M-PESA (M for mobile, PESA is Swahili for money) is a mobile phone-based money transfer service, payments and micro-financing service, launched in 2007 by Vodafone and Safaricom, the largest mobile network operator in Kenya. It has since expanded to Tanzania, Mozambique, DRC, Lesotho, Ghana, Egypt, Afghanistan, and South Africa. The rollouts in India, Romania, and Albania were terminated amid low market uptake. M-PESA allows users to deposit, withdraw, transfer money, pay for goods and services (Lipa na M-PESA, Swahili for “Pay with M-PESA”), access credit and savings, all with a mobile device.
| Website | www.vodafone.com/m-pesa |
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The service allows users to deposit money into an account stored on their cell phones, to send balances using PIN-secured SMS text messages to other users, including sellers of goods and services, and to redeem deposits for regular money. Users are charged a small fee for sending and withdrawing money using the service.
M-PESA is a branchless banking service; M-PESA customers can deposit and withdraw money from a network of agents that includes airtime resellers and retail outlets acting as banking agents.
M-PESA spread quickly, and by 2010 had become the most successful mobile-phone-based financial service in the developing world. By 2012, a stock of about 17 million M-PESA accounts had been registered in Kenya. By June 2016, a total of 7 million M-PESA accounts had been opened in Tanzania by Vodacom. The service has been lauded for giving millions of people access to the formal financial system and for reducing crime in otherwise largely cash-based societies. However, the near-monopolistic providers of the M-PESA service are sometimes criticized for the high cost that the service imposes on its often poor users.
History
Safaricom and Vodafone launched M-PESA, a mobile-based payment service targeting the un-banked, pre-pay mobile subscribers in Kenya on a pilot basis in October 2005. It was started as a public/private sector initiative after Vodafone was successful in winning funds from the Financial Deepening Challenge Fund competition established by the UK government’s Department for International Development to encourage private sector companies to engage in innovative projects so as to deepen the provision of financial services in emerging economies.
The initial obstacle in the pilot was gaining the agent’s trust and encouraging them to process cash withdrawals and agent training. However, once Vodafone introduced the ability to buy airtime using M-PESA, the transaction volume increased rapidly. A 5% discount was offered on any airtime purchased through M-PESA and this served as an effective incentive. By 1 March 2006, KSh50.7 million had been transferred through the system. The successful operation of the pilot was a key component in Vodafone and Safaricom’s decision to take the product full scale. The learning from the pilot helped to confirm the market need for the service and although it mainly revolved around facilitating loan repayments and disbursements for Faulu customers, it also tested features such as airtime purchase and national remittance. The full commercial launch was initiated in March 2007.
A snapshot of the market then depicted that only a small percentage of people in Kenya used traditional banking services. There were low levels of bank income, high bank fees incurred and charged; most of the services were out of geographical reach to the rural Kenyan. Notably, a high level of mobile penetration was evident throughout the country making the adoption of mobile payments a viable alternative to the traditional banking channels. According to a survey done by CBS in 2005, Kenya then had over 5,970,600 people employed in the informal sector. This informal sector constituted 98%.
In 2002, researchers at Gamos and the Commonwealth Telecommunications Organisation, funded by the UK’s Department for International Development (DFID), documented that in Uganda, Botswana and Ghana, people were ( using airtime as a proxy for money transfer. Kenyans were transferring airtime to their relatives or friends who were then using it or reselling it. Gamos researchers approached MCel in Mozambique, and in 2004 MCel introduced the first authorised airtime credit swapping – a precursor step towards M-PESA. The idea was discussed by the Commission for Africa and DFID introduced the researchers to Vodafone who had been discussing supporting microfinance and back office banking with mobile phones. S. Batchelor (Gamos) and N. Hughes (Vodafone CSR) discussed how a system of money transfer could be created in Kenya. DFID amended the terms of reference for its grant to Vodafone, and piloting began in 2005. Safaricom launched a new mobile phone-based payment and money transfer service, known as M-PESA.
