Mobile money is changing the way microfinance institutions do business.  For the institution, mobile money is more efficient, safe, and transparent than cash.  For the customer, mobile money offers “unrivaled convenience” and lowers the effective interest rate of credit by reducing time and transport costs associated with repayment.  Customers still face significant transaction costs, however, which should be considered when designing mobile financial services.  

The average cost of an M-Pesa PayBill transaction in Kenya, for instance, is Ksh 30 (about US$0.39).  To put things in context, you could purchase any of the following for Ksh 30 in Nairobi: 

• 1.5 pieces of roasted maize
• 1 large avocado
• 6 servings of Nescafe
• 3 chicken sausages
• A bus or matatu ride across town 

Assuming a one-year loan with weekly repayments and no grace period, a borrower will end up paying Ksh 1,560 (about US$20.00) in transaction costs alone.  While some microfinance institutions simply pass this cost onto borrowers, others mitigate it by allowing borrower groups to send a single pooled payment.  A group of five borrowers, for instance, can send a single payment at a cost of Ksh 6 per borrower instead of five separate payments at a cost of Ksh 30 per borrower, which would amount to Ksh 1,248 (about US$16.00) in cost savings per borrower over the life cycle of the loan.  

Pooled payments are definitely more competitive than individual payments, but they have their own costs.  For instance, a microfinance institution that accepts pooled payments but tracks borrowers individually has to manually disambiguate payments.  One such microfinance institution in Nairobi does the following: 

1. Borrower group sends pooled payment via M-Pesa
2. Loan officer writes M-Pesa transaction ID and individual payment amounts / types on a receipt
3. Loan officer gives carbon copy of receipt to group Chairman or Treasurer
4. Loan officer gives receipt to branch office
5. Branch office sends stack of receipts to head office
6. Head office manually maps M-Pesa transaction ID to the appropriate receipt and enters individual payment amounts in management information system

In the process above, #6 alone takes two days per month and is a significant cost to the microfinance institution.  

As mobile money systems continue to grow and mature, microfinance institutions everywhere will have to grapple with the question “Who eats the costs?”.  Is it better for borrowers to eat the transaction costs or for microfinance institutions to eat the back-office costs? 

Our next post will explain why we favor the latter.  

Ben Lyon // 11JAN2011