Kenya Banking Landscape Pre-2007
In 2006, basic banking penetration in Kenya was approximately 19%. Predominately providing banking services from their brick and mortar operations, many Kenya banks found it difficult to service much of Kenya’s rural areas (which comprised a significant percentage of Kenya’s populace). The spending power of rural areas and the perceived nominal services a bank could provide the average client made the provision of banking services through the traditional brick and mortar operations simply uneconomic. At the time, it seemed as if providing banking services to the rural populace would be an unachievable task.
Africa’s Extraordinary Mobile Phone Growth
While the lack of banking services in rural areas continued to persist, something else very significant was occurring on the continent. Africa was witnessing the proliferation of mobile phones (mobile phone penetration in Kenya went from ~28% in 2007 to 88% in 2016) in urban and rural areas alike. The growth in mobile telephony and the increased presence and scale of multinational mobile telecommunications companies helped drive increased internet penetration in Africa broadly and in Kenya more specifically. Off the back of the rapid growth in mobile phone use, a business was able to revolutionize the operating model for banking services in the African context.
The Emergence of a New Way of Banking
In 2007, Safaricom, a subsidiary of Vodafone brought to market M-Pesa (‘M’ standing for mobile and Pesa Swahili for money). Known for its convenience, ease of use, and accessibility, M-Pesa enabled money transfers between the most basic mobile phones through SMS. Through M-Pesa’s network of over 40,000 agents (oftentimes individuals or small shops who act as agents to M-Pesa and accept cash and load mobile credit to M-Pesa accounts for clients and vice versa for withdrawals) by the end of 2008 M-Pesa’s payment and money transfer services were used by more than 5 million people. Today, M-Pesa is now used by more than 17 million Kenyans, equivalent to approximately 66% of the adult population. Furthermore, more than 25% of Kenya’s Gross National Product flows through the M-Pesa platform. Since inception, M-Pesa’s platform has grown from a money transfer business to a platform that offers loans and savings products, salary disbursement, and bill payment services.
M-Pesa Opportunities and Threats
Considered by many to be one of the greatest mobile money/mobile financial services success stories in the world, M-Pesa is faced with a number of challenges and opportunities from an operating model perspective:
- Expand Service Offerings to Customers through M-Pesa Platform – Thus far M-Pesa has been used as a means to extend money transfer services, loans and savings products, salary disbursement, and bill payment services to a large segment of consumers who prior to M-Pesa did not have access to the aforementioned services. Having proven concept, M-Pesa must continue to innovate and continue to extend additional financial services through the platform. As an example, Kenya’s insurance penetration rate is estimated to be approximately 3%. Given the de minimis penetration rate in the country, surely M-Pesa has an opportunity to extend insurance products to customers on its platform. Not only will product expansion help to continue to drive customers to the M-Pesa platform but the number of products provided on the M-Pesa platform can help to build barriers to entry that will make competing with M-Pesa overwhelmingly difficult.
- Build Credit Score Capabilities – While M-Pesa has helped consumers gain access to basic banking products, it is well known that credit extension in Kenya has been limited due to the lack of reliable credit scores. At the heart of the flow of capital to and from millions of consumers, M-Pesa has tremendous amounts of data on individual consumers and has the opportunity to think critically about how to turn this data into a useful credit metric that can be appropriately used for the provision of loans. If such a system is created, M-Pesa’s importance to the broader financial infrastructure of Kenya would continue to increase thereby insulating the platform from competition.
- Disruptive Business Models – While M-Pesa’s success can be largely attributed to its innovative approach to providing banking services, competitors are out in various markets trying to create new products and services that will compete directly with
M-Pesa. Local competitors and external innovations such as bitcoin have the potential to upend M-Pesa’s current competitive advantage. In order to defend itself against ensuing competition, M-Pesa needs to continue to hire appropriate engineering talent that will help the company continue to innovate.
 Communications Authority of Kenya, Sector Statistics Report Q2 2008.
 Communications Authority of Kenya, Sector Statistics Report Q4 2015-2016.
 KPMG Report – Insurance in Africa 2015.