The initial work of developing the product was given to a product and technology development company known as Sagentia. Development and second line support responsibilities were transferred to IBM in September 2009, where most of the original Sagentia team transferred to. Following a three-year migration project to a new technology stack, as of 26 February 2017, IBM’s responsibilities have been transferred to Huawei in all markets
Concept
The initial concept of M-PESA was to create a service which would allow microfinance borrowers to conveniently receive and repay loans using the network of Safaricom airtime resellers. This would enable microfinance institutions (MFIs) to offer more competitive loan rates to their users, as costs are lower than when dealing in cash. The users of the service would gain through being able to track their finances more easily. When the service was piloted, customers adopted the service for a variety of alternative uses and complications arose with Faulu, the partnering MFI. In discussion with other parties, M-PESA was re-focused and launched with a different value proposition: sending remittances home across the country and making payments.
Services
M-PESA is operated by Safaricom and Vodacom, mobile network operators (MNO) not classed as deposit-taking institutions, such as a bank. M-PESA customers can deposit and withdraw currency from a network of agents that includes airtime resellers and retail outlets acting as banking agents. The service enables its users to:
- deposit and withdraw local currency
- transfer currencies to other users
- pay bills
- purchase airtime
- save currency in a virtual account (Mshwari, Swahili for “calm”)
- transfer currencies between the service and, in some markets like Kenya, a bank account
- borrow money to complete a transaction when short on cash (Fuliza, Swahili for “flush (with money)”)
Partnerships with Kenyan banks offer expanded banking services like interest-bearing accounts, loans, and insurance.
The user interface technology of M-PESA differs between Safaricom of Kenya and Vodacom of Tanzania, although the underlying platform is the same. While Safaricom uses SIM toolkit (STK) to provide handset menus for accessing the service, Vodacom relies mostly on USSD to provide users with menus, but also supports STK
Cost, transaction charges, statistics
Transaction charges depend on the amount of money being transferred and whether the payee is a registered user of the service. The actual cost is a fixed amount for a given range of transaction sizes; for example Safaricom charges up to KSh66 (US$0.6) for a transaction to an unregistered user for transactions between KSh10 and KSh500 (US$0.92–US$4.56). For registered users the charge is KSh27 (US$0.25) or 5.4% to 27% for the same amount. At the highest transfer bracket of KSh50,001–70,000, the fee for a transfer to a registered user is KSh110 (US$1) or 0.16–0.22 %. The maximum amount that can be transferred to a non-registered user of the system is KSh35,000 (US$319.23), with a fee of KSh275 (US$2.51) or 0.8%. Cash withdrawal fees are also charged. With a charge of KSh10 (US$0.09) for a withdrawal of KSh50–100 or 10% to 20%, and up to KSh330 (US$3.01) for a withdrawal of KSh50,001–70,000 or 0.47% to 0.66% .
In an article published in 2015, Anja Bengelstorff cites the Central Bank of Kenya when she states that CHF 1 billion is moved in fiscal year 2014, with a profit of CHF 268 million, that is close to 27% of the moved money. In 2016, M-PESA moved KSh15 billion (US$147776845.14) per day, with a revenue of KSh41 billion. In 2017 KSh6,869 billion were moved according to a figure in Safaricoms own annual report, with a revenue of KSh55 billion. This would put Safaricom’s profit ratio at around <1 % of total money transferred.
Effect on poverty in Kenya
With the support of Financial Sector Deepening Kenya and the Bill & Melinda Gates Foundation, Tavneet Suri from the Massachusetts Institute of Technology and William Jack from Georgetown University have produced a series of papers extolling the benefits of M-PESA. In particular, their 2016 article published in Science has been influential in the international development community. The much cited result of the paper was that “access to M-PESA increased per capita consumption levels and lifted 194,000 households, or 2 % of Kenyan households, out of poverty.”[29] Global development institutions focusing on the development potential of financial technology frequently cite M-PESA as a major success story in this respect, citing the poverty-reduction claim and including a reference to Suri and Jack’s 2016 signature article. In a report on “Financing for Development”, the United Nations write: “The digitalization of finance offers new possibilities for greater financial inclusion and alignment with the 2030 Agenda for Sustainable Development and implementation of the Social Development Goals. In Kenya, the expansion of mobile money lifted two per cent of households in the country above the poverty line.”[30]
However, these findings on the role of M-PESA in reducing poverty have been contested in a 2019 paper, arguing that “Suri and Jack’s work contains so many serious errors, omissions, logical inconsistencies and flawed methodologies that it is actually correct to say that they have helped to catalyse into existence a largely false narrative surrounding the power of the fin-tech industry to advance the cause of poverty reduction and sustainable development in Africa (and elsewhere)”.
