NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

This post was co-written with Kopo Kopo Founders Dylan Higgins and Ben Lyon, who respectively serve as CEO and head of product.

Small and medium-sized enterprises (SMEs) in developing countries send and receive all kinds of payments. These microenterprises pay bills, employees, and suppliers; they are paid by customers, middle men, and even governments – often in surprisingly large amounts over long distances. Most of this happens in cash, which costs time and money to guard, hide, count, and transport. SMEs often have high working capital turn over and no formal record-keeping systems, implying that the tally of in-and-out payments, invoices, and balances are likely to rest solely in the owner’s head. Contrast this with how most large, formal businesses manage their money through bank accounts connected to payment systems and use record keeping financial software that seamlessly integrates payments, invoices, records, and inventory.

Many expect that SMEs could benefit substantially from mobile money (MM) as a tool to manage payments and working capital, given that it offers an electronic cash substitute for sending payments and storing working capital along with rudimentary record keeping. (Hey, at least every transaction is digitally recorded). Anecdotal evidence seems to confirm that many small businesses use MM intensively in markets where it is available: Last year I wrote a post discussing some of the reports my team at the Bill & Melinda Gates Foundation received from the field. It also discussed a study that seemed to confirm that SMEs got a lot of value out of MM, based on interviews of approximately 100 SMEs around Tanzania.

Besides that mostly qualitative study, the phenomenon of SME usage of mobile money is not well documented or researched. In response, in late 2011, we conducted a survey of 865 SMEs in various cities and towns in Kenya to better understand MM adoption patterns in one of the most active MM markets in the world.

What does the data show?

SMEs are a valuable market segment for mobile network operators (MNOs) to target, as they are intensive users compared to regular. In fact, 99.5 percent of respondents in our data used MM, and 67 percent used it for business. Eighty percent of users report using MM once per week or more, whereas the average usage in Kenya is closer to a few times a month.

SMEs may promote viral adoption of customers, employees and suppliers. Respondents said their reasons for adopting were either because clients (47 percent) or suppliers (39 percent) asked them to, indicating they are nodal points driving adoption up the value chain.

SMEs should be a critical market segment for mobile network operators who seek to make MM usage pervasive across the value chain from consumers, to merchants, to suppliers.

However, while MM use by SMEs is widespread, it is not yet deep. Most SMEs use MM on a one-off basis here and there, and do not actively promote MM at the point of sale. In particular, SMEs are not yet “closing the e-loop” by receiving large volumes of retail transactions electronically and then paying out to employees in electronic value – both retail transactions and wage payments were predominantly cash. Enticing SMEs and other businesses to close the loop will be a major part of the endgame for MM operators who hope to move toward a cash-light world. (Ignacio Mas wrote a recent piece pointing out that M-PESA has not lived up to its potential as evidenced by his study showing very little usage by formal businesses, despite widespread adoption by consumers. See his post here on why it’s not used more and here for how that could be changed.)

Finally, we looked at several barriers that have prevented SMEs from using MM. Respondents cited high tariffs and inadequate access to record-keeping or customer-management interfaces as main barriers to using MM more in their business. They also indicated they would require better marketing materials to make sure consumers are clear on where they can pay with MM and what fees (if any) they will be charged.

In order to make MM ubiquitous with small businesses, MM providers and their partners will need to keep an eye on cost and convenience and offer value-added services for businesses beyond simply sending money.

Kopo Kopo is offering a merchant-facing platform that is specifically designed for SMEs and will help tackle some of the challenges highlighted in our study. The Kopo-Kopo platform acts as an additional application layer on the mobile money system which addresses the concerns of SMEs from account provisioning to marketing to value-added business intelligence tools. SMEs have responded positively to this approach and Kopo-Kopo is now expanding its presence throughout Kenya to meet the growing demand from the “long tail” of smaller retailers. You can read more about the service on the Kopo Kopo website.

Download the full study here; and feel free to pass it along!