M-pesa in Kenya Ignacio Mas and Dan Radcliffe, Bill & Melinda Gates Foundation1 March 2010

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Mainstreaming M-PESA’s Regulatory Treatment

M-PESA’s regulatory treatment as a payments vehicle needs to be formalized so that it can become regulated in the most appropriate way. To this end, the CBK has been trying to get a new payments law enacted by Parliament, but the draft has not yet been approved. The intention is for M-PESA to be covered in future by regulations emanating from this payments law. The CBK is also in the process of finalizing agent banking regulations which would allow commercial banks to use retail outlets as a delivery channel for financial services. Banks are quite reasonably complaining that they could not replicate the M-PESA service themselves since they are not currently allowed to undertake customer transactions through agent networks on their own. We believe there should be a level playing field, so that both banks and M-PESA can operate such agent networks.

Pricing that Enables Smaller Payments

M-PESA’s current pricing model is not conducive for small transactions. A US $10 P2P transfer plus withdrawal, for example, costs around 7 percent of the transaction size (US 0.40¢ for the transfer plus US 0.33¢ for the withdrawal). We see two advantages to adjusting M-PESA’s current pricing model to make it work for smaller-denomination transactions:

  • It would make the service accessible to a poorer segment of the population, for whom pricing is now too high given their transactional needs. This would allow Safaricom to maintain customer growth once saturation starts to set in at current pricing.

  • It would allow customers to use M-PESA for their daily transaction needs, and in particular to save on a daily basis when they are paid daily.

A reduction in customer prices could come about in several ways:

  • For electronic transactions, the current P2P charge of US 40¢ allows for substantial scope for price reductions. But let’s be careful. There is a compelling logic behind the current model of extracting value from remote payments (for which there is substantial customer willingness to pay), while maintaining tight pricing on cash transactions (for which customers are less willing to pay). But we do believe there is room for ‘tranching’ the P2P fee so that the price works for smaller (e.g. daily) transactions.

  • For cash transactions, one way to enable lower fees would be to create a category of street-level sub-agents, characterized by lower costs and commissions than store-based agents. Sub-agents would be a kind of “e-susu collector,” operating with small working capital balances in order to aggregate small customer transactions. Sub-agents would use normal M-PESA retail outlets to rebalance their cash and M-PESA stored value. The key principle here is that segmentation of customers needs to go hand-in-hand with segmentation of agents.

Linking with Banks and other Institutional Partners to Offer a Fuller Range of Financial Services

While some customers use M-PESA as a savings device, it still falls short of being a useful savings proposition for most poor people. According January 2009 CBK audit of M-PESA, the average balance on M-PESA accounts was around US $3. This is partly a “large number” problem: if 900,000 people used M-PESA to save, that would “only” be 10 percent of users and their savings would be diluted within an “average” savings balance. But the fundamental problem is that there is still a lot of conversion of electronic value back into cash, say following receipt of a domestic remittance. We attribute this to a combination of factors:

  • Lack of marketing. Safaricom does not want to publicly promote the savings usage of M-PESA for fear of provoking the Central Bank into tighter regulation of M-PESA.

  • Customer pricing. There is a flat fee of around US 33¢ for withdrawals under US $33, which means that small withdrawals carry a large percent fee.

  • Product design. M-PESA works very much like an electronic checking account, and does not offer structured saving products which may help people build discipline around savings.

  • Inflation. M-PESA does not pay interest. In an environment with 15 percent inflation (during its first full year of operation in 2008), this may be too onerous for savings.

  • Trust. Deposits are not supervised by the Central Bank. And unlike payments, where trust can be validated experientially in real time, savings requires trust over a longer period of time.

  • Privacy. People may want more privacy in their savings behavior than an agent provides.

  • Excess liquidity. 16,000 cash-in points are also 16,000 cash-out points. The ubiquity of M-PESA agents may make it too easy for customers to cash-out their funds, thus limiting their ability to accumulate large balances.

