2 single spaced, due sunday noon PST

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

MPESO: Democratizing Financial Services in Nicaragua

case 1-429-424April 3, 2015

Published by GlobaLens, a division of the William Davidson Institute (WDI) at the University of Michigan.

and Julian Chernyk to be the basis for class discussion rather than to illustrate either the effective or ineffective

handling of an administrative situation.

Introduction

As Haroldo Montealegre waited at the last intersection on his way to the of ce, multiple buses, each

with the words “Solo Tarjeta” (“Card Only”) visible in the front window, crossed in front of him, transporting

his fellow Managuan residents. Montealegre continued toward his of ce, smiling as he thought about how

much the bus system in Nicaragua had changed in the past year. He remembered the sleepless nights he

spent wondering how long it would take for the bus cooperatives to accept his proposal to automate the

bus fare collection system while his company bled funds. Institutional change is never easy, especially in

a developing economy like Nicaragua, but Montealegre now slept easier knowing that MPESO was covering

costs and witnessing steady growth in its user base and daily transaction numbers. Just three years ago,

Montealegre never would have thought that his vision for bringing mobile money to Nicaragua would rely

on a partnership involving most buses in Managua, nor could he have imagined how crucial this partnership

would be. Looking back now, he realized he could not have reached a critical mass of over 700,000 users in

any other way — without the bus partnership, his company surely would have failed.

Montealegre was the founder and CEO of MPESO, a mobile money social enterprise based in Managua,

the capital and largest city in the Central American nation of Nicaragua. In Nicaragua, a majority of the

population lacked access to traditional banking services. Through MPESO, Montealegre saw an opportunity to

replicate in Nicaragua the success that mobile money had experienced in Africa, both as a social innovation

to improve the lives of his fellow citizens and a vehicle to earn nancial returns in a space where he would

operate as a rst mover.

In Montealegre’s view, physical money posed several inherent problems, including

sanitary and personal safety concerns. It also placed a high burden on poor individuals to

keep meticulous track of the little money they did have. MPESO thus aimed to revolutionize

life at the Base of the Pyramid (BoP) — a diverse group encompassing 3 billion people

spending less than $3 a day, and up to 1.5 billion additional people spending up to three

2015

next billion

case writing competition

First PlaceFirst Place

Pr oud Spon sor

2015 Nex tBillion Cas e

Wr iting Com petition 2

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

times that much — by replacing and eventually eliminating cash-based transactions in favor of cashless

ones. The long-term goal of the organization was to empower low-income individuals to overcome the

constraints associated with limited capital and a lack of nancial services. When Montealegre launched his company in 2011, he did not realize how crucial the partnership with

the bus cooperatives would be. As it turned out, no matter how useful MPESO’s technology was, nor how

much it would improve the lives of the unbanked majority in Nicaragua, people would not adopt mobile

money until they had a compelling reason to do so. It was the implementation of a cashless bus fare system

requiring an MPESO account that provided the impetus.

By May 2014, MPESO had over 700,000 users, and the company processed over 1 million transactions

worth 20 million Nicaraguan córdobas (NIO) or USD 700,000 on a daily basis. 1i

The company was in the black,

but Montealegre knew that for his mission to become a reality, he had to continue to innovate and grow

MPESO. Most Nicaraguans used MPESO to pay their bus fares only, despite the fact that the array of services

offered by the company was far more extensive. The main dilemma Montealegre faced was where to focus

operations in the short term. Should he aim to expand MPESO’s array of services for Nicaraguans? Or would it

be more worthwhile to focus on expanding the bus fare collection system abroad? The bus fare product was

true and tested, and although it was limited in its social impact and pro t margin, expanding it into other

markets such as the Dominican Republic and Costa Rica would help MPESO grow its geographic footprint.

Mobile Money Background

More than 2.5 billion people in the world lacked a bank account, 2

yet 6 billion had access to a mobile

phone. 3

This was largely because banks found it too expensive to open branches and ATMs in poor and rural

locations. People at the BoP were often left with only informal networks through which to transfer and store

money. These unof cial channels were prone to risk. For example, low-income individuals who saved by

stuf ng money under a mattress or investing it in livestock were vulnerable to theft or material loss. Mobile

money lled this void at the BoP by providing a more secure range of nancial services, from simple transfer

and savings mechanisms to more complicated products such as business or group loans.

As an example, in sub-Saharan Africa, mobile phone penetration in 2013 stood at 80% for urban

households and 63% for rural ones. 4

In contrast, only 41% of people in developing economies had an

account at a formal nancial institution in 2012. 5

Statistics such as these were the driving force behind the

emergence of over 100 mobile money deployments in emerging markets as of July 2011 — at least 84 of

them had originated in the preceding three years. 6

Yet few mobile money platforms had managed to reach a

sustainable scale. These included GCASH and Smart Money in the Philippines; Wizzit, MTN Mobile Money, and

FNB in South Africa; MTN Mobile Money in Uganda; Vodafone M-PESA and Airtel in Tanzania; Celpay Holdings

in Zambia; and MTN Mobile Money and Orange Money in Côte d’Ivoire. 7

M-PESA Montealegre looked to M-PESA, the industry pioneer, for inspiration and as a model for his operations.

