Ignacio Mas and Dan Radcliffe, Bill & Melinda Gates Foundation1 March 2010
M-PESA is a small-value electronic payment and store of value system that is accessible from ordinary mobile phones. It has seen exceptional growth since its introduction by mobile phone operator Safaricom in Kenya in March 2007: it has already been adopted by 9 million customers (corresponding to 40% of Kenya’s adult population) and processes more transactions domestically than Western Union does globally. M-PESA’s market success can be interpreted as the interplay of three sets of factors: (i)pre-existing country conditions that made Kenya a conducive environment for a successful mobile money deployment; (ii)a clever service design that facilitated rapid adoption and early capturing of network effects; and (iii)a business execution strategy that helped M-PESA rapidly reach a critical mass of customers, thereby avoiding the adverse chicken-and-egg (two-sided market) problems that afflict new payment systems.
M-PESA in a Nutshell2
M-PESA was developed by mobile phone operator Vodafone and launched commercially by its Kenyan affiliate Safaricom in March 2007. M-PESA (“M” for mobile and “PESA” for money in Swahili) is an electronic payment and store of value system that is accessible through mobile phones. To access the service, customers must first register at an authorized M-PESA retail outlet. They are then assigned an individual electronic money account that is linked to their phone number and accessible through a SIM card-resident application on the mobile phone.3 Customers can deposit and withdraw cash to/from their accounts by exchanging cash for electronic value at a network of retail stores (often referred to as agents). These stores are paid a fee by Safaricom each time they exchange these two forms of liquidity on behalf of customers. Once customers have money in their accounts, they can use their phones to transfer funds to other M-PESA users and even to non-registered users, pay bills, and purchase mobile airtime credit. All transactions are authorized and recorded in real time using secure SMS, and are capped at $500.
Customer registration and deposits are free. Customers then pay a flat fee of around US 40¢4 for person-to-person (P2P) transfers and bill payments, US 33¢ for withdrawals (for transactions less than US $33), and US 1.3¢ for balance inquiries. Individual customer accounts are maintained in a server that is owned and managed by Vodafone, but Safaricom deposits the full value of its customers’ balances on the system in pooled accounts in two regulated banks. Thus, Safaricom issues and manages the M-PESA accounts, but the value in the accounts is fully backed by highly liquid deposits at commercial banks. Customers are not paid interest on the balance in their M-PESA accounts. Instead, the foregone interest is paid into a not-for-profit trust fund controlled by Safaricom (the purpose of these funds has not yet been decided).
M-PESA is useful as a retail payment platform because it has extensive reach into large segments of the population. Exhibit 1 shows the size of various retail channels in Kenya.5 Note that there are nearly five times the number of M-PESA outlets than the total number of PostBank branches, post offices, bank branches, and automated teller machines (ATMs) in the country. Using existing retail stores as M-PESA cash-in/cash-out outlets reduces deployment costs and provides greater convenience and lower cost of access to users.
Exhibit 1: Outlets offering financial services in Kenya6
A Snapshot of M-PESA after Three Years
M-PESA is going from strength to strength. As shown in Exhibit 2, Safaricom reached the 9 million customer mark in under three years.
The latest developments and figures reported by Safaricom as of January 2010 are:7
9.0 million registered customers, of which the majority are active. This corresponds to 60% of Safaricom’s customer base, 23% of the entire population, and 40% Kenyan adults.8
16,900 retail stores at which M-PESA users can cash-in and cash-out, of which nearly half are located outside urban centers.
US $320 million per month in person-to-person (P2P) transfers. On an annualized basis, this is equal to roughly 10% of Kenyan gross domestic product (GDP). Although transactions per customer have been on a rising trend, they remain quite low, probably still under two P2P transactions per month.
US $650 million per month in cash deposits and withdrawal transactions at M-PESA stores. The average transaction size is around US $33, but Vodafone has stated that half the transactions are for a value of less than US $10.
US $7 million in monthly revenue (based on the six months to September 2009). This is equal to 8% of Safaricom revenues.
19% of Safaricom airtime purchases are conducted through M-PESA.
There are 27 companies using M-PESA for bulk distribution of payments. Safaricom itself used it to distribute dividends on Safaricom stock to 180,000 individual shareholders who opted to receive their dividends into their M-PESA accounts, out of a total of 700,000 shareholders.
Since the launch of the bill pay function in March 2009, there are 75 companies using M-PESA to collect payments from their customers. The biggest user is the electric utility company, which now has roughly 20% of their one million customers paying through M-PESA.
At least two banks (Family Bank and Kenya Commercial Bank) are using M-PESA as a mechanism for customers to either repay loans or withdraw funds from their banks accounts.
Customer Perspectives on M-PESA9
A survey of 3,000 M-PESA users and non-users conducted in the fall of 2008 shed considerable light on the profile of M-PESA’s early adopters and customer usage patterns. The survey found that the average M-PESA user is, in comparison to non-users, twice as likely to have a bank account (72 percent versus 36 percent), wealthier (65 percent higher expenditure levels), more literate, and better educated. Early adopters appear to be experienced with banking propositions and fairly “tech savvy,” which probably makes them more acutely aware of the convenience offered by M-PESA relative to the alternatives.
