M-PESA, a mobile phone-based system for person-to-person payments and money transfers. M-PESA – M stands for mobile phone, and PESA is a Swahili word for money. We in the developed world take money transfer for granted, as is usually a very simple transaction, using an easily accessible service. But in a country like Kenya, where financial services are so heavily under-developed, it is very difficult, risky and expensive to send or receive money. M-PESA has not only made it cheaper and easier to send money, but it has also had a profound impact on the ability of Kenyan households to manage their money.
It is basically a platform for making small-value electronic payments. Although M-PESA customers earn no interest on the balances in their accounts, many also use it to build small amounts of savings. Vodafone, led by Nick Hughes and Susie Lonie, were the brains behind the M-PESA concept, and Safaricom (Kenya's dominant mobile phone operator) pursued it. Since its inception in March 2007, M-PESA has attracted over 13 million customers which represent over 50% of Kenya's adult population, and now employs 28,000 agents spread all across Kenya.
How Does M-PESA Work?
M-PESA is built on the premise that charges are only incurred when a customer "does something" with his or her money and thus there is no charge for depositing funds. Rather, charges are incurred for sending and receiving funds. For example, one can create a M-PESA accounts at one of the 20,000+ retail stores throughout Kenya by inserting a new Safaricom SIM card in ones mobile phone, and then he or she is ready to deposit funds.
So here is an example of a M-PESA transaction:Person A deposit 300 shillings (about $4) at a M-PESA store. The owner of the store takes the cash, enters the transaction on his or her mobile phone, and then registers the transaction in a log book, which the Person A then signs. Almost immediately, Person A receives a text message on his cell phone confirming the deposit. Person A then sends the money using his mobile phone to Person B, incurring a 30 shilling charge for that transaction. Person B can then withdraw that money at any M-PESA outlet or at an ATM, for a withdrawal fee was 25 shillings. Fees increase to 170 shillings (or 175 at an ATM) for withdrawals of 20,001 to the maximum 35,000 shilling limit. Though the tariff increases with transaction size, the gradient is not steep, which makes small-scale transactions less economical than larger ones.
Another interesting feature is that customers can send money to non-M-PESA clients that have access to a mobile phone. Money is debited from the sender's account and the recipient receives a code via text message which can then be used to claim the debited amount at any M-PESA store. M-PESA clients pay a commission that is about three times the standard fee when sending to non-customers, though the non-customer pays nothing to withdraw. The pricing is structured this way for 2 reasons – first, the arrangement acts a sales pitch to ensure that the non-customer has an enjoyable first experience with M-PESA. Second, the sender has a strong incentive to persuade the recipient to register with M-PESA to reduce future commission fees.
Another important aspect of M-PESA's success is the meticulous attention paid to branding. All M-PESA stores are painted "Safaricom green" (see pictures above), which ensures a uniform appearance, reinforces the link with the well-respected mobile provider, and makes it easier for customers to locate the outlets.
How Does M-Pesa Make a Difference? - A Few Examples:
- A person who has migrated and working in an urban area like Nairobi, can now safely and efficiently send money to his family living in a village. Without M-PESA, he would have had to take a long, time-consuming, tedious and often unsafe (carrying cash in very risky in Kenya) journey back home. M-PESA has also made is easier to store money. It is not uncommon for Kenyans to store money under their mattresses….which is unsafe and inconvenient. Now, Kenyans can store their cash as e-money using their mobile phones and M-PESA. And the best part is that one doesn't even have to own a mobile phone to use the M-PESA service. All he or she needs is a registered sim-card from the service provider (Safaricom), and then the person can use it by inserting the sim-card into anyones mobile phone to use the M-PESA service. This definitely helps someone who is extremely poor, and cannot afford to buy a mobile phone.
- A new wave of applications is making it possible for customers to make a range of payments to businesses using their M-PESA accounts. Although the most widely used application is the payment of electricity bills, other businesses have realized M-PESA's advantages and are joining in. Some private schools in the poorest areas of Kenya, and is one of the first M-PESA 'super-users.' These schools only accepts payments through M-PESA or directly into its account at a Bank. These arrangements mean that the school's employees do not collect cash payments, which would pose a security threat in the neighborhoods where these schools are located. In addition, using M-PESA means parents need not be physically present to make tuition payments and that other members of the extended family (e.g. grandparents) can pay.
- The ability of a person to make immediate, real-time transactions of as little as $2 helps prevent unnecessary periods of going without food. There is evidence that households with M-PESA are more successful at weathering negative events and, specifically, do not reduce their food consumption when faced with a shock. Additionally, being able to get money quickly allows a family to take a relative to see the doctor on the first day of their illness, and children are able to attend school when they would have otherwise been forced to skip or drop out for lack of fees.
- Real-time payment transactions using M-PESA also benefit service providers. When health care organizations can receive payments more quickly and more transparently, they can provide better service
M-PESA Expanding its Services via M-KESHO:
M-PESA has exceeded all expectations, and until recently it was only a payments service – the customers received no interest on their deposits. But that changed with the introduction of M-KESHO in May 2010. It's a joint venture of Safaricom and Equity Bank. M-KESHO will provide financial products that will ride on the M-PESA transactional platform. There is no fee to open an M-KESHO account, nor minimum balances or monthly charges. M-KESHO accounts differ from M-PESA in that they pay interest, do not have an upper limit on account balances, and are linked to credit and insurance facilities provided by Equity Bank. Customers can deposit and withdraw money from their M-KESHO account by transferring value to and from their M-PESA account. The M-KESHO arrangement between Safaricom and Equity is exclusive for one year, and thus the product could be offered by other banks after that.
Why Kenya?
The success of a concept like M-Pesa in Kenya was mainly due to 4 reasons:
1) Migration patterns within Kenya have split many families and thus generated high demand for domestic remittances services.
2) Kenya was heavily under-banked. In 2007, the ratio of private credit to GDP was around 20% and there were only 2.5 million bank accounts in a population of 39 million. High levels of financial exclusion provided an open playing field for M-PESA.
3) M-PESA also benefitted from the structure of the mobile telephony industry, since Safaricom enjoyed a market share of nearly 80%.
4) The Government / Central Bank of Kenya should also get some credit for easing regulations. As the M-PESA accounts earned no interest, and because customer balances were deposited in a trust account in a regulated financial institution, the Central Bank of Kenya (CBK) allowed Safaricom to operate M-PESA outside the mandates of the banking law under a letter of no objection from CBK that laid down specific conditions for M-PESA operations.
Whether the M-Pesa model can be successfully duplicated in other countries remains to be seen.
Even though M-PESA seems to be based on such a simple concept of sending of receiving money, it is having a huge impact. It has improved people's ability to deal with shocks, allowed businesses to better coordinate their activities, and opened a connection to the financial system for a large number of Kenyans that were previously excluded. According to one survey, 90 percent believed their money was safe with M-PESA; more than 90 percent said they were "happy", "very happy", or "extremely happy" with the service; and 92 percent said they would be worse off without M-PESA. It is amazing to see how having easy access to mobile money and the ability to make immediate transactions, are changing lives for the better in Kenya.
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