Started in 2007 in Kenya by Vodafone and Safaricom — the largest mobile network operators in Kenya

and Tanzania — M-PESA (“M” for mobile and “PESA” for money in Swahili) was one of the most successful

mobile money platforms. Safaricom originally envisioned the platform as a microcredit repayment service,

but changed direction during the pilot stage after monitoring transactions and customer feedback, which

indicated customers preferred to use the service for remittances. Rural Kenyans who had moved to urban

communities seeking employment began using the service to send money home. 8

i The córdoba-dollar exchange rate as of May 2014 was NIO 25.81 to USD 1. 3

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

When it was launched, M-PESA was structured as an electronic payment and money storage system

accessible through mobile phones. It was branded as a simple service — “send money home.” Users were

required to register at an authorized M-PESA retail outlet where they were assigned an individual electronic

money account managed by Safaricom, which deposited the customer’s money into a pooled account at a

regulated bank. This electronic account was accessible through a subscriber identity module (SIM) card

application on the mobile phone. Users deposited cash into their accounts for free by exchanging cash for

electronic credit at an agent, who was in turn advanced a fee for the exchange. Users were not charged for

deposits, only when they did something with their money. 9

Once they had money in their accounts, users could send it to other M-PESA users, as well as to non-

registered users, through their phones. They could additionally use M-PESA to pay bills, receive money

transfers, and purchase airtime for their cell phones. Safaricom ensured liquidity and managed individual

transactions through master agents who bought and sold electronic value to individual agents through

connections with local banks. Both retail agents and master agents received commissions on transactions. 10

The M-PESA interface allowed users to easily launch the service from their phone’s menu, which prompted

the user to provide all the necessary information, one piece at a time, based on the type of transaction

requested. All transactions were recorded using short messaging service (SMS). The messages were encrypted

using the security keys on the customer’s SIM card. To ensure customer trust, Safaricom also required agents

to record all transactions in a log book. For each transaction, the agent entered the MPESA balance, the date,

agent ID, transaction ID, transaction type (customer deposit or withdrawal, agent cash rebalancing), value,

customer phone number, customer name, and the customer’s national ID number. Most of the information

was copied from the agent’s con rming SMS. Customers were then asked to sign the log for each transaction.

As of 2009, each customer paid a KSh 25 (USD 0.30) fee to Safaricom on small transactions. 11

Critical Success Factors

Agent Network

The agents of a mobile money operator conduct the cashing in and cashing out functions of the company,

enabling users to turn cash into electronic currency and back to cash again. The face of the company, agents

are often business owners with storefronts in convenient locations. Many mobile money providers focus on

building their agent networks as fast as possible to increase convenience for users. Still, providers have to

strike a balance — if they enlist too few agents, then users get frustrated by a lack of access points to the

system; if there are too many, individual agents do not generate enough business to cover their costs. Agents

in turn stop offering mobile money services, upsetting users further. 12

Agent quality is extremely important for mobile money companies. The best agents maintain liquidity,

market both mobile money and the provider well, and educate users. Acquiring and retaining this talent

means choosing agents carefully, training them well, and proactively monitoring them. To do this, a mobile

money provider has to understand the business from the agent’s perspective, give agents a manageable

path to pro tability, analyze their day-to-day operations, and help them through points of dif culty. 13

Ensuring that agents have more to gain from working with the system than from cheating it is of paramount

importance — if agents do not see a payoff, then they will not represent the provider well.

Finally, mobile money providers must take into consideration the issue of fraud prevention. After all,

once a user loses trust in the system, it is extremely dif cult to regain. Many rst-time users of mobile

money do not understand how to use the technology, so they often simply hand their phones to agents to

perform the required task. 14

This situation poses an inherent risk; in fact, 80 of Safaricom’s rst 200 agents

were red for taking away user airtime. 15 4

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

Nicaragua

Nicaragua had a population of 5.8 million people 16

and was one of seven countries in Central America.

Home to one-third of the country’s population, Managua was Nicaragua’s largest city and capital. 17

In Nicaragua, as of 2009, 42.5% of the country lived below the poverty line. 18

Nicaragua was also one

of the most underbanked countries in Central America, with just 14% of the population having access to

nancial services. 19

In Latin America, 55% of the unbanked said that they did not have enough money to use

a formal account and 40% indicated that accounts were too expensive, while 21% said they lacked suf cient

documentation to open an account. 20

Furthermore, many of the people in Nicaragua who did have a bank account did not use it. While

certain employers required accounts to make paycheck deposits, many Nicaraguans withdrew their balances

immediately when they were paid. This also led to logistical problems; ATMs regularly ran out of money on

paydays. 21

Although partly a factor of bureaucratic barriers, the high rates of unbanked and underbanked individuals

in Nicaragua re ected an inherent societal mistrust in nancial services. Nicaraguans were also highly

traditional and often reluctant to adopt new technologies.

In stark contrast to Nicaragua’s nancial sector, the country’s cell phone industry was large and growing:

cell phone penetration was forecast to grow to more than 80% by 2015, up from 53.9% in 2010. 22

It was

precisely this type of environment — low bank penetration and high mobile phone usage — that mobile

money providers had capitalized on in Africa and other developing regions. The challenge in Nicaragua, then,

was to build a network that could support low-income individuals and bring them into the formal nancial

services world. 23

The Decision Maker: Montealegre

Haroldo Montealegre was born in the U.S. and spent most of his childhood in Managua. He had a

naturally inquisitive mind, obtaining his economics degree from Vanderbilt University before going on to

receive his JD from Loyola University New Orleans (see Exhibit 1).

