The future of banking through cell phones

M-Pesa brings banking to the needy

The importance of banking

While many of us take basic banking services for granted, for many in the world it is a highly desirable service that is out of reach. Banks provide crucial functions, such as the ability to store money, earn interest, take out loans, and transfer money. Despite the critical nature of this service, in developing countries, only 54% of adults have access to a bank account [1]. Common barriers to opening a bank account include poverty, costs, travel distances, and the cumbersome requirements to open a bank account to those who are often uneducated or illiterate[2].


The New Bank: M-Pesa

However, with the recent proliferation of cellular devices in even developing countries, it has now become possible for a significantly larger portion of the world population to have access to banking services. In 2007, the Kenyan cellular phone company, Safaricom (a subsidiary of Vodafone), launched M-Pesa – a way convert cash to a virtual currency which could then be stored or transferred in virtual wallets. Today, two-thirds of the adult population in Kenya uses M-Pesa and the value of the amount transferred through M-Pesa is roughly 25% of the country’s GDP[3].


Operational Model Differences

The proliferation of cellular devices were critical for M-Pesa because it allowed Safaricom to lower their costs through some key operational model differences compared to a traditional bank. Lower costs for Safaricom in turn allowed for lower fees for customers, which made banking products affordable for more people.

For example, Safaricom does not own any bank branches. In order to deposit or withdraw cash from their M-Pesa account, instead of going to a bank branch owned by a bank, M-Pesa users go to a Safaricom agent, who essentially acts like a super-user and can either provide the user cash in exchange for e-currency, or vice versa[4]. These agents are often owners of their own businesses, such as a nail salon or a newspaper kiosk. Unlike a bank, these agents are not employees of Safaricom, and instead are simply users who are trained by Safaricom and are allowed to directly interface with Safaricom by depositing cash or withdrawing cash from Safaricom’s bank account itself in exchange for the virtual currency. Without a physical branch, Safaricom can keep costs – and therefore fees – low.


Business Model Differences

Not only was the proliferation of cellular devices critical in allowing for operational model differences between Safaricom and a traditional bank, it also allowed for business model differences that affected users of M-Pesa.

Previously, without access to banking services – what is referred to as the “formal” financial products – Kenyans previously resorted to “informal” means, such as pawn shops (as a mean of loans), buying jewelry (as a means of saving), and physical delivery of cash through drivers of bus routes (as a means of funds transfers) [5]. These methods had serious drawbacks including lack of accessibility (jewelry is illiquid and can only be quickly transferred through cash at a discount), risk of loss (bus drivers could fail to deliver the funds), as well as high fees (pawn shops with exorbitant interest rates).

M-Pesa users can transfer funds, add a savings account, take out a loan, or use any of the many other services that banks provide wherever and whenever through their cell phones to purchase all these services. This offers a much more valuable business model than not only the informal financial industry (which relied on users to safely store jewelry or find bus drivers they can trust) but also the formal banking industry, which had bank branches that (1) were often a long and dangerous walk away, (2) had limited hours of business, and (3) had long lines. With M-Pesa, even communities with very low population density can now have access to banking services safely through their own cell phones[6].


Potential Future Improvements

Already, the M-Pesa ecosystem has created opportunities for other startups to offer M-Pesa customers to savings accounts, loans, and a credit score based on their transaction history. However, as banking creates new prosperity for Kenyans, I believe M-Pesa customers will have access to far more financial products that are familiar for affluent U.S. customers, such as brokerage accounts or revolving lines of credit (i.e. credit cards).

(700 words)



[1] Dupas, Pascaline, et al. Banking the Unbanked? Evidence from three countries. No. w22463. National Bureau of Economic Research, 2016.

[2] Ali, Abd Elrahman Elzahi Saaid. “Beyond Traditional Microfinance: Financial Inclusion for Unbanked Kenyans.” International Journal of Social Science Studies 4.8 (2016): 74-85.

[3] T.S. (May 27, 2013) The Economist “Why does Kenya lead the world in mobile money?” Retrieved from

[4] Mbiti, I., & Weil, D. N. (2013). The home economics of E-money: Velocity, cash management, and discount rates of M-pesa users. The American Economic Review, 103(3), 369-374. doi:

[5] Olopade, D. (May 2014). The Atlantic “Africa’s Tech Edge” Retrieved from

[6] Ndirangu, Lydia, and Esman Morekwa Nyamongo. “Financial Innovations and Their Implications for Monetary Policy in Kenya†.” Journal of African Economies 24.suppl 1 (2015): i46-i71.


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Student comments on The future of banking through cell phones

  1. Thanks DK. Cell phone technology certainly has opened entire populations to banking and financial services. Since these services are so new in some areas, Vodafone should take it upon itself to also provide elementary financial education to its customers regarding responsible borrowing practices. Financial access sadly also means the proliferation of ‘predator’ lending practices. It would be tragic if those who M Pesa were seeking to serve lost faith in the financial community. Furthermore, the Kenyan government should pass common sense usury legislation as an added protection.

