Jake Kendall

The Big Idea: Domestic Remittances in Africa – Demand is There, Will the Teleco’s Step Up?

My team at the Gates Foundation believes bringing large numbers of the poor onto payment platforms – like mobile money – will have direct benefits for families. But more importantly it will also create an opportunity for the market to reach these households with credit, savings, and insurance at much lower costs.

To date there has been some reasonable skepticism that mobile payments will take off outside of Kenya the way they have inside. Many ask: Leaving aside the question of how to get financial services to go over the platform (see my post on this topic here); how willing are poor households going to be to take the first step and adopt mobile money payment services in the first place?

To better understand the latent demand for domestic payments by African households, our team added a module of over 30 questions on payments to the Gallup World Poll in 8 countries (1,000 respondents each were queried in Uganda, Tanzania, South Africa, Nigeria, Rwanda, D.R. Congo, Zambia, and Kenya). Questions in the module assessed respondents’ payment behaviors through services such as money transfers, international remittances, government and wage payments, and utilities and other bills (respondents were asked only to report payments to or from distant counterparties).

Bill Maurer, the director at the Institute for Money Technology and Financial Inclusion at the University of California Irvine, and I have recently written a short note on this data here on pymnts.com. The results are surprising.

Just over half (51 percent) of the 8,000 respondents sent or received a domestic payment or remittance in the past 30 days. Government to person and wage payments and payments to formal institutions (e.g. interest payments, utility bills, etc.) were reported by almost a fifth of respondents. We think these numbers are large in comparison with popular industry perspectives. A full quarter of the respondents reported sending or receiving cash delivered in person, which signifies a clear opportunity for electronic transactions to solve a very common pain point faced by many African households. Surprisingly, and contrary to popular wisdom, only 4 percent reported an international remittance, in stark contrast to the much higher levels of domestic payments.

Long distance payments were even common among poorer households: 42 percent of respondents in the lowest two income quintiles of their respective country reported at least one payment. And while the higher income respondents used banks, mobile, or money transfer more frequently; the poor used cash, sending through traveling friends, informal money carriers, or even traveling in person to make large payments. The hassles and risks associated with this type of transfer are obvious and the fact that such a large population is willing to use them is a strong testament to the urgency driving households’ need to move money. Thus, it is likely the poorest in Africa who could benefit the most from the growth of mobile money services as they are currently using cash.

Given the relative population sizes of the countries in the sample, we calculate that 124 million adults across the eight markets sent or received a long distance payment in the previous 30 days. We also calculated that 62 million didn’t use any formal mode of transfer for any of their transactions, instead sending money in cash. These figures indicate a large latent demand by households and a sizeable opportunity for providers who can meet this demand.

And speaking of market players who have gotten it right, the latest figures from a survey by Billy Jack (of Georgetown University) and Tavneet Suri (of MIT) in Kenya show that as of May 2011, 86 percent of Kenyan households outside Nairobi had access to M-PESA, which now serves more than 70 percent of Kenya’s sub-$1.25/day households (and almost the same ratio for the unbanked). More recent deployments such as Vodafone and Tigo in Tanzania, MTN in Uganda, UBL and Telenor in Pakistan have also been showing significant growth of volume of subscribers recently, and much of the new growth has included a healthy mix of low income clients (see more recent research on demand for payments including Telenor and M-PESA’s growth down market in my post here.)

The data cited above and the success of M-PESA Kenya and others in reaching large numbers from all levels of income show a deep and near universal need for payments services in these markets and proves that suppliers can meet this need – when they get it right. Telcos and other service providers in Africa should take note lest they miss this huge market opportunity.