About M-Pesa

Kenya stepped into the arena of mobile money transfer services in 2007 through the successful launch of M-PESA by Safaricom1, a mobile network operator (MNO) (Mas and Radcliffe, 2010).
Safaricom is the leading mobile network operator (MNO) in Kenya, and an affiliate of Vodafone Group- a British multinational telecommunications company. The mobile phone acts as both a wallet and a bank account. Kenya’s M-PESA is not the first mobile money deployment; however its rate of adoption has been unprecedented. The first sustainable mobile money system was launched by Smart Money, in 2001, in the Philippines. Based on an exchange rate of $/KES 85.

M-PESA is a mobile payments system that allows users to make financial transactions such as deposits, withdrawals, bill payments, remittances, and purchase of goods and services by using a mobile phone,2 without requiring a bank account, internet connection, or a payment card. ‘M’ is an acronym for ‘mobile’ and ‘Pesa’ is a Kiswahili word that translates to ‘money’; M-PESA therefore translates to ‘mobile money’. Within 4 years of its launch, M-PESA attained over 15 million service users thus enabling millions of unbanked Kenyans, the majority of whom reside in rural areas, to have access to a 24-hour financial service system.

The exceptional growth of M-PESA mobile money service in Kenya since its introduction has spurred a wave of mobile money service deployments across and beyond the African continent.3 Today, Kenya stands as a world leader in the provision of mobile money services with about 19.5 million service users and an annual transaction volume of about KES 672.3 billion (US$ 8 billion)4, or 24 percent of Kenyan Gross Domestic Product (GDP) (CCK Report, 2012). Indeed, of the about 100 million users of mobile money around the world, one in five is Kenyan (Juniper Research, 2011). The success of M-PESA in Kenya has proven that mobile money services havethe potential to revolutionize access to financial services worldwide where over 2.5 billion adults do not have a formal bank account, and yet about 6 billion people have access to mobile phones (86 percent penetration rate) (ITU, 2011; Demirguc-Kunt & Klapper, 2012, 11). Most of the unbanked population reside in the developing regions of the world such as Sub-Saharan Africa where only 24 percent of the adults have a formal bank account. However, the region has a mobile phone penetration rate of over 60 percent, which provides a readily-available platform to roll out mobile money services5 (Demirguc-Kunt & Klapper, 2012, GSMA, 2011). The adoption of mobile money services in Sub-Saharan Africa is particularly important because increased financial access can have a positive impact on long term economic growth through reducing poverty and income inequality (Clarke, 2002; Beck et al., 2004; Levine, 2005). Indeed, many believe that financial inclusion of the wider population is a key tool for achieving the Millennium Development Goal (MDG) of eradicating extreme poverty and hunger.
Mobile money services yield a number of documented benefits to providers, users and the government, including facilitating transactions (Mas & Radcliffe, 2010; Jack & Suri, 2011a), increasing money circulation in the economy (Demombynes & Thegaya, 2012), enhancing money security (Plyler et al., 2010), facilitating social capital accumulation (Plyler et al., 2010; Morawczynski, 2008), creating employment opportunities (Plyler et al., 2010), reducing economic vulnerability (Jack & Suri, 2011a), fostering entrepreneurship (Kendall, et al., 2012), increasing savings (Demombynes & Thegaya, 2012), and promoting financial autonomy (Morawczynski, 2009; Jack & Suri, 2011a). Despite these many benefits of adopting mobile money, no country has managed to match the speed and extent of M-PESA uptake in Kenya, not even in the neighboring Tanzania where the same business model and implementation strategies were employed. The statistics indicate that the launch of M-PESA in Tanzania by Vodacom only managed to attract about 280,000 users within 14 months of its launch, while Safaricom’s M-PESA managed to garner 2.7 million users within the same timeframe (Rasmussen, 2009).
The findings indicate that the remarkable success of M-PESA in Kenya was influenced by three key aspects. First is enabling country conditions present during the implementation of M-PESA such as the right amount of existing banking infrastructure, the poor quality of alternative financial services, the favorable urbanization ratio, the higher mobile phone penetration rate, the higher level of financial literacy, the level of economic development and the presence of a national identification (ID) system. Second is the effective operation strategies employed by Safaricom in Kenya, such as tailoring the marketing of the product to the needs of the population, and its ability to effectively build an agent network. Finally, the success of M-PESA in Kenya is owed to the favorable social cultural context in Kenya, exemplified by the established culture of remittance, and the need for financial autonomy especially among marginalized household members-particularly women.
This paper argues that the unique combination of these conditions enabled Safaricom to effectively deploy the M-PESA scheme, and has encouraged millions of users to rapidly adopt the service. This indicates that the exceptional growth rate of M-PESA in Kenya is a unique phenomenon that may not be repeated in another country. As a result, this paper recommends that service providers move away from importing the M-PESA template, and rather seek to develop models that fit the unique needs of the users.
Since the introduction of the M-PESA mobile money service in Kenya in 2007, over 70 percent of the Kenyan adult population has subscribed to the service in the country. To access the M-PESA service, an individual registers for a Safaricom electronic account with one of the over 30,000 authorized M-PESA agents that are conveniently located in kiosks across the country. Registration is free and only requires presentation of a piece of official identification. This virtual electronic account (e-wallet) is then linked to the phone through the Subscriber Identification Module (SIM) card. The individual is then allowed to set up a secret PIN on the account that is prompted whenever the funds are accessed. The users can make a cash deposit into the M-PESA account by paying cash to an MPESA agent who in exchange ‘loads’ the account with equal credit (e-float) at an equal convertible value (Morawczynski, 2008; Banks, 2012) Based on an estimated population of 39.5 million as provided in the 2012 Kenya Economic Survey. Of the total mobile phone subscribers, approximately 19.5 million (66 percent) use mobile money service offered by the different MNOs within the country. M-PESA serves about 15 million (78 percent) of the total mobile money service subscribers (GSMA, 2012), while the remaining 4.5 million users (22 percent) are serviced by Airtel Networks (airtel money), Essar Telecom (yu) and Telkom Kenya (Orange) mobile network operators in the country.