After graduating from law school in 2008, Montealegre returned home to join a Managua-based law rm

focused on renewable energy. Three years into the job, he came across an article in The Economist concerning

the rapid growth of mobile money in Africa. 24

Noting the similarities between the Nicaraguan and African

markets, he saw enormous untapped potential for such an operation in Nicaragua — if he did not take

advantage of the opportunity, he thought, someone else surely would. 25

While he enjoyed his work as an attorney, Montealegre thought that a successful mobile money effort

could help many low-income Nicaraguans lift themselves out of poverty. He was determined to generate

positive impacts in the lives of people at the BoP who lacked access to nancial services, and so, in 2010,

armed with not much more than an entrepreneurial mentality and a erce sense of determination, he went

about creating a mobile money platform in Nicaragua. Montealegre called his endeavor MPESO and was

excited about its potential, but he also recognized from the start that for the effort to be successful, it would

have to reach a critical mass of users, and it would have to do so quickly. 26 5

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

Exhibit 1

Haroldo Montealegre, founder and CEO of MPESO

Source: Roy Moncada. “Puntos de Venta Para Tarjetas TUC.” La Prensa. 11 May 2013. Accessed 20 Mar. 2015.

com.ni/2013/05/11/nacionales/146193-puntos-de-venta-para-trjetas-tuc>.

MPESO History

First Steps

For Montealegre, mobile money was not just a tremendous business opportunity, but also a way to

democratize nancial services for Nicaraguans. MPESO would be a game changer — anyone rich or poor, from

the city or from the farm — would gain access to nancial services by simply making a call or sending a text

message, regardless of whether he or she had a bank account. 27

In 2010 Montealegre hired a software developer and a compliance advisor from Claro, Nicaragua’s

largest mobile network operator, to develop the MPESO platform architecture. After a year of work, MPESO’s

mobile payment platform was launched in July 2011. At the time, Montealegre naively believed that “if you

build it, they (the users) will come.” His thinking was that Nicaraguans would send money to one another

electronically with as much enthusiasm as Kenyans had. But not many did; few Nicaraguans took the time to

This was a daunting challenge for Montealegre. He had invested heavily in an expansive agent network

and a broad technological infrastructure to make his mobile money platform operational. But MPESO’s main

product offerings were person-to-person transfers and formal savings instruments that Nicaraguans at the

BoP were unfamiliar with. Lacking a compelling product to attract these potential users, agents were not

seeing the foot traf c necessary to earn a meaningful commission and were rapidly losing interest. In fact,

200 of Montealegre’s rst 300 agents abandoned the platform; this in turn choked revenues for MPESO. 29

Montealegre and MPESO were caught in the trap that had befallen so many other mobile money operators

— unable to cover costs, the company began to ounder. Montealegre considered giving up. 30 6

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 The Partnerships

Montealegre found that no matter how bene cial MPESO appeared to be in theory, it was dif cult to

convince people to change their established patterns. His breakthrough came in November 2011 — MPESO’s

technological infrastructure could be leveraged to create an automated fare collection system in Managua.

This would happen via a fare card ( tarjeta in Spanish) whose funds would be tied to an MPESO account.

Called Tarjeta TUC (Transporte Urbano Colectivo or Urban Bus Transport Card), the card was enticing for

Managua’s bus cooperatives because it would give them more control over bus fare collection. It would also

generate the in ux of MPESO users Montealegre needed to cover the company’s high xed costs. 31

The bus system in Managua was run by 28 privately owned bus cooperatives, which operated under a cash

only fare system. The cooperatives typically lost approximately 10% of expected revenues, in part, because

drivers were pocketing the cash. 32

Other attempts to revolutionize mass transit had failed, including a 2007

50-million USD (1.29- billion NIO) Metro Bus project. 33

Nevertheless, Montealegre knew the cooperatives

were still looking to move to a cashless system, so in December 2011, he began the dif cult process of

convincing each of the cooperatives to partner with him. 34

The bus cooperatives had three main concerns. 35

First, they feared MPESO would be a tool for bus drivers

to steal from them. They also wanted to know what types of controls were in place to prevent MPESO from

keeping the fares it collected. Finally, the cooperatives had concerns that people would not want to adopt

the MPESO technology and that ridership would fall. 36

Montealegre alleviated the cooperative’s concerns by explaining the transparency of the MPESO system

— every transaction would be recorded on MPESO servers. Anyone could view his or her account through

MPESO’s Web portal, on a bus validator following payment, and after recharging an account. He showed

videos of people using similar automated fare collection systems in other countries. The partnership with

MPESO would cost the cooperatives a fee of only 8% of fares, versus the 10% or more that they could

not account for, so the collaboration made nancial sense for both sides. It also made sense for riders.

