Last week we asked “Is it better for borrowers to eat the transaction costs or microfinance institutions to eat the back-office costs [of mobile money]?” and indicated that we favor the latter. Instead of explaining our own reasoning, we figure financial institutions put it best. For instance,

• Kevin Kihara of Family Bank cites “attractive unit economics and meaningful corporate cost savings” as the main benefits of mobile money;
• Waweru Gichimu of Kenya Women Finance Trust (KWFT) lists “reduced cases of fraud”, “enhanced security in group meetings”, and “cost savings” as the major benefits;
• Nat Robinson of Juhudi Kilimo says mobile money “helps our field staff better manage their portfolios” and provides “much more real-time knowledge of payments”; and, 
• Isaac Njuguna of Zimele Asset Management says “The cost of processing one hundred M-Pesa transactions is cheaper than serving one hundred clients at the window”.  

Simply put, the benefits of mobile money outweigh the costs. But what are the costs? What are the implications of integrating mobile money with your business and technical processes? The costs tend to fall into three broad categories: 1) professional services, 2) software, and 3) transaction costs.

1. Professional services include business process analysis / reengineering and software design. Depending on the company, a consulting engagement could last anywhere from several weeks to several months and easily cost tens of thousands of dollars. The deliverable is typically an assessment of current business processes, a list of recommendations for how to change roles and responsibilities to accommodate mobile money, and a technical outline describing how to integrate your core banking software with mobile money. 
2. Software includes both integration and maintenance. Depending on the business model of the integrator, you may end up paying an installation fee, purchasing a license, paying a regular service fee, or a mix of the three. 
3. Transaction costs vary by mobile money system and systems integrator. Some integrators, for instance, charge a per transaction fee in addition to the mobile money fee, while others, usually premium rate service providers, negotiate a revenue sharing agreement with the mobile money provider. 

Though effective for institutions with large budgets, we see the above as sub-optimal for a super-majority of the microfinance market. Of the ~10,000 microfinance institutions globally, over 90% are Tier 2, 3, and 4 and constitute ‘the long tail of microfinance’. Institutions in the long tail may not use robust management information systems (MIS) like Abacus, Bankers Realm, or Temenos T24 – they may not use any MIS, in fact – but they do understand the benefits of mobile money and are willing to pay for a solution.

In order to serve the long tail of microfinance, we have to change the way we think and do business, which is exactly why we founded Kopo Kopo. Look for details and some big announcements in the coming months.

Ben Lyon // 19JAN2011