The impact of mobile money on deepening financial inclusion and easing financial transactions is evident with the impressive growth of the volume of mobile money transfers in the country. The average monthly volume transacted through the payment systems in Kenya is about KES 56 billion (approximately US$ 660 million).

In the 2011-2012 fiscal year, approximately KES 672.3 billion (US$ 8 billion), or 24 percent8 of Kenyan Gross Domestic Product (GDP), was handled through the mobile money platforms in the country (CCK Report, 2012). To put this in a global perspective, the M- PESA money transfer system alone processes more transactions domestically than Western Union does globally (Kendall et al., 2012; IFC Report, 2011a, 50). In fact, over half of the world’s mobile money transactions are handled through Kenya’s M-PESA.

How M-PESA Works
Mpesa, has shown that mobile phones are hugely flexible devices - phones that before were just for text and calls are now completing complex financial transactions. That’s the important thing to remember here, you don’t need fancy, expensive smartphones with data hungry apps. All you need is a basic gsm phone. Your network sends you a menu and once you’ve registered you can send money anywhere across Kenya
**register**
you register to join Mpesa at any Mpesa agent for free. This is quick to do and easy - because Mpesa agents ate everywhere in cities and they seem to be in every village. Once registration is done the network sends you an updated menu on your phone - so you’re ready go.
**load some money on**
- once registered you can load money on to your phone at any agent by just handing over your cash and they load it onto your phone.
- or a kind relative, friend, or employer can put money onto your account for you.
**send money**
It’s easy to send money too. You just go to the menu on your phone, enter the phone number of the recipient and amount and the money arrives near instantly - in the time it takes for an sms to arrive.
**pay bills**
You can also pay all sorts of bills, over 600, by mpesa. Through a very similar process to sending money to friends. You can buy a flight, pay your water bill and much more.
**take money out **
- to take your money out you just need to go to an Mpesa agent and basically you send them some money, which they then give to you there and then.
- or go to an atm. This is pretty new - you can also take your money out at some atms without a card. Unfortunately, no one would let me watch them do this so i can’t give details!

Exhibit 1: Getting started

Exhibit 2: Transaction procedure

Exhibit 3: Transaction process

Impact of M-Pesa

Kenya’s M-PESA system is acclaimed for deepening financial inclusion by providing affordable key financial services to populations that had been left out of the formal financial services system. According to the 2006 FinScope survey, only 19 percent of the Kenyan population was formally banked before the introduction of mobile money while the remaining 81 percent used semi-formal, informal or had no financial services. This situation is largely attributed to the existing poor formal banking infrastructure, with challenges ranging from limited number of banks that are mainly located in urban areas, to exclusionary participation conditions, such as high account maintenance fees, that create barriers to the use of the service (Biljon and Kotzé, 2008). Currently, M-PESA provides access to financial services to over 70 percent of the Kenyan adult population by enabling over 15 million Kenyans to have access to a formal financial system.

