M-KESHO in Kenya: A new step for M-PESA and mobile banking

M-PESA, a successful mobile payments service in Kenya, is already demonstrating how m-payments can successfully expand the range of financial options available to poor households.  Earlier this month, the Gates Foundation took several microfinance experts to Kenya, including Bob Cull; FAI’s Dean Karlan and Jonathan Morduch; David Roodman; Stuart Rutherford and Dean Yang, to learn about M-PESA first hand.

And while we were there, M-PESA announced some big news:  finally, M-PESA is connecting with banks in Kenya. And with a big bang too, as two big players in the financial inclusion scene in Kenya are joining forces: Safaricom (the mobile operator behind M-PESA) and Equity Bank are launching M-KESHO, a co-branded suite of financial products that will ride on the M-PESA transactional ‘rails.’ Three years ago, there were 2.5 million bank accounts in Kenya, out of a population of 39 million. Today, there are close to 8 million bank accounts (of which 4.5 million are with Equity Bank) plus a further 9.5 million M-PESA accounts. One third of M-PESA accounts are held by people that are otherwise unbanked, and this is the segment that the new product is targeting. Equity’s aggressive objective is to acquire 3 million M-KESHO customers by the end of this year.

In late April, the Central Bank of Kenya issued new agent banking regulations which for the first time allowed banks to engage a wide range of retail outlets for transaction handling (cash in & out) and product promotion (receiving account applications, though applications must be approved by a bank staff). This paved the way for banks to begin utilizing the M-PESA platform and associated network of M-PESA outlets as a channel.

On March 18, the President and Prime Minster of Kenya attended the high-profile launch of M-KESHO, a full savings account issued by Equity Bank but marketed as an “M-PESA Equity account.” Like M-PESA accounts, M-KESHO accounts have no account opening fees, minimum balances or monthly charges. But unlike M-PESA accounts, M-KESHO accounts pay interest, do not have a limit on account balances, and are linked to limited emergency credit and insurance facilities. And unlike its regular Equity account holders who can only transact at the bank’s 140 branches, Equity’s M-KESHO customers will be able to transact at any of the 17,000 retail outlets that accept M-PESA.

M-KESHO is fully integrated into the M-PESA user interface on customers’ mobile phone, and is also accessible through Equity Bank’s own mobile banking service (available on JAVA or USSD). Customers can deposit and withdraw money from their M-KESHO account by transferring value to/from their M-PESA account, which they can in turn cash into or cash out from at any M-PESA outlet. Deposits into M-KESHO are free to the customer, whereas withdrawals incur a KSH 30 (40¢) payable to Equity Bank plus the normal KSH 25 (33¢) cash out fee payable to Safaricom.

Safaricom is also connecting M-PESA with the accounts of other banks, enabling customers to cash in/out of their bank accounts through M-PESA. But Safaricom and Equity have agreed on a short-term exclusivity on M-KESHO, relating to product co-branding, use of select M-PESA agents to promote the bank’s products, and user interface integration.

What are the product features and how does it work?