Exhibit 3 highlights how customers use the service. Consistent with its broad market positioning, more than half the sample use it primarily for sending and receiving money. Interestingly, 21 percent of M-PESA users report using M-PESA for storing money. However, the survey revealed that less than 1 percent of accounts had balances of over KSh 1,000 (US $13), and a government audit of M-PESA in August 2009 revealed that the average balance on M-PESA accounts was only US $2.70.10The survey also found that 52 percent of customers use the service on a monthly basis, suggesting that customers have yet to incorporate M-PESA into their daily lives.
Exhibit 3: The Uses of M-PESA
The survey also found that 98 percent of users report being happy with the service and 84 percent claim that losing M-PESA would have a large, negative effect on them. Exhibit 4 below illustrates how customers compare M-PESA with alternative services.
Exhibit 4: Comparing M-PESA with the Alternatives
M-PESA’s Service Evolution
M-PESA’s original core offering was the P2P payment – enabling customers to send money to anyone with access to a mobile phone. It opened up a market for transactions which previously were handled largely informally – through personal trips, friends, and public transport networks. That is represented by the set of transactions labeled ‘personal networks’ in the middle of Exhibit 5 below. Many P2P transactions can be characterized as scheduled payments (such as sending a portion of salary earned at the end of the month to relatives back home), but many represent a basic form of finance, where people can draw on a much broader network of family members, friends, and business associates to access money as and when required. Thus, M-PESA not only introduces a large measure of convenience to transactions that were already occurring, but it also enables a basic form of financial protection for a large number of users by enabling a network for instant, ‘on demand’ payments.
In recent months, Safaricom has increasingly opened up M-PESA to institutional payments – enabling companies to pay salaries and collect bill payments. In future, Safaricom envisions increased use of M-PESA for in-store purchases. Thus, Safaricom intends for M-PESA to become a more pervasive retail payments platform, a strategy represented by the downward arrow in Exhibit 5.
Exhibit 5: Potential Range of Transactions Supported by M-PESA
The challenge remains for M-PESA to become a vehicle for delivery of a broader range of financial services to the bulk of the Kenyan population – represented by the upward arrow in Exhibit 5. So far, the evidence is limited that people are willing to use the basic M-PESA account itself as a store of value. There is likely to be a need to develop more targeted savings products that balance customers’ preference for liquidity and commitment, and which connect into a broader range of financial institutions. This is the journey M-PESA must be on for it to deliver on its promise of addressing the challenge of financial inclusion in Kenya. A key precondition is regulation: the Central Bank of Kenya is in the process of finalizing regulations that will allow non-bank outlets and platforms such as M-PESA as a channel for formal deposit-taking. Beyond that, Safaricom will need to develop appropriate service, commercial and technical models for M-PESA to interwork with the systems of other financial service providers. We return to this topic in the concluding section of this paper.
The broader significance of M-PESA
Before examining why M-PESA achieved such dramatic growth, we discuss briefly three top-line lessons that have emerged from M-PESA’s success:
First, M-PESA has demonstrated the promise of leveraging mobile technology to extend financial services to large segments of unbanked poor people. This is fundamentally because the mobile phone is quickly becoming a ubiquitously deployed technology, even among poor segments of the population. Mobile penetration in Africa has increased from 3 percent in 2002 to 48 percent today, and is expected to reach 72 percent by 2014.11 And, happily, the mobile device mimics some of the key ingredients needed to offer banking services. The SIM card inside GSM phones can be used to authenticate users, thereby avoiding the costly exercise of distributing separate bank cards to low-profitability poor customers. The mobile phone can also be used as a point of sale (POS) terminal to initiate financial transactions and securely communicate with the appropriate server to request transaction authorization, thus obviating the need to deploy costly dedicated devices in retail environments.
Second, M-PESA has demonstrated the importance of designing usage- rather than float-based revenue models for reaching poor customers with financial services. Because banks make most of their money by collecting and reinvesting deposits, they tend to distinguish between profitable and unprofitable customers based on the likely size of their account balances and their ability to absorb credit. Banks thus find it difficult to serve poor customers because the revenue from reinvesting small-value deposits is unlikely to offset the cost of serving these customers. In contrast, mobile operators in developing countries have developed a usage-based revenue model, selling prepaid airtime to poor customers in small increments, such that each transaction is profitable on a stand-alone basis. This is the magic behind the rapid penetration of prepaid airtime into low-income markets: a card bought is profit booked, regardless of who bought the prepaid card. This usage-based revenue model is directly aligned with the model needed to sustainably offer small-value cash-in/cash-out transactions at retail outlets and would make possible a true mass-market approach, with no incentive for providers to deny service based on minimum balances or intensity of use.
Third, M-PESA has demonstrated the importance of building a low-cost transactional platform which enables customers to meet a broad range of their payment needs. Once a customer is connected to an e-payment system, she can use this capability to store money in a savings account, send and receive money from friends and family, pay bills and monthly insurance premiums, receive pension or social welfare payments, or receive loan disbursements and repay them electronically. In short, when a customer is connected to an e-payment system, her range of financial possibilities expands dramatically.
Putting these elements together, M-PESA has prompted a rethink on the optimal sequencing of financial inclusion strategies. Where most financial inclusion models have employed “credit-led” or “savings-led” approaches, the M-PESA experience suggests that there may be a third approach – focus first on building the payment “rails” on which a broader set of financial services can ride.