CORE BUSINESS VALUE ADDED TRANSACTION TYPE

80/20 commission split Figure A4: Commissions Earned

Figure A5: Core Business Value Added

TOTAL Customers Agents ANMs Third-party _{Operators provider}Account provider Txn

(M-PESA) MNO (Safaricom) Account Sign up -

Cash in at Agent -

Deposit from Third Party -

Transfer from bank account -

Cash out at Agent -

Transfer to bank account -

Cash out at ATM -

P2P Transfer -

Merchant purchases -

Bill Pay at Agent -

Balance inquiry -

e-Bill Pay -

e-airtime purchase 10.0% 10.0%

Acct balance and interest rate 0.7% 0.7%

Transaction Session Fee -

ARPU Increase 90% 90%

Churn reduction 90% 90%

Core Business Benefit

CORE BUSINESS VALUE ADDED TRANSACTION TYPE

In M-PESA’s case, you can see that commissions for agent transactions are split between the agent and ANM on an 80–20 percent basis.32 _{In practice, ANMs have n egotiated higher}

percentages with agents, but M-PESA is now imposing a standardized split to protect agents.

The Core Business Value Added Table

The Core Business Value Added table (Figure A5) captures benefits that accrue to the core (not the branchless banking) business of the entities in the supply chain.

In M-PESA’s case, Safaricom saves its normal airtime distribution costs (estimated at 10 percent) when customers purchase airtime from their e-wallets. Banks generate in- come from the float that banks hold as a deposit. The ARPU increase and churn r eduction e xpenses also accrue to Safaricom, net the 10 percent distribution costs. Safaricom agents do not report additional core business sales to M-PESA customers, so none is included in this case.33

The Agent Liquidity Requirements Table

The Agent Liquidity Requirements table (Figure A6) calculates the amount of float and cash balances agents will require. The amount is calculated by applying the multiplier to the total amount of daily cash-in transactions (the settlement account) and cash-out transactions (cash on hand), and then multiplying that figure by the number of rebalanc- ing transactions per day. For example, the M-PESA model assumes that agents rebal- ance once per day, and therefore they need one times the average cash-in and cash-out amounts. If agents rebalanced every two days, they would need twice that much liquidity.

33 _{See Section 1.6 for an explanation of how important the “foot traffic” effect is for Brazilian agents.}

In practice, rebalancing requirements are highly variable. An agent with a perfect balance of cash-in and cash-out transactions might not have to rebalance at all, or might have to do so infrequently. In contrast, an agent that does mostly cash-out transactions might have to rebalance several times a day, or need more cash than settlement balance.

The Agent Expense Table

The Agent Expense table (Figure A7) contains the variables that drive the monthly cost structure of the agent business.

Variable costs are calculated by a number of units that is derived by dividing the average TXN/day by the number in the daily TXNS/unit column. So, for example, the agent hires an

employee for every 80 transactions per day, for a monthly cost of US$31.50 per employee.

Figure A6: Agent Liquidity Requirements

AGENT LIQUIDITY REQUIREMENTS Multiplier

Settlement account 1 732

Cash on hand 1 609

Fixed costs. Some agents rent small kiosks for as little as US$19 per month. Other

agents are small shop owners with existing facilities who do not incur additional rental expenses. In Kenya, agents generally do not incur specific expenses related to security, other than the security features of the kiosk. Agents conduct transactions on their own mobile phone, which are readily available in Kenya for as little as US$40 or less.

Liquidity costs. Rebalancing costs are travel or transaction-related expenditures in-

curred in rebalancing the float account or cash on hand. Working capital expenses are a cost of capital, calculated on the total amount of cash and float required (which the model draws from the float calculation tables). Theft is calculated as a percentage of working capital.

At average transaction volumes, the M-PESA agent needs US$1,341 to maintain float and cash balances. The cost of capital may be a borrowing cost, or an opportunity cost for deploying cash in the agent business. In practice, M-PESA agents who have tried to borrow the funds have not fared well. Several ANMs say that they have a strict policy against signing on agents who need to borrow money to maintain cash and float balances because the expense undermines the profitability of the agent’s business. The largest por- tion of the cost comes from transport associated with rebalancing, which is estimated here at US$1.13 per daily transaction.

The ANM Expense Table

The ANM Expense table (Figure A8) calculates the agent management-related expenses of both the transaction provider and the average ANM. The expenses are calculated with the same method used in the Agent Expense table.

M-PESA incurs direct costs for the roles it plays in agent management; these are shown in the transaction provider section of this financial model. In practice, M-PESA outsources some of these functions, but still pays for their costs. The expenses calculated in the average ANM section are incurred directly by M-PESA aggregators.

Figure A7: Agent Expenses

AGENT EXPENSES TXN/DAY 53

VARIABLE COSTS Daily TXNS/

unit Units Cost/Unit Total

Wages 80 1 $ 31.50 32

FIXED COSTS Units/mo Cost/Unit Total

Rent/Infrastructure 1 19.00 19

LIQUIDITY Volume

Rebalancing costs 26 $ 1.13 29

Working Capital Expense 1,341 1% 13

Loss to Theft 0% -

-$12 -$10 -$8 -$6 -$4 -$2 $0 $2 $4 $6 $8 $10 M ill io ns REVENUE DISTRIBUTION REVENUE SOURCE (fees) Txn provider (M-PESA) MNO

(Safaricom) Third-party

Operators

ANMs Agents

Customers

Figure A9: Revenue Generation and Distribution

34 _{The graph is supported by a data table.}

3. Output Tables and Graphs

The Revenue Generation and Distribution Graph

The Revenue Generation and Distribution graph34 _{is one of a series of outputs the model}

produces. It provides a top-level view of financial flows in the supply chain. The bottom of the graph shows the source of revenue (who pays the fees) and the top shows which entity retains the revenue. The yellow bar in the stack indicates value added to an entity’s core business.

The graph shows that customer transaction fees constitute the primary source of rev- enue in the M-PESA business model. M-PESA retains 58 percent of total revenue, or about US$6.9 million per month. Agents and ANMs share 34 percent and 8 percent, respectively.

Figure A8: ANM Expenses