A significant amount of literature presents evidence that increased financial access has a positive impact on long term economic growth through reducing poverty and income inequality.
Indeed, financial inclusion is a key subject on the development agenda due to its influence on achieving the MDG of halving poverty by 2015. One key benefit of M-PESA is its ability to facilitate financial transactions by providing a platform for transferring money quickly, cost effectively and securely thereby enabling individuals to make and receive payments in a timely fashion. Rather, payments of tuition, remittances, utility bills and other expenses can all be done in a timely and convenient fashion simply by sending an SMS through the M-PESA service.

What India can learn from M-Pesa

A study conducted in Kenya to evaluate M-PESA’s community-level impact found (1) easier circulation of money allowed clients to remit money in times of financial distress; (2) conducting business transactions became easier and safer; and (3) vendors were able to reduce the transaction costs and apply savings towards business expansion. M-PESA’s phenomenal success has prompted Indian policy makers and private partners to consider using similar applications to achieve financial inclusion objectives and to provide a cost-effective alternative to brick-and-mortar bank branches. Safaricom launched M-PESA in 2007; by 2009, nearly 40% of Kenya’s adult population used M-PESA services; and by 2011-2012 Safaricom estimated that over 14 million Kenyans use the service as of 2011-2012. Subsequently, in India the Interbank Mobile Payment System (IMPS) was launched – a mobile based funds transfer service for users registered with participating banks. MNOs and banks partnered to provide m-banking services all over India including Airtel’s (MNO) “Mobile Money Transfer”; and by other banks such as ICICI, HDFC, and State Bank of India(SBI) have launched their own mobile payment services in partnership with several MNOs experiencing varying degrees of success. Despite these initiatives taken in India, the adoption of mobile payment technology, especially among the low-income population, has been cautious. This is due to the following reasons:

* Stringent regulations and marketing models aimed at acquiring the predominantly urban and technically advanced users. Additionally, transactions need to be conducted on a phone via an internet connection, which is not only a relatively expensive service but also requires basic know-how about the internet technology. While these systems have been adopted by approximately 15% of urban mobile users as of 2009, cash continues to be a predominant mode of transaction for unorganized retailers and their clients

* Marketing models towards developing a strong client and agent base are also lacking. Though m-payment systems have been promoted on television and internet, the onus of enrolling into the m-payment system and understanding the application primarily lies on the client * There is no clear client acquisition model in place - store managers and customer care representatives rarely advertise the products to the clients directly, and do not receive a separate incentive to enrol customers. Furthermore, retaining customers after signing them on to an m-banking service has been challenging as well * A CMF-IFMR study found that while customer acquisition was fairly easy when the mobile money service was provided for free, a midway introduction of transaction fees led to almost a third of existing users dropping out of the services. The inactive low-income users expressed their keenness to restart using mobile money in the future subject to a reasonable pricing policy by the service provider. The study concludes that despite the immense potential of mobile money in promoting financial inclusion in India, very little efforts have been made by the RBI and banks to promote the model among the prospective low-income clients

* Regulations in India permit mobile transactions only they are linked to a registered bank account, through which transactions take place. While it is a well-intentioned regulation to protect clients, this excludes the 40% unbanked population and may also be a deterrent for those uncomfortable with the banking system

* Another study conducted by CMF-IFMR found that the financial inclusion mandate by the RBI does not allow private partners to charge appropriate fees for zero-balance accounts targeted for the low-income populations. This has discouraged agents to offer diversity of financial products to low-income clients through the m-banking channel

So, what are the key take-aways for India from such a model?

* Protecting the client base should be the top priority * Stringent regulation to ensure the profitability of the service providers * RBI & Dedicated banks should consider creating a dedicated fund for promoting the use of mobile money among low-income clients * RBI should incentivize private partners to develop platforms to reach low-income urban and rural populations, and create an intuitive interface for users with diverse economic and education backgrounds * A larger focus on increasing the penetration of mobile phones in India, which stands at 51%compared to over 68% in Kenya * Lastly, the government can set the gold standard by using mobile systems for government payments, taxes and other payments via a mobile payment system