I can walk down the street from my house and buy a cup of coffee and pay for it with my cell phone. I can go online and transfer money from my checking account to my Cal1 account that’s attached to my student ID card so I can pay to print out papers at school. I can also pay for my lunch at the café in Boalt Hall with my Cal1 card. I’ve sold things on craigslist and had the buyer pay me with PayPal. I can text a donation to the Red Cross to help with cleanup of hurricane Sandy. I have a Clipper card I use for public transportation that automatically loads money it when the balance gets too low. I have a FastTrak pass I keep in my motorcycle jacket so I don’t have to stop and pay with cash at the tollbooth on my way to San Francisco. In the connected world that I live in it’s really easy to take all of these conveniences for granted, but in emerging markets many people don’t even have access to even basic banking services, either because there is a lack of brick and mortar banks or because financial institution don’t provide a level of service that caters to customers who don’t carry high balances. In this paper, I’m going to examine a financial service called M-PESA, how it works, and what its effects are on the people who use it.

M-PESA is a simple digital money transfer system that was created by a telecom group called Vodafone and was launched by its African subsidiary, Safaricom, in March 2007. In Kenya, the service was adopted very quickly and large amounts of cash, around 10% of Kenya’s GDP, were being transferred. The way M-PESA works is mobile phone users can go to a service location and purchase e-money, and essentially deposit cash into a virtual account that is attached to the SIM card used in their phone. This is where the service gets its name, M for mobile and pesa in Swahili mean money. The user can then transfer the money to other cell phone users with a text message. This service was adopted so quickly because there aren’t very many banks or ATMs Kenya. In 2010, Safaricom had over 18,000 M-PESA service locations, meanwhile, there were less than 500 bank branches in Kenya.

M-PESA has three basic transactions: cash-in, cash-out, transfer. There is no charge to deposit funds but there is a small charge to send funds. Fees are generally higher for transactions by non-registered M-PESA users, but registration only requires a form of ID. When a user deposits money into their account, they are actually purchasing e-float or e-money. Safaricom deposits the funds collected from these “cash-ins” into three tradition Kenyan banks. Safaricom is not allowed to pass any interest generated from deposits on to their customers because it is not technically a banking institution. Instead, any interest that’s earned on user’s deposits, Safaricom donates charity.

Nick Hughes, the creator of M-PESA, joined Vodafone in 2001 and was tasked with helping the company identify the role it could play in addressing the Millennium Development Goals. In 2003, Hughes put together a proposal and submitted it for consideration for the Financial Deepening Challenge Fund, a competitive grant set up by the U.K.’s Department for International Development that was looking for innovative ways to access to financial services. Hughes and his team were awarded £1 million and started developing the pilot program.

Hughes began holding preliminary design workshops in both Tanzania and Kenya and partnered with Commercial Bank of Africa (CBA) and Faulu Kenya, a microfinance institution. It was at this point that he began to realize the major differences in the ways that a telecom company and a traditional bank function; telecom companies are very used to dealing with a high volume of small transaction where traditional banks are used to dealing with lower volume large transactions.

Faulu Kenya operates like many other microfinance institutions. It grants loans to community groups who are responsible to one another in coordinating weekly repayment. The repayment records were all tabulated by hand by the community groups before a representative would travel to the Faulu Kenya offices with the cash and make the payment on the loan. M-PESA was initially used to replace the physical transaction but due to the technological deficiencies at Faulu Kenya, it proved to be a challenge.

Through this first iteration, Hughes and his team noticed some interesting transactions that began to occur. Even with only 500 users, they saw many different kinds of transactions: people repaying the loans of others as payment for other services, business trading, people making deposits before traveling and withdrawals once they reached their destination, people using M-PESA as an overnight safe, people sending remittance, people helping out others when they were out of money. From these use scenarios, the financial needs of the users began to become clearer.

Hughes realized how great the need was for basic financial services. His team had developed a system aimed at serving the unbanked in Kenya that solely focused on easing transactions and facilitating circulation as a means to help alleviate poverty.

Furthermore, M-PESA did this without indebting the poor in Kenya.

Kenya’s economy is a fragile economy that relies largely on remittance sent over varying distances. According to a 2009 CGAP brief detailing a 14 month field study in poor settlement outside of Nairobi, the users that were interviewed made small frequent transfers to their family members who live far away. These transfers were cheaper that using older Western Union type money transfer services, and because of the high number of M-PESA agents around Kenya, M-PESA is more convenient. The savings amounted to between 5–30% of income for some families. Rather than a rural mother having to travel almost a week to get to Nairobi, they could contact their husband in the city and have the money she needed in much less time. Unfortunately, many rural women reported that since using M-PESA, their husbands made less frequent visits home (Morawczynski and Pickens 2009). The ability to send money to someone faster also increases the speed in which that money is spent. Rural areas see more cash flowing in their communities than they did before. This allows rural businesses to expand. Not only have smaller, local businesses like food vendors and farmers been able to expand, small M-PESA agents are setting up new shops all the time.

Because people are carrying less cash around, physical security has improved. Before M-PESA, people often sent money back to their families with bus drivers hoping that the package would get home safely without any incident. Beyond physical security, food security has improved with M-PESA. Farmers can easily hire extra day labor and the time and money saved from traveling in to town increases productivity (Plyler, et al. 2010).

