“Branching Out without Branches”: Digitization, M-PESA and Financial Inclusion in Kenya

Mobile proliferation is enabling emerging economics such as Kenya to “leapfrog” tradition models of banking, bring financial services to millions who previously went unbanked

“Cash is king”, as the saying goes. It plays a fundamental role in most economic and commercial transactions. Access to cash and other financial services requires the presence of financial institutions willing to offer services and extend credit in channels accessible to consumers. In Kenya, however, the majority of the population lives in rural communities, far away from branch locations (about 15km on average[i]).

The absence of financial services not only limits to extension of credit, and thus successful business formation, but also increases the transaction costs of all economic exchanges. The proliferation of mobile technologies and handsets has created opportunities for new models of banking that can address the problem of the unbanked in much of the developing world.

Researchers at the UK’s Department for International Development recognized this when they observed Kenyan’s transferring mobile airtime credits to each other as a proxy for money[ii]. Forging a partnership with Vodafone subsidiary Safaricom, they developed M-Pesa (Swahili for M(obile)-Money), a mobile platform for small value electronic payments. M-Pesa allows any user of a mobile devise to deposit cash into an account connected with one’s phone, transfer money to other users, pay for goods and services and withdraw money. The platform has allowed for mobile payments, disbursements of microcredit and other financial services to those far away from physical bank branches. Over 50% of Kenya’s poor, rural and unbanked population now uses the service[iii]. Since its launch, M-Pesa has become an integral part of the Kenyan financial system, used by over 70% of Kenyan households[iv], with around 43% of Kenyan GDP flowing through the platform[v].

Safaricom has been able to use digitization of banking transactions and the proliferation of mobile devices to alter the business model around low value banking services. M-Pesa provides access to cash deposits and withdrawals through 40,000 M-Pesa agents[vi], who are often retailers or corner shops that can be found in almost any community. Once money is put into one’s M-Pesa account, it can be used to pay vendors or service providers, transferred to friends or used to pay bills. People with account can also use the platform to obtain low-value credit or fundraise for extraordinary expenses. Safaricom collects small commissions on withdrawals and transfers on the platform[vii].

M-Pesa is able to deliver these vital financial services through an innovative operating model that leverages both physical and digital infrastructure in the Kenyan context. Traditional banks have avoided expanding into these geographies given the high fixed costs of building branches in rural locations as well as the low sizes of transactions that many customers would execute (thus limiting potential fees). M-Pesa has been able to lower fees charged, while still remaining profitable, by leveraging existing physical presence in rural areas and not investing in bank branches throughout the country.

Once cash is put onto the platform through physical locations, M-Pesa uses the both mobile connectivity and the digitization of Kenya’s financial system to execute financial transactions. Users can transfer money from their balances through the use of SMS technology. At the same time, Safaricom is able to take user balances from platform and place them within the formal banking system by depositing money within Kenya’s commercial regulated banks.

The massive adoption of the M-Pesa platform throughout Kenya has been a testament to the value it provides. As a first mover, Safaricom has come to dominate the mobile payments industry in East Africa. However, it’s success has attracted the attention of competitors, who are working quickly to establish their own mobile payments platforms. Rival airtel has already launched it’s airtel money platform offering similar financial services for those on the Airtel network.

For Safaricom to continue to leverage the opportunities of digitization for financial inclusion, they must continue to add additional value to the platform beyond competitors’ products. Some opportunities might include offering additional financial services through M-Pesa (such as term loans, insurance or savings products) or partnerships with organizations seeking to raise or distribute funds to a wide variety of Kenyan citizens. Digitization has afforded M-Pesa mass connectivity and financial interconnection, which the platform should constantly seek to use to provide value to it’s mobile customers as well as institutions looking to reach them.

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[i] “Is Mobile Banking Breaking the Tyranny of Distance to Banking Infrastructure? Evidence from Kenya”, IIIS Discussion Paper No. 412, Oct. 2012

[ii] “M-Pesa and the Rise of the Global Mobile Money Market”, Forbes, Dec. 2015

[iii] “10 Things You Thought You Knew about M-PESA”, Consultative Group to Assist the Poor, World Bank, Nov. 2010

[iv] “10 Things You Thought You Knew about M-PESA”, Consultative Group to Assist the Poor, World Bank, Nov. 2010

[v] “M-Pesa and the Rise of the Global Mobile Money Market”, Forbes, Dec. 2015

[vi] “M-Pesa Agents”, Safaricom, http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[vii] “M-Pesa Rates”, Safaricom, http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-tariffs



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Student comments on “Branching Out without Branches”: Digitization, M-PESA and Financial Inclusion in Kenya

  1. Great article. I would like to stress out the radical impact that M-Pesa has brought to the region. By enabling the “digitization of banking transactions” M-Pesa has also facilitated the emergence of a number of novel business models that have helped further raise a part of the local population from poverty. For example, pay-as-you-go solar home system providers, such as M-Kopa in Kenya (http://www.m-kopa.com), have leveraged the mobile payment technology from M-Pesa to offer solar PV panels and lightbulbs to customers in rural parts of the country. By being able to propose mobile daily lease payment options that are cheaper than the cost of filling kerosene lamps (the standard lightning technology in place), M-Kopa and others have been able to electrify a large portion of rural Kenya (see article for more info http://qz.com/587325/pay-as-you-go-solar-power-is-bringing-electricity-to-more-people-in-rural-east-africa/)

  2. Inspiring story! I’ve also seen that M-Pesa has further differentiated itself by providing highly useful agricultural information to farmers in Kenya through SMS and helplines, which takes what ITC eChoupal was doing a step further [1].

    Having said that, however, I can’t help but notice that M-Pesa’s success was predicated on the alignment of a couple of crucial factors: (1) first mover advantage and (2) existing physical presence in rural communities. I wonder how scalable this is to companies in other countries looking to replicate the same model?

    [1] Vodafone, “Agriculture – Our approach”, https://www.vodafone.com/content/sustainabilityreport/2014/index/transformationalsolutions/agriculture.html

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