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

Thursday, November 12, 2015

The mobile money agency system has made huge progress in increasing access to financial services and reducing the cost of transactions, though in terms of serving the “last mile” – those wishing to make single dollar transactions – there is still much to be done. But the answer may be staring us in the face, says Vahid Monadjem, CEO of Nomanini.

In disrupting the traditional financial system, with its reliance on formal tellers and ATMs, mobile money and its agency model have taken off across Africa. According to Frost & Sullivan, the value of mobile money transactions in Sub-Saharan Africa reached USD 656 million in 2014, and may more than double to USD 1.3 billion in the next four years.

The success of the likes of M-Pesa, Paga, Zoona and Splash-Cash stemmed from the relative inaccessibility to and unaffordability of the banking system for small transactions. Mobile money providers reduced the cost of transactions by eliminating the need for high-cost office space and tellers behind expensive counters. Yet, if we are speaking about banking the unbanked, values transacted are still relatively large and hence infrequent. The average M-Pesa transaction value is over USD 20, which is a lot if you earn less than USD 2 per day, which well over one billion people globally do. It’s time to extend the gains of the agency model to the next level: to single dollar transactions with general retail merchants on every street corner.

For payments with dedicated agents, who earn all their income from transactions, the fixed monthly cost is USD 150 – 250 per agent. An agent would have to process over USD 20,000 in transactions to break even. If they were to do that on single dollar transactions, each agent would have to process two transactions a minute, eight hours a day, every day of the week. This is not likely to happen. So average transaction values remain at around USD 30 and providing single dollar transactions continues to be uneconomical.

There is a need for a third tier in the payments system if the last mile of payments is to be covered. The first tier is of course bank branches and ATMs, the second tier is mobile money agents and the third tier is merchant payments. We need to make single dollar transactions a cost-effective reality, which it cannot be under the current system, as it is impossible for single dollar transactions to cover the costs of the first and second tier models.