Imagine a world where banks are nowhere near where you live. The nearest branch is 10 kilometres away, but it takes you almost an hour to get there by foot and bus because you don’t have your own vehicle. With waiting times at the branch, that’s a round-trip of two hours – a quarter or so of your working day gone. The bus fare is about a quarter of the money you make on a good day. This means each banking transaction costs you the equivalent of almost half a day’s wages. 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, and 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 (Collins et al. 2009), documents 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. They store some cash at home to meet daily needs, they park it with a trusted friend for emergencies, they buy jewellery because that represents a future for their children, and they pile up some bricks for the day when they can build an extra room in their house. They make regular contributions to a savings group with a circle of friends to build up a pot, and one day it will be their turn to take that pot home to buy new clothes. They also borrow from friends, seek advances from their employers, pawn some of their jewellery, and go to the moneylender.
It is estimated 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.
In Kenya, prior to 2007, a large number of the nation’s population faced the problems stated above. Mobile phone operator Vodafone changed Kenyans lives when it launched the revolutionary M-PESA (“M” for mobile and “PESA” for money in Swahili) through its Kenyan affiliate Safaricom in March 2007. Most of us have heard of M-PESA before, but what is this M-PESA thing that has become such a buzzword and is mentioned almost instantly in ICT4D (Information and Communications Technologies for Development) conversations?
M-PESA is a small-value electronic payment and store-of-value system in Kenya, accessible from ordinary mobile phones. It has seen exceptional growth since its introduction in March 2007. As of November 2011 M-PESA has over 14million subscribers and well over 28000 agents across the country—the system processes more transactions domestically than Western Union does globally. There are now nearly five times the number of M-PESA outlets than the total number of post offices, bank branches, and automated teller machines (ATMs) in Kenya. M-PESA’s market success is the result of the interplay of three factors:
- Pre-existing country conditions that made Kenya an ideal environment for a successful mobile money deployment.
- A clever service design that facilitated rapid adoption and early capturing of network effects.
- 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.
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. 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. Customer registration and deposits are free.
What M-PESA has done in Kenya is phenomenal. Other developing countries can learn valuable lessons from this success story. It is important to remember that Kenya’s conditions made it ideal for a successful deployment of M-PESA. Likewise, fellow developing countries need to assess the conditions of their countries and identify the ideal context in which they can apply technology in order to improve the daily lives of their citizens.