•    Product suite. M-KESHO is a package of financial products issued by Equity Bank that runs on the M-PESA transactional rails. The core product is a savings account, but account holders can also tap into loan and insurance facilities.
•    Branding. It is jointly branded by Safaricom and Equity Bank – they own the brand and logo jointly. The first part of the logo takes after the M-PESA logo, while the second part has the brown color of Equity (to me it looks more M-PESA-like than Equity-like). ‘Kesho’ means ‘future’ in Kiswahili. So they are positioning this as a more aspirational service than M-PESA, which is more functional.
•    Marketing. Equity Bank and Safaricom have developed a joint marketing plan with joint funding to market M-KESHO.
•    Account terms. Like existing Equity and M-PESA accounts, the savings account has no account opening fees, minimum balances or monthly charges. Like M-PESA accounts, there are no monthly statements or passbooks. Unlike M-PESA accounts, it pays interest (though not very much: 0.5%-3% depending on saved balance) and does not have a limit on account balances.
•    Account linkages. M-KESHO customers must have an M-PESA account (and hence be a Safaricom customer). In addition, they may have a normal Equity Bank account and this can be linked to their M-KESHO bank account, but that is not required.
•    Account opening. Under the new agent banking regulations in Kenya, account opening cannot be delegated to agents. So account opening will take place either at branches or at a subset of some 5000 M-PESA agents at which Equity Bank will place a bank representative. (These are students paid on commission; how this is better than giving the commission directly to the store owner is beyond me.) Customers must bring the original plus a photocopy of their ID and two photographs (at agent locations their picture will be taken on the spot with a digital camera). Customers complete a relatively short and simple application form, but accounts won’t be active until 48 hours later.
•    Account management. M-KESHO accounts are held in a server owned, hosted and operated by Equity Bank. Equity Bank has the right to up-sell M-KESHO customers to full Equity Bank accounts when their account balance reaches KSH 10,000 = USD 133.
•    Deposit/withdrawal options. M-KESHO only takes electronic transactions, offering no direct cash in/out possibilities. Money can flow into and out of the M-KESHO account either from a customer’s M-PESA account or (optionally) from a normal Equity Bank account. M-KESHO customers can’t do cash transactions at an Equity Bank branch teller, but of course Equity branches are M-PESA agents so they can first cash into either their M-PESA or Equity Bank account and then transfer the amount into M-KESHO. M-PESA’s minimum transaction size of KSH 100 = USD 1.30 and maximum transaction size of KSH 35,000 = USD 467 also apply to M-KESHO.
•    Accessing M-KESHO through Safaricom’s M-PESA phone menu. M-KESHO customers will have one more item on their M-PESA menu that says ‘M-KESHO’ (their M-PESA menu will get refreshed automatically over the air upon registration). A submenu then allows customers to fully manage their M-KESHO account: transfer money to/from their M-PESA account, request a balance inquiry or mini-statement (last five transactions only), and apply for the loan or insurance facilities.
•    Accessing M-KESHO through Equity’s Easy 24x7 phone menu. Equity has its own mobile phone user interface for its customers, available through a number of channels: JAVA, WAP and USSD. Customers will have the option of managing their M-KESHO account (including transferring money in either direction between their M-PESA and M-KESHO accounts) from either their M-PESA phone menu or through the Easy 24x7 service.
•    Transaction confirmations. A transfer of value between a customer’s M-PESA and M-KESHO accounts will entail two SMS confirmations: one from Safaricom confirming that the M-PESA has been credited (debited) and one from Equity confirming that the M-KESHO account has been debited (credited). While the M-PESA confirmation typically comes within seconds of the transaction request, the M-KESHO confirmation may take 1-5 minutes. (Equity claims this is a Safaricom issue.)
•    Customer transactional fees. Deposits into M-KESHO (i.e. transfers from a customer’s M-PESA account to his M-KESHO account) are free for the customer, while withdrawals (i.e. transfers from the customer’s M-KESHO to his M-PESA account) cost KSH 30 = USD 0.40 (i.e. they are tariffed as a normal P2P). This is in addition to the M-PESA cash out fee, which for amounts less than $30 is an additional KSH 25 = USD 0.33. Thus, a ‘full’ deposit (cash to M-PESA to M-KESHO) is free to the customer, while a ‘full’ withdrawal costs the customer a fairly steep USD 0.73. M-KESHO (but not M-PESA) fees are deducted directly by Equity Bank from customers’ M-KESHO account. Equity also a KSH 5 = USD 0.07) charge for each balance inquiry and mini-statement.
•    Credit facility features. Loans must be requested from the mobile phone, and are for amounts between KSH 100-5000 = USD 1.30-67. Equity intends to use a credit scoring system based on the balance and transactional history of the customer on their M-PESA, M-KESHO and normal Equity accounts (if any) for the previous six months. There is an application fee that depends on the amount, ranging from KSH 20-500 = USD 0.27-6.67. Overdue interest is charged at 3% of outstanding balance.
•    Insurance facility features. This is limited to personal accident insurance for the first year, then it is upgradeable to full life insurance cover. It is optional, and customers apply through their mobile phone. Annual premium is KSH 530 = USD 7 if paid annually in advance (the premiums are higher if customers choose to pay on a monthly or weekly basis reflecting the time value of money).

