M-PESA is considered a global success story: It is used by more than two-thirds of Kenyan adults, supported by more than 85,000 agents and 50,000 merchants, processes over 8 million transactions every day totaling close to $20 million, and has enabled financial institutions to offer new financial products over the mobile channel. It was pioneered in Kenya by mobile phone operator Safaricom, a Vodafone group affiliate.
M-PESA (“M” for mobile and “Pesa” for money in Kiswahili) is an electronic payment and value storing system that is accessible through mobile phones. To access the service, customers must first register at an authorized M-PESA retail outlet, opening an account linked to their phone number. It is accessed through an application on the SIM card in the mobile phone. It works on any phone, including very basic models commonly found across rural Africa. Customers deposit and withdraw cash from their accounts by exchanging cash for electronic value at a network of retail outlets referred to as agents. Most agents are very small. Some are entirely specialised and others are run as a sideline in a shop. Agents are paid a fee by Safaricom each time they exchange cash for M-PESA value on behalf of customers. Once customers have money in their accounts, they can use their phones to transfer funds to others, pay bills, make purchases at stores, transfer funds to and from banks, and purchase mobile airtime credit. All transactions are authorized and recorded in real-time using secure text messages.
The M-PESA mobile money service was launched commercially in March 2007 but the story began much earlier than that. In 2000, DFID established the Financial Deepening Challenge Fund (FDCF), to encourage private sector led projects to improve access to financial services. This fund targeted commercial entities with the capacity to impact on markets, but for whom the uncertainty of the outcome made it impossible to make a business case to invest alone. Vodafone was awarded a grant of nearly £1m, which they were required to match, to begin developing a product that would leverage mobile phone technology to deliver financial services in East Africa.
After the funds were awarded, Vodafone partnered with its affiliate Safaricom in Kenya to conduct workshops with financial institutions to identify the barriers to increasing access to financial services. A partnership was formed between a microfinance institution, a bank and Safaricom to develop a pilot to enable microfinance loans to be paid with the help of mobile phones. Much work went into building the software and designing the platform for the pilot. When the pilot was launched towards the end of 2005, in-depth market research and product design was conducted to better understand the needs of the target clients and how they might use the product. The flexibility of the funding from DFID allowed the pilot to take a ‘test and learn’ approach. In working closely with clients in the field, the project team realised that the technology could seize a much bigger opportunity. Many Kenyans straddle the rural and urban divide; those working in the cities support those back home. Getting money back to relatives ‘up country’ was a real headache. Mobile technology combined with a low-cost network of agents created a solution to sending money to people around the country. It was relatively cheap, safe and reliable.
Regulation was a key hurdle which had to be crossed prior to the commercial launch. In 2007, there were no regulations applicable to a mobile money service. CBK took the brave step of allowing the innovation to move ahead, taking a risk-based approach. M-PESA was launched in March 2007 focusing on its core money transfer function, marketed as ‘Send Money Home’. Uptake was unprecedented in the Kenyan market, reaching 2 million customers in less than a year (Figure 1).
The initial product was launched with a simple value proposition allowing cash in, and cash out, transfers to other mobile numbers, and the purchase of airtime. While these are still among the most common uses of M-PESA, the creation of a low-cost retail payment platform created huge new opportunities. FSD Kenya helped the Commercial Bank of Africa and Safaricom to develop a mobile banking solution based on M-PESA called M-Shwari. This enables people to open fully regulated bank accounts, deposit money and borrow based on credit scoring, all entirely over their phones. M-Shwari’s growth has outstripped that of the original M-PESA product. Other functions added and commonly used are bill payments, purchases at point of sale, transferring money to bank accounts and repaying loans (most microfinance institutions allow borrowers to pay by M-Pesa). The government is using M-PESA as a channel to reach some of the poorest families in Kenya with social protection payments. As an enabler of ‘micro-payments’, M-PESA has encouraged many other innovations. M-KOPA, for example, enables rural families to acquire solar-powered lighting, purchasing on a ‘pay as you use’ basis – substituting the money they would have spent on paraffin to acquire an asset that will provide free light for years (with health benefits and a positive carbon impact).
The overall value of M-PESA is hard to measure given its pervasive impact. For example, a panel survey of users from 2009 – 2014 found that M-PESA facilitates informal insurance. Users of M-PESA were better able than non-users to manage health and other shocks by being able to access funds from their social network more quickly and at a lower cost. The survey also demonstrated that each year the users of M-PESA included more poor, rural and female users. Data from FSD Kenya and World Bank financial inclusion surveys confirm that a significant percentage of the poorest families are being reached.