M-Pesa: A Case Study in Financial Inclusion

Fintech Before Fintech

When tech thought leaders aren’t trying to vaguely explain to you why their current product needs a token, they’re talking about financial inclusion and the various fintech developments that are poised to make it happen.

More often than not, this just involves more aesthetically-pleasing spreadsheet software or existing banking backends and smartphone features (Bluetooth, NFC, biometrics, etc.) being frankensteined together.

Whilst things like Apple Pay and Google Pay leverage some interesting technologies, they still rely on the participant being ‘banked’ in the first place. That, and they’re about ten years too late to the party.

M-Pesa was launched in 2007, and it’s still going strong. The concept of a phone-based money transfer service originated back in 2002, when researchers realized the popularity of the market for phone airtime — individuals in a handful of African nations often transferred it to friends and family for subsequent use or resale. Paving the way for the as-of-yet nonexistent M-Pesa, the researchers presented the research to a telecom provider, who became the first to authorize the transfer of airtime.

When M-Pesa (launched by Safaricom) made its debut a few years later, it had initially been conceived as a solution for microfinancing — allowing institutions to distribute and collect loan payments without the hassle of cash. However, during this pilot, its widespread adoption in a myriad of alternative use cases caused the company to reconsider and relaunch with a focus on ensuring individuals could send money to their families and execute payments.

The system is by no means sophisticated when contrasted against today’s avalanche of whitepapers and their technobabble, but it does its job well — users register an account with Safaricom, purchase credits from various retail outlets or authorized resellers, and top up their phone. A PIN protects their account, which can be accessed to send or receive funds. If one wishes to cash out, they can visit a physical location to exchange their virtual funds for cash.

M-Pesa’s adoption has been nothing short of phenomenal. In its first month, it saw over 20,000 signups. By 2017, it boasted over 27 million subscribers, a whopping 3.5 trillion shillings transacted and 130,000 agents across the country. Since its initial launch, it has been rolled out in Afghanistan, South Africa, Albania, Romania and India. The ecosystem spawned resulted in businesses and infrastructures operating on top of M-Pesa.

From Virtual Money to Cryptocurrency

Banking the unbanked (or rather, making the status of ‘banked’ obsolete) is, in my opinion, the most interesting application for Bitcoin. Isn’t that why we’re here?

M-Pesa is a fascinating example of the value of digital money. A study by a duo of researchers examined the impact of the network in households between 2008 and 2014, evaluating factors such as proximity to a participating agent, professions and spending habits.

Their analysis found that, as a result of M-Pesa’s proliferation, 2% of Kenya’s households had been lifted out of poverty. Moreover, the study established (due to the lack of hard cash in said households) that money was better managed and less prone to being allocated to unimportant endeavors (I feel there’s a loose parallel to be drawn to the HODL/long time preference mentality here).

Clearly, there are benefits to virtual currency that physical fiat can’t mirror. Beyond convenience and security (no need to carry cash), the M-Pesa offering allows for remittance across long distances cheaply and without a bank account. It still falls short of cryptocurrency in some obvious regards, namely in the requisite counterparty risk and lack of censorship-resistance/fixed supply cap. However, the breadth of its sprawling infrastructure should be of great interest to those pushing for widespread Bitcoin adoption.

M-Pesa has proven that relatively low-tech ‘dumb phones’ can be transformed into tools for better wealth control. The leap from virtual money to cryptocurrency isn’t a massive leap from there. Indeed, tools such as BitSIM (development appears to be stalling, though the concept is simple; overlaying a SIM card with a small sticker so that even archaic phone models can transact in BTC), Samourai’s PonyDirect and CoinText (currently aimed at Bitcoin Cash) facilitate entry into the Bitcoin ecosystem with cellphones.

In addition to these, concepts like Akin Fernandez’s Azteco or Danny Brewster’s FastBitcoins are poised to make acquiring Bitcoin as simple as purchasing a phone top up at a physical location — foregoing the need for prohibitive KYC/AML regulations (note that some reports indicate that this may be a problem going forward).

Insofar as on-ramps, LocalBitcoins is often a go-to solution for many. At time of writing, Kenya is currently ranked 14th for LocalBitcoins by volume/population, with roughly 60 BTC being traded in the past week. M-Pesa is a popular payment option on the platform. Though not news (the service was announced over a year ago), Bitwala also offers users the ability to pay invoices due in M-Pesa in Bitcoin.

ETFs and stablecoins may be interesting to some, but they’re crafted to cater to the institutions that Bitcoin was designed to siphon power from. More interesting are applications where cryptocurrency reaches those that the traditional financial infrastructure have neglected.

The revolutionary impact of M-Pesa in the lives of the unbanked should be a lesson in utilizing low-tech solutions to drive financial inclusion

Picture from Wikimedia Commons.