Rather than expecting Safaricom to develop and market richer savings services, we believe that M-PESA should support savings propositions by linking into banks. M-PESA would then become a massive transaction acquisition network for banks rather than an alternative to them. Safaricom is beginning to connect with banks. In September 2009, for example, Family Bank connected to M-PESA to allow their customers to transfer money from M-PESA to their Family Bank account (using M-PESA’s bill pay function). This is following a successful pilot of loan repayments via M-PESA’s bill pay function.

M-PESA would also benefit from establishing further linkages with institutions beyond banks, such as billers, distributors, and employers. By promoting M-PESA as a mechanism for distributing salaries and social welfare payments, enabling payments across supply chains, and paying bills, the need for cash-in and cash-out would be minimized, and, as a result, a key component of transaction costs could be reduced. We also suspect savings balances would be higher if people received payments directly into their account rather than in cash, and if they had more useful things they could do with their money in electronic form.

Concluding thoughts: How M-PESA can reinvigorate visions around financial inclusion

Imagine a world where banks are nowhere near where you live. The nearest branch is 10 kilometers away, but it takes you almost an hour to get there by foot and bus because you don’t have your own wheels. With waiting times at the branch, that’s a round-trip of two hours – a quarter or so of your working day gone. And the bus fare is only 50 cents, but that’s one quarter of what you make on a good day. So each banking transaction costs you the equivalent of almost half a day’s wages. It would be like an ATM charging us something like $50 for each transaction, given what we earn.

Then, imagine a world without credit instruments or electronic payments. No checks, no cards, no money orders, no direct debits, no internet banking. All your transactions are done in cash or, worse, by bartering goods. All exchanges are physical, person-to-person, hand-to-hand. Consider the hassle and the risk of sending money to distant relatives, business partners, or banks.

How would you operate in such a world? A recent book, Portfolios of the Poor, has documented how poor people cope. How they save to ‘push’ some excess money from today to tomorrow, how they borrow to ‘pull’ tomorrow’s money to fund some needed expense today. You store some cash in the home to meet daily needs, you park it with a trusted friend for emergencies, you buy jewelry because that represents a future for your children, you pile up some bricks for the day when you can build an extra room in your house. You make regular contributions to a savings group with a circle of friends to build up a pot, and one day it will be your turn to take that pot home to buy new clothes. You also borrow from friends, seek advances from your employer, pawn some of your jewelry, and go to the moneylender.

The authors of Portfolios of the Poor document some poor families across India, Bangladesh and South Africa using up to 14 different mechanisms to manage their financial lives. They have few options, but you need to deploy all your ingenuity to use them all, precisely because none are very good. Some are not very safe because of their sheer physicality. If you save by storing your grain or buying goats, when your village hits hard times you may not be able to find ready buyers for your grain or goats. Forget about getting loans from neighbors during hard times. The local moneylender runs a quasi-monopoly in the village because it is too costly for you to go to other moneylenders in other villages, and in any case they don’t know you there. So you end up paying dearly for a loan.

We estimate that over 2 billion people need to cope with such circumstances. The lack of good financial options is undoubtedly one of the reasons why poor people are trapped in poverty. They cannot sustain or even aspire to higher income because they are not able to invest in better farming tools and seeds to enhance their productivity, start a microenterprise, or even take the time to search for better paying employment opportunities. Their income is volatile, often fluctuating daily, so without reliable ways of pushing and pulling money between good days and bad days they may have to face the stark decision to pull the kids out of school or put less food on the table during bad patches. And without good financial tools they may not be able to cope with shocks that set them back periodically. Most of these shocks are foreseeable if not entirely predictable: a drought, ill-health, lifecycle events such as marriage and death.

Cash is the main barrier to financial inclusion. As long as poor people can only exchange value in cash –or, worse, physical goods—they will remain too costly for formal financial institutions to address in significant numbers. Collecting low-value cash deposits and redeeming their savings back into small sums of cash requires a costly infrastructure which few banks are willing to make extensive in low-income or rural areas. But once poor people have access to cost-effective electronic means of payments such as M-PESA, they could, in principle, be profitably marketable subjects by a range of financial institutions.

