Mobile Money in Emerging Markets: The Business Case for Financial Inclusion

5 April, 2018

Original source: McKinsey & Company

Mobile money systems offer a dual promise, as an engine for financial inclusion, and as an emerging markets business opportunity for providers. Two billion individuals and 200 million small businesses in emerging economies today lack access to savings and credit. Success in financial inclusion entails reaching these users with products that go beyond payments and can significantly improve people’s financial lives. Providers who can do so profitably can tap into huge and largely untouched markets. To uncover how digital payments providers can capture these opportunities while benefiting people currently without access to financial services, McKinsey & Company examined the actual financial and transaction data of a sample of mobile money providers, all on a blinded basis. The main findings from this research are summarized below:


Scale enables ultimate profitability but requires significant up-front spend.


Payments systems realize significant scale benefits when network effects kick in and fixed costs becomes small on a relative basis—both for individual providers and at the market level. We estimate that above-scale mobile money can be a 35 percent-margin business, but small providers may need to spend over two times what they earn just to maintain their size. To get people to use mobile money, however, providers must invest heavily in marketing to customers, acquiring and training agents, and investing in business and distribution infrastructure. In fact, percustomer spend may need to be as much as two times higher for a small provider than for one that has attained scale.


Regulation can accelerate or hinder ability to grow—or make scale a prize not worth attaining.


Regulations can influence a mobile money provider’s ability to grow and maintain a customer base build and sustain an agentnetwork, develop critical capabilities and infrastructure, and offer products beyond basic payments. For example, caps on fees charged to consumers for cash-out services can make the difference between a profitable and moneylosing business; for the business models on which we focused, capping such tariffs at $0.25 per cash out would shift overall provider margins from 35 percent to roughly -5 percent.


Opportunities for providers will increase as mobile money business models evolve.


Though cash-in-cash-out (CICO) will remain necessary, there is large opportunity to reduce use of cash in favor of digital payments, increasing frequency of electronic transactions. Providers will benefit. We find that digital transactions have margins of 95 percent compared to CICO margins of 30 percent. Beyond standard digital payments, mobile money can help providers enhance existing business models and develop new ones— ranging from micropayments, new forms of data-based financial services, and entirely new digital business models. However, ultimately, providers should tighten their focus on those mobile money services that deliver higher returns than the other opportunities that they have to grow their businesses.


To seize current and future opportunities, providers will need to partner or acquire new skills.


Growing and sustaining a profitable mobile money system requires a set of diverse and hard-to-develop capabilities, including broad marketing and distribution, management of an agent sales force, systems and analytics, rapid product development, and financial intermediation. Today, no single type of provider—banks, mobile network operators (MNOs), or Internet providers—has all of these skills. For example, MNOs can leverage theirexisting agent and cash distribution networks to achieve costs for cash-in-cash-out that are roughly 40 percent lower than those of banks, comparing growing but still subscale mobile money services. On the other hand, MNOs have no experience or existing capacity holding deposits as part of financial intermediation. Recipes for overall success could include bankMNO partnership or an established Internet player acquiring an agent distribution network. The mobile money opportunity for providers is both significant and attainable, but incremental action will not unlock the potential. Providers will need to invest for the long term and be prepared to work in new ways, including through partnerships with other types of firms. And because success is in everyone’s best interest, providers and regulators should consider constructive collaboration.

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