The word “pesa” means “money” in Swahili, which is the most widely spoken language in Southeast Africa. M-PESA is a mobile-payment service, developed by Kenya’s largest mobile-network operator, Safaricom. Launched in 2007, M-PESA was originally developed to allow for payments on micro loans to be easily collected. However, it was found that M-PESA users were using the service to transfer money to one other, in addition. In response, the M-PESA platform was built out around an e-wallet, allowing for deposits and withdrawals of cash, bank account transfers, the payment of bills from electricity to school fees, loan and savings transactions, and the receipt of salaries.
Today, M-PESA has captured roughly 70% of households in Kenya, and over 50% of lower income households, demonstrating its contribution to financial inclusion. Kenyans benefit from the following advantages of M-PESA:
- A fast and convenient money-transfer system, available throughout the country and accessible to everyone with a mobile phone
- A secure and trusted service, removing the need to carry cash and the consequent risk of theft or loss
- Time savings for users by removing the need to travel to banks and wait in queues
- Cheap rates that reduce costs of financial products, e.g. lower rates on micro loans
Taking advantage of a range of contextual factors, M-PESA has reaped the dividend of network effects. In fact, the introduction of M-PESA has spurred a host of Kenyan start ups who run their businesses wholly on mobile phones. Few of the ideas spawned from M-PESA and implemented elsewhere have managed to replicate its unique success.
So what’s the big secret?
M-PESA has met all of the critical success factors of a high performing mobile-payments service – great technology, simple marketing, sound partnerships with banks and support from the regulator. But one factor outshines the rest in terms of the proficiency with which it has been structured and maintained – M-PESA’s distribution system. As effortless as it may seem, transferring money via mobile requires a robust backstage set up.
Customers who wish to deposit or withdraw cash from their M-PESA e-wallet, in exchange for mobile money, can do so at one of Kenya’s 40 000 registered M-PESA agents. Compared to the 840 bank branches found countrywide, the superior convenience of M-PESA is evident, especially in rural areas. To appreciate the strength of the distribution system though, we must understand the challenges it faces. A large proportion of the population is employed in cities, sending money home to family in rural areas using M-PESA. As a result, M-PESA agents in cities mostly receive deposits of cash, whilst agents in rural areas mostly pay out withdrawals. Therefore, the reliability of the system rests heavily on active liquidity management; rural agents need to have an efficient system of replenishing their cash resources once these have been swapped out for mobile money via customer withdrawals. M-PESA has achieved this through “pooling” and “layering” within the distribution system.
M-PESA agents pool the net mobile money they receive from customers and travel a short distance to exchange this for cash from a registered M-PESA intermediary. These intermediaries, in turn, pool the cash and mobile money received from agents, and arrange the logistics between affiliated banks. The pooling in the system aims to increase efficiency by reducing the number of players that need to ferry cash at each stage. Meanwhile, the layering in the system acts a cushion against clearing delays in the banking system, allowing for the speed of M-PESA transfers. Because the availability of liquidity is core to any payment service, Safaricom visits all agents on a bi-monthly basis to check on the quality of this process, and how agents are handling the growth in volumes of transactions.
What’s the headline?
In summary, if money transfers made through M-PESA were not immediately available, or if cash could not be reliably obtained from an agent, the M-PESA system would be of little value to its users. M-PESA’s carefully orchestrated distribution network enables the required customer service levels. Kenya – not just a tech hub hey!
- Bridges to Cash: The Retail End of M-PESA, Frederik Eijkman, Jake Kendall, Ignacio Mas, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1655248