  2. I’ve been following M-Pesa for a bit and I’ve always wondered how will they implement some of these financial products. I wonder if they will look anything like what we have in the developed world of if we will have to create new services for these markets because the market will want a more sophisticated, but simple product as they are jumping forwards.

    For example, there are solar generator/battery solutions that are paid for on a monthly basis through M-Pesa. In this example, the credit extended is the item, not the financing attached to it. If you can offer items on these turns and remotely turn off access to them through the internet (as they do with the solar solution), maybe you don’t need to create credit cards. You can apply this model for anything that can be converted into a consumable. I think you could do this with food, medicine, utility access, and most items that run on electricity.

  3. Thank you for the post DK!

    Mobile banking is a fascinating subject to me. Imagine the potential impact this technology can provide to developing countries if in the U.S (where traditional banking is available everywhere), apps such as Venmo, Paypal among others already have become important aspects of our lives. This concept of financial inclusion that M-pesa is striving for by lowering transaction costs will not only improve the quality of lives of the Kenyan families but also will aid the country’s economic growth (1). However in order to do so, M-pesa will need broaden the services it offers to its customers. The latter will not be an easy task. In order for M-pesa to tap into services such as remittances, mortgage payments among others it will need to meet regulatory compliance (2). I wonder if the company plans to enter that space and battles those complications in its quest to provde financial inclusion to the Kenyan population.



  4. Great post David! I’ve also been following M-Pesa for a couple years now, and totally agree that it’s been an incredible tool to expand access to financial services and as a result, quality of life, for rural Kenyans. Another step that M-Pesa has recently taken is to allow remittances to tap into cash flows back to Kenya from its diaspora around the world. Through partnerships with companies like WorldRemit[1] and HomeSend[2], M-Pesa is able to capture part of the $862 million remittances sent from abroad back home to Kenya annually.[3] Coincidentally, I had a great conversation with a Kenyan Uber driver I had last week, who said that he’s been using the service to send money back home to his family!


  5. Having worked at a major credit card company, I really liked your article about M-Pesa. The stat that only 54% of adults in developing countries have access to a bank account reminds me of a stat we often would quote in the credit card industry: 85% of worldwide transactions are still done in cash. However, the advancement of technology that has come with smart phones gives people in developing countries a lot of opportunities without much needed infrastructure. I think it’s incredible that M-Pesa has already captured 25% of Kenya’s GDP within less than 10 years. Something, I would really like to learn more about is how M-Pesa is fighting against security fraud. A found a very interesting article about how a proliferation of email scams occurred after the launch of M-Pesa.

  6. M-pesa is a really interesting company and changing a lot of unbanked individuals’ lives especially in emerging markets. The one issue with making mobile banking the go-to financial solution, vs. simply a side feature (like venmo) becomes security. If someone’s entire financial accounts lie within one’s mobile phones, security can be compromised quickly. Furthermore, Tel-cos get increasingly more powerful.

  7. Thanks for this interesting post David! M-pesa has been instrumental in increasing financial inclusion in a number of developing nations. One additional benefit that M-pesa provides is an efficient and safe means of distribution for government assistance schemes and employment plans. This has been a big part of their value proposition in India. Traditionally, there have been significant leakages in the distribution of government welfare schemes either due to the “commissions” charged by middle-men or delays arising out of red-tapism. M-pesa attempts to solve a lot of these issues. Despite this, M-pesa has not seen as much success in India as expected. A large part of this is due to lack of awareness and an unwillingness to transact online. One of the key reasons M-pesa was successful in Kenya was that because of the high crime-rate people felt safer transacting online than they did carrying around cash. In India however cash is still a preferred means of payment and people seem to distrust online banking. Vodafone is focused on awareness-building programs, particularly in rural India to help drive adoption.

  8. I really enjoyed the article, David. I would like to get your opinion on whether bank will be able to migrate all their products to mobile. For instance, I don’t know if someone would be willing to take a 500k mortgage or 200k educational loan through the web. It is not like I don’t trust online transactions, but my potential loss, even if the likelihood that I am going to get scammed is small, could be huge. I think most people, myself included would prefer to go to a branch at least to sign the paperwork!

  9. It sounds like M-pesa is serving a valuable purpose a country with less than reliable means of exchanging money. I suppose in this case the risk of fraud or failure in transferring goods or services is much higher than the risk of fraud through cashless payment platforms.

    When I first read this, I thought “would the developed world ever go cashless?” Then I remembered something I read about the Scandanavian countries: . It’s exciting to imagine a world where I wouldn’t have to worry about hitting up an ATM before going to an event. However, this brings me back to my original thought. In the US, as more things become digitized, the risks posed by fraud, hacking, or a security breach in general plays an increasingly large threat to our way of life. I’d like to know what type of security measures M-pesa takes to make sure that the entire economy of Kenya doesn’t collapse if they are hacked.

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