Notes on M-PESA

October 14, 2012
I spent a few weeks in Kenya in September. In many ways, Kenya is immensely tech savvy, including in its payments systems. M-PESA is a mobile money system that Vodafone launched in Kenya in 2007. It’s not something often written about in the US, but it’s very relevant to payments systems broadly. Here’s a few thoughts/facts/observations:
  • M-PESA is the world’s most widely-adopted mobile payments system. More than 50% of the mobile payments in the world happen over M-PESA. M-PESA operates in Kenya, Tanzania, South Africa, Afghanistan, and India, though almost all transactions still take place in Kenya, the first launch market. M-PESA was developed by Safaricom and Vodafone (Safaricom’s parent company). The IP is still held by Vodafone.
  • M-PESA’s premise is simple: users conduct instant peer-to-peer money transfers, using phone numbers as identifiers. Cash enters and leaves the system through M-PESA agents or traditional ATMs.
  • Safaricom introduced M-PESA in Kenya in 2007, initially to lower operating costs for microfinance institutions. During the pilot, loan recipients began using M-PESA more broadly, and the product was expanded. This history is documented in Money, Real Quick.
  • Today, 70% of Kenyan adults have used M-PESA, which is greater penetration among Kenyan adults than Facebook has among US adults. The equivalent of 30% of Kenyan GDP flows through it each year.
  • Safaricom, the incumbent monopoly, is by far the largest telco in Kenya. In rural areas, rival telcos struggle to provide any cell reception; Safaricom has coverage, data, and M-PESA agents.
  • The network of human agents that broker M-PESA-to-cash exchanges is over 40,000 agents strong – meaning M-PESA has more physical points of presence than there are bank branches in Kenya across all banks.
  • Other telecoms have replicated M-PESA’s technology, but they’ve yet to replicate its agent network. Load-balancing cash requirements seems to be the hardest piece. (Cash tends to flow from urban to rural areas.)
  • M-PESA agents are everywhere. It feels like every fourth shop in Nairobi had an M-PESA sign. “M-PESA is like your shadow”, as the saying goes.
  • It appears that the local entrepreneurs who double as M-PESA agents do so not for margin from the service but to drive foot traffic into their stores.
  • Similarly, Safaricom makes razor-thin margin on M-PESA itself but makes up for it with improved customer retention.
  • At Nairobi’s shopping centers, the ATMs that dispense or transfer money from M-PESA had the longest lines.
  • M-PESA adoption has been strongest where its alternatives are worst. Bank transfers and checks are practically unavailable in Kenya. Before M-PESA, internal remittances were sent on a bus with a human courier and utility bills were paid in cash to a teller. Now, internal remittances and larger recurring charges are two of M-PESA’s dominant uses. M-PESA offers a better version of both checks and bank transfers.
  • M-PESA is used less often for local transactions – a restaurant bill, a product at the market, transportation, small services like shoe shining – because cash works sufficiently well most of the time. Its flat fee per transaction model makes smaller transactions disproportionately expensive, which disproportionately affects its cash-constrained users. In current form, M-PESA is not a better version of cash.
  • M-PESA doesn’t yet offer a product that grants credit, though one is purportedly imminent. Banks and microfinance institutions offer loans, but credit cards are rare, and credit card acceptance rarer still. The internet offers no salve; many ecommerce sites based in the US or Europe reject outright credit cards issued in Kenya for fraud risk.
  • The Kenyan Government announced last week that it planned to tax cash withdrawals from M-PESA at 10%. It’s probably ill-conceived: it’s a consumption tax that hits the most price-sensitive consumers, and may become an example of “the tax that shifts consumption so far it destroys more revenue than it creates.”
  • M-PESA’s IP is held by Vodafone in London, though it was largely developed by IBM in Germany. People who develop software atop M-PESA say that technology's stilted, the service is erratic, and they've little hope for its improvement. Still, while development can be slow and brittle, success means access to the world's most widely-adopted mobile money system.
  • M-PESA slipped past financial regulators and banks, who seemed to think little of the service, and by the time it took off, its market position was sufficiently strong that it could avoid the onerous regulation requirements under which banks fall. This lowers the system’s cost structure, relative to that of a bank, and broadens its potential customer base. Banks have petitioned unsuccessfully for regulation; it might help the Kenyan Government holds a minority interest.
  • Telecoms like Safaricom should be in the pole position: they've got brand recognition and millions of networked customers, whom they can contact and with whom they've a billing relationship. Yet they differ from the slow-moving, multinational incumbents found in the US or Europe: they still operate in a market that’s yet to suffer from a barrage of smartphones.
  • If you’re curious for more, this Kindle Single is one of the best things I’ve read about M-PESA.