M-PESA, Success Story of Kenya’ Mobile Money Transfer Service

People do not need to go to the bank or to carry cash to pay their utility bills, taxi rides, or grocery shopping as long as they have mobile phones in their pockets.  Believe it or not, I am not talking about the US or the UK or Japan; I am talking about Kenya.  Kenyans pay these daily fees by just sending a text message thanks to their world-leading mobile money transfer service, M-PESA (“M” for mobile and “PESA” for money in Kiswahili). 

Launched in March 2007 by Safaricom, Kenya’s largest mobile phone operator, M-PESA has become an influential cutting-edge technology.  It currently has over 19 million subscribers in the country.  Roughly speaking, this means that over 70% of the working-age (15-64 years old) Kenyans subscribe to the mobile banking service.   The service is surprisingly accessible with over 40,000 M-PESA agent outlets (usually street shops) across Kenya.

Why has M-PESA become so popular?  First, it is a quick way to transfer money.  In rural areas, banks are hours away.  Also, it sometimes takes weeks to authorize financial transfer at the bank, and people are denied access to their bank accounts if they cannot fully verify their identities (identity verification is not that easy).  Second, it is cheap.  Traditional transfer methods are quite expensive in Kenya, and for those who just scrape by, the transfer cost is a painful expenditure.  As for M-PESA, registration and deposit are free, and transfer and withdrawal fees are much cheaper than other means.  Third, it is relatively safe.  As a financial transfer method, it is safer than sending someone else with cash (the money carrier may get attacked on his way, or he may run away with the cash).   It is also a safer way to save financial assets than hoarding cash or transforming them into livestock (cash can be stolen, and livestock may die).  Fourth, as M-PESA widened its coverage and deepened its penetration into the society, it benefitted from positive network externality.  With more subscribers, the cost of service declined, which made more sense for people to register for the service.  Moreover, as people’s demand for the service increased, corner shops became incentivized to keep enough cash and e-money.  The more the M-PESA network expands, the more people sign up for the service, and the better the service becomes.  And the virtuous cycle continues.

So there are many attractive features of M-PESA as you can see, but I cannot end this blog without mentioning M-PESA’s role in cultivating the field of “e-remittance” in Kenya.  M-PESA matched well with Kenyans’ demand for a better way of remittance to their families and relatives in the event of emergencies or costly life-cycle events such as funerals and weddings.  M-PESA’s e-remittance works like this.  A Kenyan working in Nairobi brings cash to a corner shop with an M-PESA sign, and the agent at the shop adds credits on his M–PESA account.  Then, almost as soon as so he transfers mobile money to his relative’s account, his relative living in a far-away village receives e-money, which can be withdrawn as cash at the closest M-PESA shop.  Safaricom wisely marketed M-PESA to the public with a strongly appealing message: “send money home” (http://www.youtube.com/watch?v=nEZ30K5dBWU).  This was a killer-phrase for Kenyans, who highly value family ties. 

Image by Safaricom

M-PESA has presented the world a successful African business model utilizing technology.  It has further potential of improving people’s lives by offering low-cost loans and encouraging savings (savings in M-PESA accounts earn interest).  In 2010, Safaricom initiated its international mobile money transfer service, and M-PESA has now expanded beyond Kenya to 45 countries and territories overseas, mainly targeting Kenyan diasporas.  Let’s see how the service develops.