They would see no increase in price. It took over a year of negotiating, but by January 2013, 26 of the 28

cooperatives had signed on. 37

Implementation Implementing a new fare collection system across 835 buses serving over 700,000 passengers daily

would not be easy, but after striking the deal with the cooperatives, Montealegre had attracted a critical

mass of users — most anyone wanting to ride the bus would have to register with MPESO. Montealegre was

eager to begin implementation, but he was also cognizant that the process of registering users, educating

them on how to use the system, and ensuring that MPESO’s servers could handle the enormous workload had

to go off without a hitch (see Exhibit 2).38

For the hard infrastructure, servers would be backed up by cross-server redundancy. The soft infrastructure

— agent preparedness and ready user assistance — would have to be in place from day one. To ensure this,

MPESO sent support teams to verify that agents were both familiar with and adept at performing user

recharges. It also stationed 100 people at bus stops and inside buses to educate users on how to use the

system. Additionally, MPESO’s customer service department was primed to handle a high volume of calls and

mitigate user problems in the simplest and most ef cient way possible. 39

The TUC system was scheduled to launch August 19, 2013. To give riders ample preparation time, MPESO

began distributing TUC cards and registering users one month in advance. There was an unexpected problem,

however. Everyone wanted to register in the rst few days. 7

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

Exhibit 2

An MPESO User Boards the Bus by Swiping Her TUC Card

Source: Julian Chernyk

The period from initial user registration through implementation was one of the most stressful times

of Montealegre’s life, but his perseverance ultimately paid off. A few months after the launch of TUC,

Montealegre began to feel that MPESO was truly here to stay. He also made it a priority to inform users about

the entire MPESO platform, including the ability for users to store everyday savings in the accounts as well

as the ease of making transfers to other accounts. He wanted them to be aware of the many potential uses

of their MPESO account.

Operations

MPESO Users

Any Nicaraguan could register for an MPESO account at an agent location using his or her government

ID number and cell phone number; the cell phone number became the user’s account number. People did

not have to make a deposit to register. The system worked similarly to a bank account — the user’s account

number was registered in MPESO’s servers and held a certain balance. Whenever there was a transaction on

the account, MPESO credited or debited money to that account from another account. For TUC, when a user

rode the bus, the system debited money from that user’s account and credited the bus company’s account.

Similarly, when a user paid an agent to recharge his or her account, money was transferred from the agent’s

account to the user’s account. 40

The money moving through the accounts was not Nicaraguan córdobas, rather a virtual credit known as

“saldo MPESO,” or “MPESO credit.” When a user gave cash to an agent, he or she received a credit, exchanged

at a one-to-one ratio, into his or her account. Similarly, the bus cooperatives received saldo MPESO each

time someone rode one of their buses.

The bus cooperatives received a wire transfer from MPESO at the end of each day matching the amount

of virtual saldo they earned. When this transfer was complete, both that amount of virtual saldo and real

world córdobas were eliminated from MPESO’s books, with the virtual saldo to be re-created later as users

recharged their accounts the next day. 41 8

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 MPESO kept track of these operations in real time, with its team of accountants continuously ensuring

that the amount of saldo in the system matched the number of córdobas that MPESO had in its physical

account — that is, it ensured that assets always matched liabilities. 42

Of course, having the unbanked at the BoP — people with no previous experience with nancial services

— trust an institution like MPESO to exchange their hard-earned cash for a virtual currency was dif cult.

Financial exclusion in Nicaragua implied lower levels of nancial literacy. Not only did people not have bank

accounts, they had little to no idea how nancial services worked. 43

The fact that MPESO had been able to

build trust in the bus fare system represented a massive breakthrough on the path toward Democratizing

Financial Services in Nicaragua.

MPESO Agents

MPESO’s agents were owners of local businesses, such as pharmacies, Internet cafes, and convenience

stores (see Exhibit 3). There were over 700 MPESO agents in Managua. Agents continuously received cash

from users and moved saldo from their unique agent MPESO accounts. 44

This was done either via the MPESO

Web site or through a cell phone application. MPESO provided its agents with cell phones at a cost of NIO

180 (USD 7). To ensure that agents had enough saldo in their accounts for user recharges, an MPESO support

team traveled about communities all day on motorcycles, collecting cash from agents and replenishing their

accounts with saldo. These motorcyclists went out in pairs — one would collect feedback from the agent

while the other collected cash. This feedback loop ensured that the company knew what agents and users

were saying about its product and that it found where improvements were needed. 45

The motorcyclists visited

most agents once a day. However, busy agents could be visited multiple times in a day, and agents who were

not as busy, once every other day. 46

As M-PESA and other successful mobile money companies had shown, the agent network was critical.

Agents were the face of the company. Users interacted with them, not MPESO employees, on a daily basis.

When looking for agents, MPESO sought aggressive entrepreneurs and well-liked community leaders.

Montealegre personally checked in with his top agents every few weeks to stay attuned to events on the

ground. 47

MPESO did not allow just anyone to become an agent. The company had to strike a delicate balance

between having enough locations to satisfy user demand and creating a sense of exclusivity around being an

MPESO agent. In this way, the company could encourage agents to attract as much business as possible and

to represent MPESO well. MPESO agents made a commission of 4% on each recharge and gained competitive

advantage by drawing people into their stores who would likely make additional purchases.

MPESO kept close tabs on all of its agents. In addition to being the face of the MPESO brand, agents

carried a real cost for the company — they had to be trained and monitored, and the company provided

with them with phones. The company monitored the agents to ensure they were well trained in the recharge

system, were not making mistakes while interacting with users’ accounts, and maintained a clean store.

