Are mobile money transfer costs too high?

Kenya’s Central Bank Governor Njuguna Ndung’u recently urged the country’s mobile money transfer (MMT) operators to reduce their transaction fees. According to the Governor, “There is no way one can send 50 Shilling at 35 Shillings”. This translates into a seemingly exorbitant 70 percent fee for a small transaction equivalent to less than $1. Safaricom, the telecom operator that offers M-Pesa service (a highly successful Kenyan venture with more than 13 million clients), and other Kenyan MMT operators, however, maintained that the services they provide represent value for money. So are mobile money transfer costs too high?

Before we answer this question, it’s worth pointing out that even if mobile money transfer costs are fixed, average costs expressed as a share of the amount sent can rise if the average size of transactions falls. That is what happened with M-Pesa. M-Pesa charges a fixed fee per transaction within pre-specified fee brackets (see tariff poster). As the use of M-Pesa spread, Kenyans started using it for smaller and smaller transactions. The average amount sent through M-Pesa declined from the equivalent of about $50 in March 2007 to less than $30 by March 2009. The fees charged by M-Pesa, including withdrawal charges, expressed as a share of the average amount, rose correspondingly until mid-2008 (see chart). Because the average transaction size fell to the lowest fixed fee bracket in mid-2008, there was a downward jump in the fee. Then average costs rose again up until March 2009.

Chart 1: Mobile money transfer fees rise with a decline in transaction size

Note: Transfer fee includes charges to send money and the fee for a registered receiver to withdraw cash. Sources: Pulver, Jack and Suri 2009 and Safaricom’s tariff poster.

With the expansion of mobile money transfer services to remote, rural areas in Kenya (a country where the average monthly income is $63), it is possible that the poorest are using M-Pesa to send and receive even smaller amounts. For example, for sending 800 Kenyan shilling (equivalent to about $10) through M-Pesa, the average transfer fee including withdrawal charges rises to 7 percent for transfers to recipients who have an M-Pesa account (and to 9.4 percent for unregistered recipients). Mobile money transfer costs relative to the incomes of the poorest could be much higher than what the average cost implies.

Whether mobile money transfer costs are reasonable, transparent and affordable is important in the quest for increasing financial inclusion of the poor. Increased competition and technological advancements will no doubt put downward pressure on mobile money transfer costs in a dynamic industry. A relevant question is the break-even point for providing these services for the operators. An earlier analysis by Ratha and Riedberg of the cost structure of the cross-border remittance industry concluded that the overall international remittance costs (including staff, infrastructure, marketing, and compliance) could be as little as $3 per transaction.  A similar analysis of the cost structure of the mobile money transfer industry could provide policymakers guidance on the feasibility of reducing costs further.