M-PESA itself does not constitute financial inclusion. But it does give us glimpses of a commercially sound, affordable and effective way to offer financial services to all.


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1 Ignacio Mas is Deputy Director and Dan Radcliffe Associate Program Officer in the Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP) team.

2 For more detailed accounts of the M-PESA service, see Hughes and Lonie (2009) for a historical account, Mas and Morawczynski (2009) for a fuller description of the service, and Mas and Ng’weno (2009) for the latest accomplishments of M-PESA.

3 The Subscriber Identification Module (SIM) card is a smart card found inside mobile phones that are based on the GSM family of protocols. The SIM card contains encryption keys, secures the user’s PIN on entry, and drives the phone’s menu. The Short Messaging Service (SMS) is a data messaging channel available on GSM phones.

4 We assume an exchange rate of US $1:75 Kenyan Schillings.

5 Kenya has a total population of nearly 40 million, with 78% living in rural areas and a GDP per capita of $1,600. 19% of adults have access to a formal bank account. See FSDT (2009a) for financial access data derived from the FinAccess survey, a nationally representative survey of 6,600 households conducted in early 2009.

6 Data from this table was pulled from the Central Bank of Kenya, Kenya Post Office Savings Bank, and Safaricom websites.

7 See www.safaricom.co.ke/fileadmin/template/main/images/MiscUploads/M-PESA%20Statistics.pdf for key monthly statistics for M-PESA. Additional figures are taken from Safaricom’s published half-year results for the period ending September 2009 and Central Bank of Kenya reports.

8 The 2009 FinAccess survey (FSDT [2009a], p. 16) confirmed that 40% of adults had used M-PESA.

9 The data and tables from this section are from Suri, Tavneet and William Jack (June 2008), “The performance and Impact of M-PESA: Preliminary Evidence from a Household Survey.” Unpublished Paper

10 Okoth, Jackson (2009). “Regulator gives M-PESA a clean bill of health.” The Standard, 27 January 2009.

11 Wireless Intelligence (www.wirelessintelligence.com)

12 FSD-Kenya (2006)

13 CIA World Fact Book (https://www.cia.gov/library/publications/the-world-factbook)

14 For fuller analyses of the use of mobile money for domestic remittances in Kenya, see Ratan (2008) and Morawczynski (2008).

15 FSD-Kenya (2006) and FSD-Kenya (2009).

16 The Central Bank of Kenya Act was amended in 2003 to give CBK broad oversight mandate over payment systems, but the operational modalities for its regulatory powers over payments systems have not been implemented, pending approval of a new National Payments System Bill which has languished in Parliament.

17 The results of the survey are explained in Okoth (2009).

18 FinAccess Survey, FSDT (2009a), p 16.

19 In her field research, Olga Morawczynski finds that sending KSh 1,000 through M-PESA is 27% cheaper than the post office’s PostaPay, and 68% cheaper than sending it via a bus company. See Morawczynski and Pickens (2009).

20 It has become habitual to illustrate network effects with reference to fax machines: the first set of people who bought a fax machine didn’t find it very useful as they couldn’t send faxes to many people. As more people bought fax machines, everyone’s faxes became more and more useful. Network effects are sometimes referred to as demand-side economies of scale, to emphasize that scale affects the value of the service to each customer. This distinguishes it from supply-side economies of scale, which refer to situations where average costs per customer fall as volume increases. Davidson (2009) discusses implications of network effects for mobile money.

21 Safaricom company results for the year ending March 2007.

22 The earliest pilot project conducted in 2004/05 revolved around microloan repayments, and involved the Commercial Bank of Africa, Vodafone, Faulu Kenya and MicroSave, in addition to Safaricom.

23 A survey of 1,210 users in late 2008 revealed that 70% of survey respondents claimed they had first heard about M-PESA from advertisements, TV or radio. FSDT (2009b), p. 6.

24 Safaricom wants the split to be 20%/80%, thus passing more of the commission down to the retail outlet.

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