MPESO evaluated agents by assessing the number of recharges they conducted per day; the average agent

completed over 100 transactions each day. The top ve MPESO agents made over NIO 25,800 or USD 1,000

in commissions per month. 48

If an agent location was performing less than 10 transactions a day, revenues

would not cover the costs of maintaining the agent. After a week of less than 10 transactions per day, an

agent would be warned. If he or she did not improve, the company would sever its relationship with the

agent. 49 9

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 Montealegre made exceptions for some agent locations along less frequented bus routes that served

populations who were too poor to afford a bus ride every day, yet bene ted greatly from ease of access to

public transportation if and when they did use it. 50

Exhibit 3

Haroldo Montealegre Meeting with One of His Top-Producing Agents

Source: Julian Chernyk

Technology Although the MPESO system could be simpli ed to a system of credits and debits, the technological

infrastructure that allowed this to occur seamlessly and securely was more complicated. The company had

to ensure that every transaction was secure and redundant (recorded across multiple servers) and that no

one’s money was misplaced or stolen. So MPESO’s servers were housed in a reproof, earthquake-proof

technological complex.

The technology behind the recharges was not unique. For simple recharges, agents turned to either the

mobile phones they received from MPESO or to MPESO’s Web app; they simply recorded a user’s phone/account

number and the amount of saldo to be transferred, and sent this information to the MPESO transaction

motor. MPESO used interactive voice response ii

for recharges and transfers, because this system allowed for

secure interactions with a company’s host system via either telephone keypad or speech recognition. 51

The technology behind MPESO’s Tarjeta TUC was much more innovative (the company had a patent

pending in the U.S.). It was unique compared with most automated fare collection systems in that

transactions were not burned onto any physical record. When a user placed a TUC card against the validator,

it appeared as though he or she was simply debiting the card, but in reality the card only represented a user’s

MPESO account; the account balance was not stored on the card. 52

The credit was stored in MPESO’s server and was beamed to all of the system’s validators every 30

seconds. MPESO did not burn account balances onto its cards because doing so would limit the number of

ii Interactive voice response is a technology that allows a computer to interact with humans through the use of voice and dual-tone,

multi-frequency signaling (an in-band telecommunication signaling system using the voice-frequency band over telephone lines

between telephone equipment and other communications devices and switching centers) tones input via keypad. 10

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

places where users could recharge their cards. In New York City, for instance, MetroCards are reloaded at

stationary machines. With MPESO, users could credit money from their account to another account from

anywhere as long as they had an Internet connection. For instance, a user could be walking toward a bus

while having zero balance, yet if someone were to credit his or her account, by the time that person got to

the bus, the money would be available in the account. For mobile money purposes, this universality of access

was crucial because it allowed users to keep their money in one central account — they pulled money from

the same account whether they rode the bus or sent money to a friend. And if their card was lost or stolen,

users could easily invalidate their cards by calling MPESO without losing their account balances. 53

Business Model There is an important distinction to be made between MPESO users and MPESO customers. The 700,000

Nicaraguans who rode the bus using their Tarjetas TUC were not MPESO customers in the sense that they

were not charged for riding the bus. Rather, they were MPESO users who had received their cards for free,

were not charged for depositing money into an account, and paid the same bus fare as those who remained

in the cash system. 54

The bus cooperatives were MPESO’s customers. They paid MPESO 8% of every bus fare that they collected.

What is signi cant about this arrangement is that even after this service fee, the cooperatives remained in a

better nancial position than they had been prior to their partnership with MPESO because there was no way

for bus drivers to pocket fares. Through TUC, the bus cooperatives also gained more transparency and insight

into their bus routes and capacity, which could be leveraged to optimize transport. 55

Only after the launch of TUC did MPESO achieve the critical mass of users necessary to cover xed

and variable costs and make the company cash ow positive. (As a private company, MPESO did not report

nancial information.) 56

To grow its pro ts, MPESO had to scale.

MPESO also had partnerships with utility companies in Nicaragua, which leveraged MPESO’s platform to

make user payments easier. MPESO users could log in to the MPESO Web portal and pay their utility bills by

debiting their MPESO accounts. To these companies, MPESO similarly charged a at rate of 5.61 NIO to 6.45

NIO (USD 0.20 to USD 0.50 per transaction). 57

Advertising was another space where MPESO hoped to grow. The

company had recently seen increased demand from businesses wanting to place advertisements on the Tarjeta

TUC as well as on the validators. While advertising remained a small portion of MPESO’s overall revenues,

the company planned to begin distributing only cards that carried advertising, generating a source of revenue

that had almost zero cost associated with it. 58

(For a diagram of the MPESO ecosystem see Exhibit 4.)

MPESO Impact

Impact Achieved

MPESO was both disruptive and transformative. A year after the launch of TUC, MPESO had become the

exclusive form of payment on 95% of the buses in Managua and was processing over 1 million transactions

daily worth more than NIO 20 million or USD 700,000. 59

As a service company, MPESO’s most important stakeholders were its users and customers. Users liked

the TUC system because it was more ef cient than the previous cash only system. Under the cash system,

riders often would not receive change from the bus drivers. Or when they were receiving change, they had

to wait to board the bus while the process took place. Many also felt safer under the MPESO system because

they no longer had to carry cash. 60

MPESO had additionally provided users a more secure way to save their

money. Instead of putting money under the mattress or investing it in livestock, people at the BoP were 11

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 introduced to a novel system through which they could transfer their money to another party while having

an account that they could trace and withdraw money from when necessary.

Exhibit 4

MPESO Ecosystem

Agents exchange MPESO credit for Nicaraguan Cordobas. Touch validator

saldo transferred

from user to

bus cooperative.

Bus Cooperatives pay an

8% commission to MPESO on each bus fare.

Bus Cooperative

User MPESO Agent

MPESO Support

Team

Support teams

visit agents on

motorcycle to

collect cash in

exchange for

MPESO credit.

