In 2008, when my colleagues Mark Pickens and Sarah Rotman examined pricing across six branchless banking pioneers, one of the most interesting models was GCASH, which offered a 10% discount on all airtime purchased through the service. Mark and I have been updating and expanding this research (this time with 16 branchless banking leaders across 10 countries). We found that GCASH’s discounted airtime pricing innovation has caught on. Not only did GCASH’s Filipino competitor Smart Money introduce a similar promotion, but several African providers (such as Vodafone M-PESA in Tanzania, Orange Money in Côte d’Ivoire and Zap in Kenya) are now also offering similar discounts or bonuses. Why are m-banking providers doing this? How does it impact the overall pricing for customers as well as the MNO’s relationship with its distribution network?

Mobile network operators (MNOs) give customers a discount on airtime purchased through a mobile money service in order to make more money. Since airtime is a virtual good, the two main costs associated with it are distribution (to sell it) and then processing the actual calls. When a customer buys airtime directly from the MNO instead of through a retail shop, several layers of distributors and retailers are avoided – each of which would normally get a cut. In the Philippines, MNOs pay a whopping 17% to the distribution network. Even if they give customers a 10% discount, they are still increasing their own margins by a healthy 7%. Although MNOs are eager to expand the share of their revenue coming from nonvoice sources, airtime still makes up the vast majority of an MNO’s profits (even M-PESA in Kenya only contributes 17% to Safaricom’s revenue). So, a slight increase in airtime profit margins translates into a lot of additional money.

One side effect of these promotions is that customers will gain familiarity with the m-banking service and be more likely to use it for other transactions. Specifically, customers will regularly perform cash-in transactions at agents and use their phones to top-up airtime from their e-wallets. Even better, bundling airtime purchases with other transactions makes m-banking much more affordable. Let’s say an M-PESA Tanzania customer wants to transfer $60 to a relative and buy $4 worth of airtime. She will not pay anything to make the deposit but will spend $0.17 for the transfer. With M-PESA’s 5% discount on the $4 airtime, she’ll receive a $0.20 discount – more than covering the cost of the transfer.

This certainly sounds like a win-win situation for the MNO and the customer, but what about the airtime reseller? Most MNOs use airtime retailers as their cash-in/out agents. While revenue from these transactions might eventually overtake airtime revenue, most agents (especially with newer services) currently make more money selling airtime. Hence, eliminating this crucial revenue stream damages the very people needed to make m-banking successful. Some operators have chosen to get around this problem by offering a small commission each time a customer buys airtime to the original agent that registered the customer. MTN Mobile Money in Uganda gives 2% back to the agent while M-PESA in Tanzania gives 5%. This also encourages agents to compete fiercely to register customers early on as they receive a portion of that customer’s airtime purchase forever after.

It will be interesting to see whether this trend continues and especially what the impact is on both customer usage of m-banking services and the provider’s relationship with the retail channel.

-Claudia McKay