INNOVATIONS IN RURAL AND AGRICULTURE FINANCE
M-PESA: Finding New Ways to Serve the Unbanked in Kenya SUSIE LONIE
FOCUS 18 • BRIEF 8 • JULY 2010 O
ver the past three years, payment strategies for emerging markets have been revolutionized by the advent of a simple
cell-phone-based payment service in Kenya called M-PESA (“M” for “mobile” and “pesa” for “money”). From a small-scale pilot program in 2006, M-PESA has become an outstanding success in Kenya; customer response has been unprecedented. Currently, more than 9 million Kenyans use M-PESA to perform tens of millions of transactions every month throughout the country. Although this success has led to new opportunities, it has also brought about many unforeseen challenges.
What is M-PESA?
Vodafone, the world’s leading international mobile communications group, based in the United Kingdom, originally developed M-PESA with funding from the Department for International Development (DFID) as a pilot program to extend the growth of financial markets to the unbanked (people without access to conventional banking services) in East Africa. In March 2007, M-PESA was launched in Kenya in partnership with Safaricom, Kenya’s leading mobile telecommunications company. It quickly became clear by the demand from the unbanked that this cell-phone-based, money- transfer business was a welcome commercial opportunity across Africa and elsewhere. In emerging economies, it is common for some wage earners to work away from home and send domestic remittances back to their extended families in rural areas. The initial focus of M-PESA, therefore, was to enable these workers to send money home via faster, safer, and more affordable means than those previously available to them. M-PESA allows customers to send money home (and make a variety of other payments, described below) without a bank account. People can begin using the system simply by registering for free at certified M-PESA agents, which include retailers such as supermarkets, gas stations, and shops that sell prepaid airtime cards. In fact, several banks have even become M-PESA agents. Customers can use cash to “buy” electronic money (e-money) from an agent, then use their phones to perform financial transactions (for example, to send money to another person or buy additional airtime). The e-money can also be converted into cash by selling it back to an agent. Agents are paid a commission for providing cash-in and cash-out services and for registering customers. Transaction values are typically low; M-PESA moves smaller amounts of money than banks would normally service. As M-PESA gains acceptance, however, it is also becoming attractive to people who already have bank accounts as a way to pay out wages to, for example, tradesmen and household staff—who are, of course, M-PESA’s targeted customers.
M-PESA: Beyond “sending money home”
There is no doubt that giving M-PESA customers the ability to send money home was a feature that filled a gap in the market. Within
two years, M-PESA had become the most frequently used money- transfer mechanism (see Figure 1 in Appendix A). The need for fast, safe money transfers, particularly to those
in rural communities, is obvious; and the benefits have been much reported in the Kenyan press and by nongovernmental organizations. However, by extending functionality and thinking laterally, M-PESA has been expanded to further serve the unbanked of Kenya.
Bill payments
The option for customers to pay their bills via cell phone was recently added to the M-PESA menu. Designed to allow people to pay their regular bills—such as utilities, school fees, and rent—this feature has become a means of payment collection for many other businesses as well. Of particular relevance to rural communities, even the provision of clean drinking water has been improved through the use of M-PESA. Grundfoss, a Danish company, developed an entrepreneurial solar-powered metering system to pump clean water from boreholes into rural areas. Pumps can be paid for by a “smart card” (a prepaid card with a memory chip), but finding means to apply credit to these smart cards in the rural areas where water pumps were situated was a problem—until M-PESA arrived. Customers sent money to Grundfoss using the “Pay Bill” feature, and their smart card was automatically credited and ready to use. This payment system is now available wherever Grundfoss water pumps are deployed. Additionally, several microfinance institutions (MFIs) are now
using M-PESA’s bill-paying feature for loan repayment collection. This eliminates the time loan recipients used to spend travelling to urban areas to deposit cash into their MFI bank accounts; this time can now be better spent attending to their farms or small businesses. Similarly, insurance and microinsurance premiums can now be paid using M-PESA.
Business payments
The “Business Payments” feature allows a business to pay a number of customers or employees through their M-PESA accounts. This service was originally introduced at the request of Safaricom’s temporary staff working in rural areas. These low-income workers previously had to travel to a Safaricom office in the nearest town to pick up their paychecks and deposit them into bank accounts; it was a time-consuming activity at best. Now they receive their wages directly through their M-PESA accounts. It has proven so popular that the organization recruited to provide M-PESA training to new agents around Kenya actually started to use the payment feature for its own staff expenses. Many other companies are now using M-PESA to pay field operatives working remotely from regional offices. Safaricom also recently offered shareholders the opportunity to receive their annual dividend payments via M-PESA; many thousands of Kenyans—who had become first-time shareholders when Safaricom issued public shares in 2008—accepted the offer.
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