Mobile banking in Kenya: Gates taking microfinance experts for a firsthand look

At the Bill & Melinda Gates Foundation, we have long been believers in the power of mobile financial services to piggyback off of the telecommunication networks that are rapidly being built in developing countries. Mobile penetration in Africa has increased from 3 percent in 2002 to 48 percent today, and is expected to reach 72 percent by 2014. That is a powerful wave we must ride.

In recent years, banks, payment system providers, and mobile operators have begun experimenting with “branchless banking” models which reduce costs by taking small-value transactions out of banking halls and into local retail shops, where “agents,” such as airtime vendors, gas stations, and shopkeepers, register new accounts, accept client deposits, process transfers, and issue withdrawals. One form of branchless banking, called “mobile banking,” uses a client’s mobile phone to communicate transaction information back to the telecommunication provider or bank. This enables clients to send and receive electronic money wherever they have cell coverage. They need to visit a retail agent only for transactions that involve depositing or withdrawing cash.  

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.  Next week, the Gates Foundation is taking several microfinance experts to Kenya, including Bob Cull; FAI’s Dean Karlan and Jonathan Morduch; David Roodman; Stuart Rutherford and Dean Yang, so they can learn about M-PESA first hand.

So, here’s a little more background on M-PESA. M-PESA is a small-value electronic payment and store of value system that is accessible from ordinary mobile phones. It has seen exceptional growth since its introduction by mobile phone operator Safaricom in Kenya in March 2007: it has already been adopted by 9 million customers (corresponding to 40% of Kenya’s adult population) and processes more transactions domestically than Western Union does globally. Customers can cash in and cash out from their M-PESA account at any of 17,000 authorized retail outlets in the country – that’s already 20 times the number of branches of the entire banking system. 

Three big lessons have emerged from the M-PESA experience, which we’ve outlined briefly below. If you want more detail, you can access our new paper “Mobile Payments go Viral: M-PESA in Kenya.”

First, M-PESA has demonstrated the power of leveraging widely deployed infrastructure–the bricks & mortar of retail shops that exist in every village and every neighborhood and the rapidly propagating cellphone technology - to extend financial services to large segments of unbanked poor people. Retail shops offer transactional points where customers can conveniently exchange cash and electronic value, in a face-to-face setting. They can also do so safely: increasingly ubiquitous mobile communications networks permit transactions to be authorized and settled in real time, thereby eliminating credit risk in transactions among customers and between these retail outlets. And this system can be propagated cheaply because both customers and stores increasingly have mobile phones of their own: there is no need to distribute bank cards among poor customers and point of sale terminals among small shops, since the mobile phone is functionally equivalent to these two pieces of equipment. 

Second, M-PESA has demonstrated the importance of designing usage- rather than float-based revenue models for reaching poor customers with financial services. Because banks make most of their money by collecting and reinvesting deposits, they tend to distinguish between profitable and unprofitable customers based on the likely size of their account balances and their ability to take on credit. In contrast, mobile operators in developing countries have developed a usage-based revenue model, selling prepaid airtime to poor customers in small increments of as low as 20 US cents, such that each transaction is profitable on a stand-alone basis. This is the magic behind the rapid penetration of prepaid airtime into low-income markets: a card bought is profit booked, regardless of who bought the prepaid card. A usage-based (i.e. transactional) revenue model would make possible a true mass-market approach, where all customers pay for themselves.

Third, M-PESA has demonstrated the tremendous need (and willingness to pay) customers have for making remote payments conveniently, securely and affordably. Once a customer is connected to an e-payment system, she can use this capability to store money in a savings account, send and receive money from friends and family, pay bills and monthly insurance premiums, receive pension or social welfare payments, or receive loan disbursements and repay them electronically. Solving people’s payment needs ought to be the key revenue driver to make low-balance savings profitable. When a customer is connected to an e-payment system, her range of financial possibilities expands dramatically.

Putting these elements together, M-PESA has prompted a rethink on the optimal sequencing of financial inclusion strategies. Where most financial inclusion models have employed “credit-led” or “savings-led” approaches, the M-PESA experience suggests that there may be a third approach – focus first on building the payment “rails” on which a broader set of financial services can ride. At the Gates Foundation, we think this is a whole new frontier for financial access. Let’s see if our experts agree when they visit M-PESA next week!

*Note from FAI: This post is part of a “before and after” series on Jonathan Morduch’s experience in Kenya and thoughts the potential of mobile banking – or lack thereof. Tune in to see what he has to say when he returns.