers M-PESA corporate account 250 8,000,000 200 6,000,000 150 4,000,000 100 2,000,000 50 0 0 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10 Subscribers Corporate Accts 30
  • Merchant & institutional payments increase exponentially withcustomer growth while P2P transfer revenue & indirect benefitsincrease only linearly with customers Growth in revenue sources related to customer growth 30.0 9.0 Revenue Breakdown (millions USD) 8.0 25.0 If revenue at scale from Millions of customers Consumer adoption as affected by price per 7.0 indirect benefits and 20.0 domestic transfer 6.0 capturing 5.0 merchant/institutional 15.0 4.0 payments dwarfs the 10.0 3.0 domestic transfer 2.0 opportunity, maximizing 5.0 customer adoption by 1.0 offering “anchor products” - - for free may result in $0.40 $0.20 $0.00 greater overall returns to Price per transfer (USD) MNOs P2P transfer revenue Indirect benefits (churn, airtime) Institutional payments (freemium) Small merchant payments Price/transfer $0.40 $0.20 $0.00 Active Customers 2,000,000 4,000,000 8,000,000 31
  • Significant indirect benefits of mobile money are also onlyrealized with large scale customer adoption• Indirect benefits can represent up to 30% to 50% of overall benefits to the MNO… 1. Airtime purchased through mobile money reducing cost of sales Indirect profit drivers 2. Use of mobile money reducing customer churn rates• …but indirect benefits are only significant when mobile money reaches a large proportion of total MNO customers – More than 20% of the voice customers need to be using mobile money to see a meaningful impact on churn – 25% of total MNO airtime must be converted from scratchcard sales to mobile money sales before cost savings surpass 2% of MNO revenue 32
  • There are additional revenue opportunities beyond transaction fees and indirect benefits that may open up at scale • Mobile money and its usage data could be utilized as a targeted advertisement delivery channel to bring in additional revenueThe mobile advertising market in Africa is already Mobile advertising opportunity may represent overamong the largest in the world 33% of total direct EBITDA from mobile money Total available mobile ad impressions Ad revenue opportunity compared with by region (InMobi) other M-PESA benefits 35.0 India 30.0 25.0North America Millions USD 20.0 Africa 15.0 10.0 Europe 5.0 0 1000 2000 3000 4000 5000 6000 0.0 Millions of impressions per month M-PESA direct Airtime cost of Ad Revenue EBITDA sales savings African consumer’s acceptance of mobile advertising is the highest in the world Note: Assuming 65 million M-PESA transactions per month each represent an opportunity for a mobile ad impression 33
  • Advancing financial access for the world’s poor www.cgap.org www.microfinancegateway.org