How Kenya created the world’s most successful mobile-payments service

M-PESA has transformed the everyday lives of most Kenyans, disrupting the traditional banking system and capturing the previously unbanked market. Allowing whole businesses to be run from a mobile phone, the secret to M-PESA’s impressive performance can be found backstage.

a9329ebf6090afb969b7a98195460892What’s this M-PESA thing all about?

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.

201024fnc604Customers 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!




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Student comments on How Kenya created the world’s most successful mobile-payments service

  1. Hi Andrea! This is a really interesting post- I’m particularly interested in M-PESA and have read a lot about it recently since our FIELD 2 project is to develop a cashless payment system for low income Cambodians. The cash withdrawal/deposit behaviors in rural vs. urban areas and the pooling solution they have devised to work around that is fascinating. Do agents in the pooling chain take a percentage cut of the cash in the process? How does that work? And I’m curious about what you mean by layering- is this just that several pooling agents work simultaneously to buffer the system? -Anjali

  2. This is a fascinating business and sounds like it really is making a difference for the Kenyan population and the Kenyan economy, thanks for sharing! It makes sense that this mobile payments system was developed by a mobile network operators, given that Safaricom would have had to overcome similar distribution challenges to sell airtime in rural, difficult to access locations. Do you know if the 40,000 M-PESA agents overlap with the same agents that sell airtime and data?

  3. Hi Andrea, thanks for writing this post, M-PESA is definitely a very interesting company to learn about (sounds like the Venmo of the developing world!). I think its particularly cool that individuals can either pay using the M-PESA mobile money they obtain from agents or by selling airtime, which is another valuable, and exchangeable unit of value that can serve as fiat money. One question I had is how depositing/withdrawing cash for mobile money at an M-PESA agent is different from going to a bank to conduct a transfer. In both instances, the user has to travel to a physical location before an electronic transfer can happen. Is the difference that users will keep large balances of mobile-money like we do in the US with venmo to limit the number of visits to the agent? If that is the case, then cyber security would also seem to be a critical component of the operating model to ensure this electronic money remains safe before it is converted to cash.

  4. Hi Andrea! So glad you wrote a post on M-Pesa! I think it’s interesting to note that M-Pesa was around before services like Venmo – and scaled up much more quickly. In many ways, these types of companies are helping African markets leapfrog more developed ones in terms of financial technology – and it’s out of necessity!

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