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 . 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.
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.
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. 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) . 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.
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).
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