Equity and Safaricom give’s and get’s

Safaricom’s strength in the relationship comes from two main elements it controls:
•    Agent network. Safaricom controls a channel of outlets that is 120 times more extensive than Equity Bank’s branch network (17,000 M-PESA stores vs. 140 Equity branches). Kenyans are clearly keen on the convenience that M-PESA delivers, whereas Equity Bank is in danger of losing customer goodwill as its branches get more and more congested.
•    User interface. Through its ownership of customers’ SIM cards, Safaricom can present a very convenient user interface which is an extension of the phone’s menu and a secure communications channel. Equity must use either an inferior user interface (e.g. USSD) or one that is operationally more cumbersome to deliver (e.g. JAVA).

Through their M-KESHO collaboration, Equity can enhance M-PESA’s value capture by:
•    Driving more transactions. Through M-KESHO, Equity adds value to the M-PESA proposition (interest payable on saved balances, loan and insurance facilities available) and can therefore be expected to increase take-up and usage of the underlying M-PESA service as a transactional channel.
•    Extracting more value from float. M-KESHO should drive higher account balances than are currently stored in M-PESA because: (i) it will now be possible to market savings services which Safaricom wasn’t able to do on its own for regulatory reasons, and (ii) it pays interest, albeit a low one. More importantly, the interest on float held on M-KESHO accounts can be appropriated by Equity Bank, which Safaricom could not do under its trust structure. Thus, simply transferring existing savings balances from M-PESA accounts to the new M-KESHO accounts increases the value accruing to the partners.

How unique is this?

What the other banks are doing. Despite the high profile launch and the ‘newsyness’ around M-KESHA, this is not the only connection between M-PESA and the banks. Several banks are tying up with M-PESA to facilitate banking transactions, though in a more circuitous, less integrated manner. For instance, KCB customers can:

•    Transfer money one way, from their M-PESA to their KCB account, using M-PESA’s pay bill function. This is not so convenient since they need to enter the KCB biller code each time they want to do a transaction (whereas under M-KESHO the accounts are automatically linked).
•    Transfer money both ways, between their M-PESA and KCB accounts, using KCB’s own mobile phone user interface, KCB Connect. This is based on USSD and hence is slower and less convenient to use than the M-PESA phone menu (which is based on SIM Toolkit and hence appears as an extension of the phone’s menu). KCB can offer this functionality because it is a superagent of M-PESA, and hence itself warehouses M-PESA value.

What is unique about M-KESHO:
•    Full integration of the M-KESHO service into the M-PESA phone menu, allowing two-way transactions between M-KESHO and M-PESA accounts.
•    Co-branding of the service, with a joint marketing plan.
•    Use of select M-PESA outlets by Equity Bank as customer acquisition points for the banking product (M-KESHO).

What is not unique to M-KESHO:
•    Customers cashing in and out from their bank accounts at any M-PESA outlet, through their M-PESA wallet.
•    Possibility of two-way transfers of money between the bank and M-PESA accounts, from the bank’s user interface.

How significant is M-KESHO likely to be?

This is big news on several counts:
•    Products on rails. It creates an opportunity to offer a broader range of financial services seamlessly on the biggest mobile money platform in existence in the world.
•    Branding. Two very powerful Kenyan brands that have relevance for the poor are coming together. Together, they can drive awareness and mass marketing on an unprecedented scale.

Whether M-KESHO takes off will probably depend on several key factors:
•    Marketing. Given that this is a jointly branded product, it’s possible that Safaricom and Equity Bank may promote in preference their own branded products rather than M-KESHO. It will be interesting to see how aggressively the partners promote the joint product.
•    Sales & admin. Will Equity Bank’s sales staff and systems be able to sustain such an aggressive customer acquisition path?
•    Customer convenience and pricing. Will customers see sufficient value in the new M-KESHO account to compensate for (i) the administrative trouble of moving money between their M-PESA or Equity Bank account and the new M-KESHO account, and (ii) the extra cost of withdrawing funds from the M-KESHO account?
•    Credit scoring. How reliably will Equity Bank be in judging the creditworthiness of M-KESHO customers to provide them with on-demand credit? The quality of the credit scoring model will play a big role in determining the attractiveness and profitability of the product.

At the Bill & Melinda Gates Foundation, we always have our eye on promising innovations that can be scaled up to have a significant impact on expanding financial aspect. M-KESHO holds great potential for this, so we’ll be watching closely.