In the early 2000s, research by Gamos and the Commonwealth Telecommunications Organisation found that African people were using mobile airtime as a virtual currency. They purchased airtime and sent the activation code to others, who would either use the airtime themselves or sell the airtime. The researchers presented the findings to several telecoms providers. In 2004, Mcel in Mozambique implemented airtime sharing, and others, including Safaricom in Kenya followed.

Following further discussions, the U.K. Department for International Development sponsored a pilot project with Safaricom to implement a system to directly transfer money through mobile phone services. The researchers also approached Western Union, but were dismissed with the assertion, "Mobile Phone-enabled money transfers will never threaten Western Union's core business model".

In 2007, Safaricom launched MPESA ("pesa" is Kiswahili for "money"). M-PESA users may deposit money into a mobile phone account at any agent to get an "e-float", transfer the e-float by short message service to others, and redeem e-float for cash at any agent. Safaricom charges fees for efloat, transfer, and withdrawal of cash, and does not pay interest on e-float. The fees are differentiated between registered and non-registered users.

For migrant workers in urban areas who wanted to send money to their home villages, M- PESA provided a reliable service, far safer and cheaper than remitting money through people traveling to the home village.

In 2008, researchers William Jack and Tavneet Suri surveyed 3000 households on their usage of M-PESA. The average M-PESA transaction is about half the size of the average Automatic Teller Machine (ATM) transaction and one-hundredth of the average check transaction. For transfers to and from registered users, M-PESA is cheaper than Western Union, especially for amounts greater than 100,000 Kenya shillings. The table below compares non-users vis-a-vis users,

Non-users Users

Number of Households 1685 1315

Share of Households 56% 44%

Annual Households Expenditure (in Kenya shillings) 197,344 329,348

Share of unbanked population 75% 25%

Share of rural population 71% 29%

Source: Jack and Suri (2011).

M-PESA funds are held by a trust which is owned by Vodafone (40% owner of Safaricom). The trust deposits M-PESA funds in commercial banks and gives the interest to the M- PESA Foundation. Since 2012, the Commercial Bank of Africa has offered savings and loans through M-PESA.

In financial year 2016, M-PESA had 100,744 agents, 16.6 million 30-day active users, each of whom carried out an average of 7.43 chargeable transactions, totaling 5.29 trillion Kenya shillings a year. Safaricom's revenue was 177.8 billion Kenya shillings, of which the top three services were voice, M-PESA, and mobile data. M-PESA contributed 41.5 billion or 23%. By comparison, in 2013, total revenue was 118.1 billion Kenya shillings, of which M- PESA contributed 21.84 billion or 18.5%.

Questions:

(A) What economic inefficiencies does M-PESA resolve and how?

(B)Explain how M-PESA exploits the concepts of price elasticity and income elasticity of demand.

(C) How can Safaricom exploit economies of scale and/or scope to provide voice, data, and M-PESA services?

(D) Using a suitable figure, draw a hypothetical demand and marginal cost for M-PESA services. How do the following affect the demand and profit-maximizing price?

(i) Network effects;

(ii) Competition from Equity Bank's Finserv service.

(E)Unlike bank deposits, M-PESA e-floats are not guaranteed by the government. Using the concept of a strategic move, explain how the trust resolves asymmetries of information.