What is Kenya the world leader in? Coffee production? Glorious beaches? Political instability? Crazy bus drivers? It certainly scores highly in all of these. But in economic terms its main recent success has been a mobile money transfer scheme called M-Pesa. Established by Safaricom, Kenya’s largest mobile phone company, M-Pesa is based around the transfer of cash from one user of the scheme to another, anywhere in the country. Suppose, for example, John Obama has moved from his village near Kisumu to work as a taxi driver in Nairobi, and wishes to send money back to his mother at month-end. Before M-Pesa, he would have had to use a money order from the post office, or an informal channel such as a bus driver, or taken the money himself - all of which are expensive, risky or time consuming. Now he can use M-Pesa to send money back to his relatives, cheaply, safely and conveniently. After registering for the service, he simply pays the cash to an M-Pesa agent in the city, specifies who the money is to be sent to, and the system sends an sms the recipient, who then goes to another M-Pesa agent, enters a PIN number, and collects the money.
M-Pesa has spread like wildfire in Kenya since its introduction in 2007, and now has as an estimated 9 million users, and 14 000 agents countrywide. That is, an estimated 50% of Kenyan adults make use of the service. It has spread beyond its original remittance function, and now incorporates a payments facility (which is technologically very similar to the remittance function). So John Obama not only uses M-Pesa to send money to his mother on the shores of Lake Victoria, he also lets his customers pay for their taxi fares by M-Pesa - which saves him the bother and risk of handling cash - and as well uses it to pay for his vehicle service and repairs and to buy his groceries. If he has money left at the end of the month, he leaves it on his phone, as it is safer than keeping cash under his mattress. Many people use M-Pesa for paying their utilities bills, so much so that apparently the payments halls of the electricity and water companies have now been emptied of customers, and employers are starting use M-Pesa to pay their workers, rather than using cash. M-Pesa has just started a cross-border service, with remittances enabled between Kenya and the UK.
M-Pesa has spread quickly because it is incredibly useful, saving users time and money. Research by Safaricom indicates an average transaction saves 3 hours in time and 3 dollars in costs. With an estimated half a million transactions daily, these savings add up to large enough numbers to have a macroeconomic impact, leading to considerable efficiency gains and productivity improvements. In agriculture, for example, the labour shortages that often emerge at harvest time are exacerbated when workers take time off at the end of the month to send money home, and similarly teachers in remote locations would have to take a day or more off at month end to take their salary cheque to a bank for encashment.
There are some factors specific to Kenya that have made M-Pesa a roaring success. First, there is a great need - the majority of adults (around 80%) are unbanked and did not previously have access to formal financial services. Second, Kenya has a high level of rural-urban migration, and hence a high level of remittances, mostly between extended family members. Third, it has a high level of mobile phone penetration. It also has a mobile phone company that was prepared to take a risk and make a considerable investment in software, security and an agent network.
But Safaricom was also helped by an accommodating stance taken by the regulator, the Central Bank of Kenya. The CBK recognised that the main regulatory issues were payments related - hence the focus was on consumer protection, security, reliability, and the integrity of the system and the agent network. One of the most important requirements was that all M-Pesa balances on the system had to be backed by money in a “trust account” at a licensed bank, thus providing security for customer funds. Crucially, however, the CBK recognised that this was not a banking service in the usual sense of the word - deposit taking - and hence did not have to be operated by a bank - leaving the way for the mobile network operator (MNO) to implement it. This enabled rapid innovation to be rolled out, and costs to be kept low. This in turn encouraged the growth of high volume low value transactions - in contrast to the normal high value low volume transactions favoured by banks.
M-Pesa-type systems have been rolled out in other countries, and have proved particularly adaptable even where infrastructure is limited - in Afghanistan and Sierra Leone for instance. The approach of the regulator is of crucial importance. Not all have been like the CBK - some have insisted that only banks can operate such systems, but this can stifle the business. The characteristics of the product are more suited to mobile operators than banks, and around the world innovation is generally being driven by the MNOs and technology companies rather than the banks.
As M-Pesa has demonstrated, mobile money has tremendous potential to provide cheap financial services to the unbanked. It may not work everywhere, but policymakers and regulators can assist by taking an appropriate regulatory approach - commensurate with the level of risks involved, but not stifling innovation. As the CBK points out, M-Pesa may involve large numbers of transactions, but the values, even in aggregate, are relatively small. The regulatory task is therefore to protect consumers of the service, rather than to worry about its impact on the banking system. As for the banks in Kenya, they ignored M-Pesa initially, and only woke up when it was too late, and realised that they had lost potential business to a dynamic new competitor.
