The Replication Limits of M-Pesa in Latin America

M-Pesa ceased operations in South Africa on June 30, shedding light on an ongoing discussion: Is the challenge of replicating the success of the M-Pesa model in Kenya more about implementation and management or about context and market structure? The fact that the same parent company has not been able to replicate its success story in South Africa seems to support the latter explanation.

In Latin America and the Caribbean (LAC), we have been dealing with this dilemma for a long time, and the evidence points to context as well. M-Pesa brought innovations to East Africa that other players had already brought to most LAC markets.

Proximity and simplicity

Stripping it of several possible adjectives (digital, branchless, mobile, etc.), M-Pesa’s two core innovations have been proximity and simplicity. Customers have massively embraced the ability to access financial services close to home without bureaucratic barriers. This has had a fantastic impact on financial inclusion.

Large agent networks and simplified account opening processes made proximity and simplicity possible (whether regulation enabled or trailed these innovations is a different discussion). At the most basic level, low-cost communications platforms enabled this, by allowing disperse nodes in a network to transact instantly.

Nonetheless, these innovations, either in tandem or on their own, have radically changed only two types of financial services so far: bill payments (including airtime top-ups) and person-to-person (P2P) domestic remittances. According to the GSMA, these transaction types accounted globally for 96% of the volume and 87% of the value in 2015 in the case of M-Pesa-like providers.

This diversity of players delivering proximity and simplicity is a powerful explanation for the replication limits of M-Pesa across markets and regions. While successful in a handful of markets in LAC such as Paraguay, Honduras and El Salvador, the M-Pesa model could not thrive in markets where its value proposal was not better than what was already offered, or in other words, where proximity and simplicity had already been achieved in large scale by other business models (see this CGAP paper on market types for more information).

The provider landscape in LAC

A look at the provider landscape in LAC for bill payments and P2P gives a sense of the scale at which LAC already embraced these innovations, and the reach they have in markets with low financial inclusion.

The following table shows five countries – where two-thirds of all people in LAC live – and maps the large-scale providers of bill payments (excluding airtime top-ups) and P2P domestic transfers in each market (large-scale is defined as encompassing more than 1,000 access points and more than 1 million transactions per month in these two categories). It displays the diversity of business models in the region: mobile network operators, banks, postal services, retail chains and aggregators working with small merchants all became providers of these innovative financial services in different settings.

Brazil is an example of how banks can achieve proximity and simplicity through an organic growth path. The initial regulation on banking agents was issued there in 1966 and 1973. In contrast, these innovations were brought to the Paraguayan market in 2008 by a telecom newcomer, Tigo Money, in the likes of M-Pesa.

The scale of the financial infrastructure deployed by these providers is also comparable to M-Pesa. For example, Colombia has around 50,000 physical agents who cover 100% of their municipalities (see this recent CGAP blog). Brazil also has 100% municipality coverage with almost 300,000 agents, of which half process bill payments and cash-in/out (the majority of agents there manage credit products).

The volumes of transactions are comparable with M-Pesa as well. For example, Oxxo’s more than 14,000 stores in Mexico processed around 85 million financial transactions per month in 2015, including their own card-based wallet cash-in/out Saldazo, as well as bill payments and airtime top-ups. Oxxo is also the country's largest banking agent network.

This plurality of financially inclusive providers in LAC raises a question about the future of financial inclusion: How well-equipped are these providers, different to M-Pesa, to offer a richer portfolio of quality financial services to the financially excluded at reasonable prices, beyond bill payments and P2P?

Are over-the-counter transactions detrimental to offering other financial services such as insurance or savings? Is credit offered by retailer chains already acting as agents or banks an empowering tool for lower-income segments? Are these vast financial agent networks platforms conducive to making payments, including merchant payments, across the value chain more efficient?

At CGAP, these are some of the questions we are working on – questions that are relevant not only to greater financial inclusion in LAC but also in other regions in the world such as South Asia, and even for some countries in Africa, such as South Africa.

A note from the author: For the sake of brevity, I left out of the table some markets with relevant providers in terms of scale, such as Banco de Credito del Perú and Banco Estado de Chile, as well as Honduras and El Salvador where Tigo Money is also thriving. Please let me know in the comments section about any other large-scale providers I may have left out.

Lea en español / Read in Spanish on the FinDev Gateway.