The development of mobile e-commerce in East Africa has leapfrogged western countries, with fully-mobile banking emerging as a means not solely to store funds, but also for transfers, government payments, and even loans. The M-Pesa system, pioneered by Vodafone’s Kenyan Safaricom subsidiary, offers individuals ready access to robust financial resources. In a nation where just 26% of the population had formal bank access in 2006, M-Pesa has revolutionized financial transactions with around 80 percent of Kenyans now having access to the financial system1. These results, placing Kenya among the top five African nations in terms of banking access, are particularly impressive when considering Kenya’s relative wealth and the rapid development of this technology.
M-Pesa was specifically designed to address the underbanked population, particularly in rural areas and migrant workers. Without existing money transfer networks, financial interactions were limited to expensive couriers of physical cash or pawnbrokers. M-Pesa is a SIM-based technology that allows individuals to deposit, access, transfer, and pay on their mobile devices, which have a high market penetration rate of above 80%.
The SIM-based distinction is notable in that M-Pesa does not necessitate a smartphone and can instead be accessed from any mobile-network connected device, such as a basic flip-phone. This is significant as just 30% of Kenyans have personal smart devices. Moreover, Safaricom’s network of over 170,000 retail affiliates (i.e., local storekeepers and shops that register to act as money transfer agents) have allowed Safaricom to offer the equivalent of a comprehensive physical bank branch network at marginal cost.
In addition to drastically increasing the financial mobility of Kenyans by allowing the ready transfer of funds from urban workers to rural relatives, M-Pesa has helped to reduce corruption in situations like tax payments as opposed to pre-existing cash transfers. Direct payments from individuals to the government eliminates the possibility of intermediaries skimming from the cash formerly entrusted to them. Furthermore, M-Pesa does away with the need for high-cost couriers, allowing individuals to retain more of their earnings and facilitating greater economic flexibility by reducing transaction costs. M-Pesa has been directly credited with increasing discretionary incomes and raising hundreds of thousands out of extreme poverty.
Moreover, accessibility to consumer credit has dramatically increased with the growth of mobile money systems. The M-Shwari system, conducted via M-Pesa, acts as a mobile banking facility that provides the functionality of a traditional bank, including loans. On a continent where credit access is extremely limited, especially for individuals in the dominant informal sector, M-Shwari is an extremely popular means of facilitating individual loans. Considering the lack of any credit history, or even known sources of income due to informal workers comprising around 83% of the economy, traditional banks are loath to provide loans of any size.
M-Pesa is able to aggregate information on its registered users as they use M-Pesa to make traditional payments for goods, restaurants, and other typical services. This accumulation allows for an informed credit decision. Safaricom has also begun to offer completely credit-free loans in which further access to capital is contingent on timely repayment of the current amount. Most notably, these loans allow individual Kenyans to develop businesses and make other value-added investments such as in education or sustained power access. Considering the well-documented effects of micro-finance in boosting individual economic growth and empowerment of traditionally marginalized groups such as women, M-Shwari is a key means of efficient provision of these services.
Nonetheless, M-Pesa is no perfect solution, with its widespread adoption introducing concerns of its own. Safaricom’s complete domination of the mobile payments market with 99% market share allows it to dictate the terms of transactions and undercut competitors. Moreover, the anonymity afforded by M-Pesa being linked exclusively to a SIM card without any biometric or individual identification allows usage by organized crime and money launderers. In a region where financial crime has only recently begun to decrease, M-Pesa may indeed facilitate its resilience.
Even though Safaricom lacks specific identifying information, the collection of transaction history via M-Shwari in addition to personal details gleaned from messaging presents a privacy risk in the absence of robust data protection regulations. These issues, while not fundamental to M-Pesa’s financial utility within Kenya, present a risk to its users and the ongoing development of the country. They also are obstacles to international adoption of similar systems, and attract regulatory scrutiny.
M-Pesa has been able to deliver upon its promise of delivering banking services in the Kenyan economy while still remaining profitable as an independent service. International expansion has proceeded, particularly in similar economies such as Tanzania and Zimbabwe. There is broad potential across sub-Saharan Africa for the implementation of similar services, with mobile phone market penetration increasing steadily year-by-year. The upstart nature of M-Pesa challenged traditional banks to innovate and develop competing operations, improving formal bank services for all Kenyans. Meanwhile, M-Pesa’s success has inspired competitors like Visa, Airtel, and Telkom to invest in alternatives that drive down consumer costs and introduce competition in a traditionally consolidated field. Should sub-Saharan economies be able to generate overall sustained economic growth, M-Pesa and similar mobile money services will play a key role in incorporating informal and underbanked workers into the financial system.