MPESO

MPESO trains and supports agents and users.

Source: Created by GlobaLens using information provided by the authors.

Customers such as the bus cooperatives were happy because they were seeing a constant increase

in month-over-month ridership numbers (based on a reduction in theft by bus drivers). Likewise, agents

enjoyed the increase in foot traf c that MPESO brought to their businesses. Some were even making noise

about offering additional MPESO services, indicating that they would be able to increase foot traf c further

if they could offer more services. 61

Other stakeholders were also happy. Bus drivers had expressed appreciation for how the MPESO system

simpli ed their jobs, including not having to make change as people boarded. Previously, drivers also had

to count the amount of fares collected each day to calculate how many riders had been on their bus. With

MPESO, this was no longer necessary, which in turn shaved time off of their workday. 62

MPESO Potential In Montealegre’s view, the large banks lacked innovation. They could not truly understand the poor

because they had been created “by the top of the pyramid, for the top of the pyramid.” 63

The advent of

MPESO, on the other hand, heralded big changes.

As impactful as TUC had been, Montealegre thought the system was only one of many lifestyle

enhancements that mobile money could provide to Nicaraguans, and one of the less signi cant ones at that.

Because of people’s reluctance to adopt new technology, the large-scale expansion of nancial services that 12

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 Montealegre had rst envisioned for Nicaragua had not yet come to fruition, although he believed it was on

its way.

Of the services already available to users through the MPESO platform, the product that was gaining

the most steam was the option for users to pay their utility bills. In Nicaragua, paying utility bills had long

been a time-consuming process with no option to pay online. 65

Seeking to capitalize on this inef ciency, in

April 2014, MPESO began offering users the ability to pay their utility bills through the MPESO Web portal or

at any agent location. This service was being used by 5% of MPESO users by the end of 2014. Montealegre

expected that the imminent launch of a mobile app for this service would push adoption numbers higher. 66

In addition to the utility payment feature, MPESO hoped to increase the popularity and geographic reach

of its person-to-person money transfer service. The main goal of this product was to equip Nicaraguans with

an easy, affordable, and safe way to send money to loved ones. Montealegre believed the market was there

for such a service where urban-to-rural remittances had to be delivered by hand, forcing people to spend

time and money, and risk theft, to deliver payments to their families. 67

In Montealegre’s view, widespread

use of the person-to-person transfer service had not yet caught on because, unlike with the TUC cards, users

did not have a “register-to-ride” type of issue to compel them to use the system, and because MPESO’s

geographic footprint was limited primarily to Managua. However, Montealegre was hopeful that with more

publicity, increased user comfort with the TUC system, and the gradual rollout of the MPESO bus fare system

to other cities, this service would also become more popular. 68

Another major project that MPESO was already at work on was the establishment of business partnerships

with micro nance institutions (MFIs). These institutions often could serve limited populations only because

of the importance of geographic accessibility in distributing and collecting loans. Yet a partnership with

MPESO would allow MFIs to more easily reach BoP customers who lived in hard-to-access areas. 69

The MFI

partnership would also stimulate competition among MFIs to offer better interest rates on loans, which

would bene t those at the BoP further.

One last project that MPESO hoped to win by leveraging its existing platform was the distribution of

government subsidies. For example, bus cooperatives traditionally received a lump sum subsidy to cover

less traveled routes, but the government had no way of properly measuring how many passengers each

route served. Some cooperatives would take advantage of this by running fewer buses. MPESO would foster

accountability and transparency in this area by providing the subsidy distribution agency with accurate, real

time data on the number of clients served by each bus. 70

Expansion in Nicaragua With the implementation of the TUC system complete, MPESO found itself on stable footing. The company

was nally cash- ow positive, and its transaction and user numbers were growing daily. Despite this success,

Montealegre knew that things remained far from his original vision for mobile money in Nicaragua.

In a way, Montealegre saw himself as the entrepreneurial champion of the common man in the nancial

services industry in Nicaragua. He continuously strived to reach BoP customers who were traditionally

ignored by the formal nancial sector. His ultimate goal was therefore much larger than achieving change in

Managua’s bus system. He was in pursuit of complete and universal nancial inclusion. And he believed that

MPESO could be the vehicle to get there.

But expansion was being hindered by logistics. He had already agreed to partner with cooperatives

and local governments in other cities, but was waiting for the cooperatives to replace their buses. Both the 13

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 municipalities and MPESO agreed that installing the MPESO validators into old, decrepit buses would be a

waste of time and money.

Montealegre knew that expansion of the bus fare system to other municipalities would provide the

impetus for the adoption of person-to-person transfers and other nancial services such as savings and

MFI partnerships. Yet as exciting as these projects and developments were, Montealegre also expressed

uncertainty about how he would be able to get around to all of them. Although MPESO had 80 employees,

there were times when Montealegre found himself at a loss for skilled manpower. 72

While Montealegre felt that he could put into effect many positive changes in the country he loved, he

also acknowledged that he could only do so much in the short term. The businessman in Montealegre also

knew that it would be smart to keep his foot on the gas of the most successful and sustainable product he

had thus far managed to create: the TUC system.

Expansion Abroad

Montealegre had great hopes for increased penetration of MPESO in Nicaragua, but the realist in him had

to admit that MPESO faced several obstacles in the adoption of new products and services. He believed that

widespread adoption would happen, but would likely take a few years. These obstacles included creating the

technology behind these different platforms and getting buy-in from users.