M-PESA does have some challenges to overcome. In a study conducted on M-PESA’s effects on women’s groups in Eastern Kenya, researchers found a few issues that need to be addressed. Some of the women interviewed mentioned they had been victims of fraud. They had received text messages saying that someone had sent them money by mistake and asked that it be returned. Other issues discovered were network related. In very rural areas, network connectivity can be an issue and users experienced dropped calls and delays in the ability to send money to others. Many researchers have found that one of the biggest problems with M-PESA is the way it impacts face to face interactions. People who participate in group meetings that are associated with microfinance loans will sometimes not attend the meetings and just send their money in to the treasurer. Women who live in rural areas have also complained that their husbands don’t make as many visits home anymore and fear their husband will find a “city-wife”.

In 2012, Safaricom partnered with Equity Bank and introduced a product called M-KESHO (keshomeans future in Swahili). M- KESHO makes 3 services available to M-PESA users: a micro-savings account, short term credit, and insurance. M-PESA users can transfer money from their account into their M- KESHO account and start earning interest on as little as 1 Kenyan shilling (75 Ksh = $1 US). After holding a balance in their M- KESHO account for 6 months, the user can apply for a credit account that will lend up to 80 shilling that must be paid off in 30 days. This credit model is based on a traditional Kenya credit model that is normally used at shops or grocery stores. The insurance offered is an annual payment that covers accidents up to $2000 US and even covers funeral costs. To open an account, the user must go to an M-PESA agent or an Equity Bank branch, show their ID and submit an application.

This partnership between Equity Bank and Safaricom has begun to broaden the level of services that are available to Kenyans. It has also spurred other banks in Kenya to try to compete. Currently, Equity and Safaricom have a 12 month exclusivity contract which may give competitors some time to develop their own products. This partnership is an example of how M-PESA is not a mechanism to replace traditional banks, but rather a supplemental product that has actually encouraged Kenyan banks to find ways they can serve the previously unbankable.

M-PESA’s role in poverty alleviation in Kenya is complex. As other private companies scramble to enter this market, services will become cheaper and users whose needs aren’t being met will hopefully be addressed. Conditions were right for this kind of intervention to work in Kenya and while there are still issues for M-PESA to address, it has acted as a catalyst for increasing the circulation of money and for broader financial inclusion.

Originally published at www.ryanlhunt.com.

Works Cited

Ehrbeck, Tillman, and Michael Tarazi. “Mobile Solutions — Putting the Banking in Branchless Banking: Regulation and the Case for Interest-Bearing and Insured E-Money Savings Accounts.” FDIC.gov. Federal Deposit Insurance Corporation, 2011. Web. 19 Nov. 2012.

Hughes, Nick, and Susie Lonie. “M-PESA:Mobile Money for the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya.” Http://www.mitpressjournals.org/. MIT Press Journals, 12 June 2007. Web. 19 Nov. 2012.

Kiiti, Ndunge, and Jane Mutinda. “Mobile Money Services and Poverty Reduction: A Study of Women’s Groups in Rural Eastern Kenya.” Http://www.imtfi.uci.edu. Institute for Money, Technology, & Financial Inclusion, 5 Dec. 2011. Web. 19 Nov. 2012.

Mbiti, Isaac, and David N. Weil. “Mobile Banking: The Impact of M-Pesa in Kenya.” NBER. N.p., June 2011. Web. 19 Nov. 2012.

Morawczynski, Olga, and Mark Pickens. “CGAP: Advancing Financial Access for the World’s Poor.” Http://www.cgap.org. CGAP, 1 Aug. 2009. Web. 19 Nov. 2012.

Mwangi, Peter. “Think M-PESA Blog: M-KESHO RESOURCE CENTRE.” Think M-PESA Blog: M-KESHO RESOURCE CENTRE. Www.thinkm-pesa.com, n.d. Web. 20 Nov. 2012. <http://www.thinkm-pesa.com/p/m-kesho-resource-centre.html>.

Plyler, Megan G., Sherri Haas, and Geetha Nagarajan. “Community-Level Economic Effects of M-PESA in Kenya: Initial Findings.” Financial Services Assesment. University of Maryland, June 2010. Web. 19 Nov. 2012.

Schwittay, Anke F. “The Financial Inclusion Assemblage: Subjects, Technics, Rationalities.” The Financial Inclusion Assemblage: Subjects, Technics, Rationalities. University of Auckland, NZ, 2 Dec. 2011. Web. 19 Nov. 2012.

Works Referenced

Eijkman, Frederik, Jake Kendall, and Ignacio Mas. “Bridges to Cash: The Retail End of M-PESA.” Http://www.microfinancegateway.org. CGAP, n.d. Web. 19 Nov. 2012..

Kapoor, Mudit, Jonathan Morduch, and Shamika Ravi. “From Microfinance to M-Finance Innovations Case Discussion: M-PESA.” From Microfinance to M-Finance Innovations Case Discussion: M-PESA. MIT Press Journals, Winter 2007. Web. 20 Nov. 2012.

Maurer, Bill. “Money Nutters.” The Institute for Money, Technology and Financial Inclusion. Economic Sociology_the European Electronic Newsletter, July 2011. Web. 19 Nov. 2012.

McKay, Claudia, and Mark Pickens. “BizResearch.” CGAP. CGAP, Sept. 2010. Web. 20 Nov. 2012.

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