Mobile banking: don’t assume M-Pesa is the model

Disruption theory clarifies the difference between M-Pesa in Kenya and mobile wallets in India.

Last month, WBUR’s On Point show discussed The Uberization of Money. One of the guests, Mehrsa Baradaran, expressed skepticism about modelling financial inclusion in the U.S. on M-Pesa, the mobile money transfer system in Kenya:

“I’ve heard Kenya used a lot, and there’s a reason why Kenya is used a lot. It’s because it’s the only successful mobile banking example out there, and it is not for lack of trying. Every other country that’s tried it has to failed to do what Kenya has done… We are not Kenya, for better or for worse.”

At first I disagreed with her, because I look forward to a future in which tech companies challenge the financial industry by offering products that are more convenient, efficient, and customer-focused. Few entities deserve to face ‘Uberization’ as much as Bank of America. (To the crowd: If you’ve ever been hit with a $35 overdraft fee for being $1 in the red, say “Yeah!”)

However, upon considering the nature of mobile wallets in India, and prompted by discourse about the exact definition of business ‘Disruption’, I have come to agree with her about M-Pesa, in a slightly different way.

Disruptive Innovation

Clayton Christensen, who coined the theory of disruptive innovation, has been striving to reclaim the term “disruption” from becoming a generic buzzword. To clarify the theory, Christensen’s co-author Michael E. Raynor appeared on the a16z podcast to describe “three necessary and sufficient conditions” that define disruption.

First and foremost, disruption theory is a theory of customer dependence. You tell me whom you’re selling to, and I’ll tell you whether you’re embarking on a potentially disruptive trajectory of innovation.

Disruptors start in segments of the market that incumbents aren’t motivated to fight for, or fundamentally don’t see… that’s step one. Second is you have to have a fundamentally different business model that allows you to serve profitably the niche that the incumbents don’t want… The last piece is this enabling technology, it’s something that allows you to now take that same business model and begin to serve the mainstream markets that the incumbents do care about. But now it’s too late because the incumbents can’t respond, because you have broken the trade-offs that they were depending on.”

From this perspective, M-Pesa has been disruptive: serving a user base that traditional banks overlooked allowed it to dominate money transfers in Kenya.

Up-Market and Down-Market

In India, mobile wallet usage is growing among users who are economically middle class and above. Most wallet users have bank accounts, from which money is loaded into apps like like Paytm and MobiKwik. Wallet apps are used for convenience in paying for phone minutes and other online shopping, and to replace card payments, such as for on-demand cab services. The apps are heavily marketed through cashback and other offers.

This is in clear contrast to M-Pesa, which attempts to capture rural users first. While wallet apps are rushing to capture market share, M-Pesa is still trying to get off the ground: “Can mobile money transfer service M-​Pesa succeed in India?”

I predict that mobile wallets which started by serving urban users will expand down-market into the rural and informal economy, capturing the market for money transfers and remittances, before projects like M-Pesa that start by serving the rural economy can achieve significant traction.

Why is starting in a position that’s up-market from M-Pesa working so well in India? Niti Bhan incisively explores this issue:

“[When] ‘Solutions on the mobile to help the BoP or poor’ are considered, they should be looked at in terms of the complete ecosystem including the critical question of Where will the money come from into the system in the first place?… the focus needs to shift to complete ecosystems that fill a vacuum of need — usually in infrastructure or services — that include actors from differing socio economic strata in order to make a viable difference to larger population involved.”

I expect an interesting twist to appear in this story. While mobile wallet usage will grow among urban consumers before going down-market, the companies behind wallet apps have the potential to disrupt, in the Christensen sense, traditional banks by eventually going up-market. Indeed, Chinese companies may be further along in this trajectory, as users of WeChat and Alipay have “leap-​frogged credit cards to embrace mobile payments.”

Product/Market Fit

While M-Pesa turned out to not be a uniform model for the expansion of mobile banking, I won’t venture to suggest which approach will work in general. Beyond the differences in markets that you can read about in newspapers and World Bank reports — regulations, access to technology, socio-economic indicators — there is always a subtle barrier to cross when building new products: consumer mindset. To gain traction in financial tech, as in anything else, nothing will replace the need to ask potential users to try out your app on their phone: does it work for them?

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