In contrast to the puzzle he faced back home, Montealegre had been contacted by bus cooperatives from

abroad that were hoping to bring MPESO to their countries. He had already conducted extensive talks with

representatives in the Dominican Republic and Costa Rica. Some of the bus cooperatives and governments

of these countries saw how successful MPESO had been at transforming Managua’s bus fare system, and they

were hoping to see that success replicated in their own backyards.

Montealegre likewise saw other opportunities in these two countries. Even though the unbanked rates

there were not as high as they were in Nicaragua, the constraints in access to nancial services were

signi cant. Montealegre not only wanted to provide nancial services to those who did not have access to

them — he also wanted to get people with bank accounts to use their money in ways that would be as free

as the Internet and modern communication would allow.

There was also a signi cant number of Nicaraguans living abroad, particularly in Costa Rica. In 2014,

approximately 400,000 Nicaraguans 73

sent USD 282 million back home from Costa Rica, both as payment for

services and as transfers to family. 74

In Montealegre’s view, this population represented a large, untapped

market — getting them to adopt MPESO would create a surge in person-to-person transfers, raising the

visibility of the service and potentially providing the key to its widespread adoption.

It was also attractive for MPESO to expand abroad from a bottom line perspective. Montealegre had

spent years and invested much capital in developing the MPESO bus fare product into a tour de force back

home, a position that afforded him strong leverage in negotiations with potential partners abroad. For one,

Montealegre did not have to spend a year proving to these outside partners why the MPESO bus fare product

made sense for them; the impact had been proven, and the potential partners were already interested in the

platform. Montealegre was also con dent that he could easily transpose what had worked in Nicaragua to

these foreign markets. After the Nicaraguan implementation, he knew which mistakes to avoid and was aware

of the factors that had complicated the original rollout. 14

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

All in all, although expanding the bus fare product to Costa Rica and/or the Dominican Republic would

create more MPESO users and increase both the company’s revenues and its geographic footprint, Montealegre

had to consider whether the move would dilute his original mission — nancial inclusion back home. Still a

start-up, MPESO risked losing its brand in Nicaragua if domestic operations were placed on a back burner or

not managed as proactively as they had been up to that point.

Part of Montealegre believed that he could focus on both expanding abroad and on maintaining

momentum within Nicaragua. Still, if he spent most of his time in Costa Rica and the Dominican Republic, it

would be dif cult to innovate and break into new markets at home, particularly if business abroad precluded

him from traveling back home to manage domestic operations rsthand.

Montealegre was torn. Opportunities abroad could be lucrative, but he had founded MPESO as a means

of extending nancial services to the citizens of the country he loved. He now had to decide if the bene ts

of expanding operations to new countries were worth delaying or compromising his mission at home. He also

wondered if expansion abroad could ultimately bene t MPESO’s penetration in Nicaragua.

Acknowledgments

The authors would like to thank Bo Hopkins, the Jackson Institute for Global Affairs and the Coca-Cola

World Projects Fund for their guidance, assistance, and insights in the creation of this case. 15

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553

Endnotes

Montealegre, Haroldo, MPESO CEO. Personal interview. 19 May 2014.

2 World Bank . Global Financial Development Report FAQs. 2014. Web. Accessed 19 Mar. 2015.

EXTERNAL/EXTDEC/EXTGLOBALFINREPORT/0,,menuPK:8816192~pagePK:64168176~piPK:64168140~theSitePK:8816097,00.html.>.

3 Rayman, Noah. “Cell Phones Could Help Millions in Developing Countries to Read.” Time Magazine. 23 Apr. 2015. Web. Accessed

19 Mar. 2015. .

4 Tortora, Bob. “Africa Continues Going Mobile.” Gallup. 1 May 2014. Web. Accessed 11 Nov 2014.

poll/168797/africa-continues-going-mobile.aspx>.

5 Demirguç-Kunt, Asli, and Leora Klapper. “Measuring Financial Inclusion: The Global Findex Database.” World Bank Development

Research Group Finance and Private Sector Development Team. Policy Research Working Paper 6025 April 2012.

worldbank.org/doi/pdf/10.1596/1813-9450-6025>.

6 Cobert, Beth et al. “Mobile Money: Getting to Scale in Emerging Markets.” McKinsey & Company. February 2012.

Web. Accessed 14 Mar. 2015.

mobilemoneygettingtoscaleinemergingmarkets.pdf>.

7 Subia, María P., and Nicole Martinez. “Mobile Money Services: ‘A Bank in Your Pocket.’” Background note. International

Organization for Migration, ACP Observatory on Migration. 2014. Web. Accessed 14 Mar. 2015.

org/sites/default/ les/BN%2013%20Mobile%20transfers.pdf>.

8 Mas, Ignacio, and Olga Morawczynski. “Designing Mobile Money Services: Lessons from M-PESA.” Innovations. Spring 2009: 77-

91. Web. Accessed 14 Mar. 2015. .

9 Mas and Morawczynski.

10 Mas and Morawczynski.

11 Mas and Morawczynski.

12 Cobert et al.

13 Cobert et al.

14 Cobert et al.

15 Cobert et al.

16 CIA Factbook. “Nicaragua.” Web. Accessed 15 Mar. 2015.

nu.html>.

17 CIA Factbook.

18 World Bank. “Nicaragua Data.” Web. Accessed 18 Mar. 2015. .

19 Demirguç-Kunt, Asli, and Leora Klapper. World Bank. “Latin America: Most Still Keep Money under Their Mattress.” 18 May 2012. Web.

Accessed 18 Mar. 2015. .

20 Demirguç-Kunt and Klapper.

21 Lieberman, Carlos, Internet café owner in Managua. Personal interview. 22 May 2014.

22 “Nicaragua: Mobile Penetration to Top 80% in 2015.” Central America Data.com. 21 July 2010. Web.

centralamericadata.com/en/article/home/Nicaragua_Mobile_Penetration_to_Top_80_in_2015>.

23 Montealegre, Haroldo.

24 The Economist. “Out of Thin Air: The Behind-the-Scenes Logistics of Kenya’s Mobile Money Miracle.” 10 June 2010. Web. Accessed

18 Mar. 2015. .

25 Montealegre, Haroldo.

26 Montealegre, Haroldo.

27 Montealegre, Haroldo.

28 Montealegre, Haroldo.

29 Montealegre, Haroldo.

30 Montealegre, Haroldo.

31 Montealegre, Haroldo.

32 Personal interviews with Managua bus drivers. 18-24 May 2014.

33 Luke, Clare. “Managua Buses Enter Digital Era: Starting in August, All Passengers on Managua City Buses Will Have to Pay Their

Fares With TUC Cards.” Nicaragua Dispatch. 18 June 2013. Web. Accessed 18 Mar. 2015.

managua-buses-enter-digital-era/>. 16

MPESO: Democratizing Financial Services in Nicaragua1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: [email protected] or 734-615-9553 34

Montealegre, Haroldo.

35 Montealegre, Haroldo.

36 Montealegre, Haroldo.

37 Montealegre, Haroldo.

38 Montealegre, Haroldo.

39 Montealegre, Fernando, MPESO Director of Ecosystem. Personal interview. 22 May 2014.

40 Montealegre, Haroldo. Personal interview. 19 May 2014.

41 Montealegre, Haroldo.

42 Montealegre, Haroldo.

43 Montealegre, Haroldo.

44 Montealegre, Haroldo.

45 MPESO employee. Personal interview. 23 May 2013.

46 MPESO employee.

47 Montealegre, Haroldo.

48 Montealegre, Haroldo.

49 Montealegre, Fernando.

50 Montealegre, Haroldo.

51 Montealegre, Haroldo.

52 Montealegre, Haroldo.

53 Montealegre, Haroldo.

54 Montealegre, Fernando.

55 Montealegre, Haroldo.

56 Montealegre, Fernando.

57 Montealegre, Haroldo.

58 Montealegre, Fernando.

59 Montealegre, Haroldo.

60 Interviews with MPESO users. 21 May 2014.

61 Personal interview with MPESO agent. May 2014

62 Personal interviews with Managua bus drivers. 2014 May 18- 24.

63 Montealegre, Haroldo.

64 Montealegre, Haroldo.

65 Chamorro, Marcella. “Why is Nicaragua Stuck in the E-commerce Dark Ages?” The Nicaragua Dispatch. 15 Aug. 2012. Web.

Accessed 16 Mar. 2015. .

66 Montealegre, Haroldo.

67 Montealegre, Haroldo.

68 Montealegre, Fernando.

69 Mathison, Stuart. “Increasing the Outreach and Sustainability of Micro nance Through ICT Innovation.” The Foundation for

Development Cooperation. 2005. Web. Accessed 16 Mar. 2015.

paper-increasing-the-outreach-and-sustainability-of-micro nance-through-ict-innovation-2006.pdf>.

70 Montealegre, Haroldo.

71 Montealegre, Haroldo.

72 Montealegre, Haroldo.

73 El Nuevo Diario . “Multa Genera Confusión Entre Nicas en Costa Rica.” 9 Aug. 2014. Web. Accessed 18 Mar. 2015. >http://www.

elnuevodiario.com.ni/nacionales/326911-multa-genera-confusion-nicas-costa-rica/>.

74 Inside Costa Rica. “Nicaraguan Remittances from Costa Rica Total $282 Million Per Year.” 1 Sep. 2014. Web. Accessed 18 Mar.

2015. < http://insidecostarica.com/2014/09/01/nicaraguan-remittances-costa-rica-total-282-million-per-year/>. 17MPESO: Democratizing Financial Services in Nicaragua

1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: P [email protected] or 734-615-9553Notes

18MPESO: Democratizing Financial Services in Nicaragua

1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: P [email protected] or 734-615-9553Notes

19MPESO: Democratizing Financial Services in Nicaragua

1-429-424

Unauthorized reproduction and distribution is an infringement of copyright. Please contact us for permissions: P [email protected] or 734-615-9553Notes

The William Davidson Institute is an independent, non-pro t education, research,

and applied practice organization established at the University of Michigan in 1992.

Through a unique structure that integrates research, educational outreach, executive education, eld-based collaborations, and development consulting services, WDI

works with emerging economies to implement sound business practices and speed the transition to a more inclusive global society.

Case study publisher at the University of Michigan

Since 2007, GlobaLens has been the case writing and publishing partner for the University

of Michigan’s Ross School of Business and is a division of the William Davidson Institute. We

professionally edit, publish and market cutting-edge business case studies and other teaching

materials for adoption by top-ranked business schools globally. Our case studies, modules, and

courses cover all core business disciplines as well as social impact-related elds of study. GlobaLens teaching materials can be reviewed and adopted at