How mPesa brought Financial Services to Africa?

Anand Laishram *

Last week, we learnt about how Celtel brought mobile telecommunications to many African countries and thereby, creating enormous value for the people in Africa. We also talked a bit about companies building upon the mobile telecommunications platform to bring other much needed services to African nations.One such company we came across was mPesa.

This week, let’s take a closer look at how mPesa operates, what business model innovations they leverage and how much value they create.

mPesa was started by Safaricom, a mobile telecommunications firm and the Kenyan subsidiary of Vodafone. The idea for mPesa came about after an interesting development was observed in the aftermath of the mobile revolution in Africa.

As we learnt, telecom firms incorporated various changes in their business model to serve the African consumers better, given their specific circumstances. One of the changes was to operate a pre-paid model. Customers would buy minutes of talktime upfront from retail stores, instead of paying a phone bill at the end of each month.

This was necessary because in most African countries, the per capita income was pretty low and poverty was quite widespread. The pre-paid model allowed customers to buy what they could afford. And it also meant that telecom firms didn’t have to worry about the non-payment of bills at the end of each month.

The interesting development that took place was that people started using the talktime minutes as a form of currency. Most African countries back then had very little in terms of financial infrastructure.Bank branches were few and far apart, and mostly in urban locations.Banks also didn’t want to serve the low-income population.

Most people didn’t have any bank accounts. Saving money and sending money from place to place were very difficult and cumbersome tasks. If someone worked in the city and wanted to send some money home, they had to travel physically. They also had to carry physical cash, which made them vulnerable to theft.

The introduction of mobile services and the ability to buy talktime minutes upfront enabled to people using the talktime minutes to carry out certain transactions more easily & securely.

If they wanted to save money, they’d buy up talktime minutes, to be converted later into cash when they needed it.
If they wanted to transfer money from place to place, they’d transfer it in the form of talktime minutes.
It was a crude system, but it worked better than the existing options.

Realising that people needed better banking and financial services, Safaricom started mPesa in Kenya in 2007. Thanks to the mobile revolution, most people already had a mobile phone. The mPesa system enabled people to save and transfer money using their mobile phones, through simple text messages.

This was facilitated with the help of human agents, who functioned as living, breathing ATMs. Agents would be stationed throughout Kenya, in easy to reach places. These could be neighbourhood retail stores, mobile recharge shops, local barbers/ bakers/ butchers etc.

Customers would go up to an agent, pay him/ her cash and have money credited to their mobile money accounts. If they wanted to withdraw money, they’d first send a text message requesting for money and fill in the password. Then, they’d go meet an agent and receive the cash they requested for.

In a country like Kenya, which had very little financial infrastructure to speak of, this mobile banking system worked wonders. Millions of customers signed up for and began using mPesa. Most households soon had a mobile money account, even if they didn’t have a formal banking account. By 2016, 96% of Kenyan households had a mobile money account.

Billions of dollars of transactions began taking place through the mPesa system. The access to financial services also helped many people control their finances better, which helped them escape poverty. Being able to save and transfer money securely protected households from disruptive events (like illness or accidents or bad harvest) which could send them below the poverty line.

According to a 2016 research paper published in the reputed journal Science, mPesa’s take-off had lifted 194000 households out of poverty in Kenya, since its inception in 2007. The researchers also found that families, which happened to live closer to where an mPesa agent was stationed, were less likely to end up in living in extreme poverty.

Today, mPesa has expanded to multiple African countries. They have about 50 million customers, who do $314 billion worth of transactions through the system. More than 604000 agents are deployed throughout these countries. mPesa’s offerings have also expanded to other financial services, beyond just storing and transferring money, such as loans, wealth management, insurance, credit scoring, remittances etc.

More than $1.5 billion per year in remittances is transferred via mPesa. mPesa customers have also secured over a billion euros worth of credit in the last year alone. What started as a text based system for feature phones has now also evolved to be leveraged through smartphone apps. Thus, mPesa has crossed some very impressive milestones in their 15 years of existence.

In a continent with a large number of non-consumers seeking better financial access and very little infrastructure to begin with, they broke down the barriers to consumption (Affordability, Accessibility, Expertise and Time) very effectively, thus allowing people to pull in much needed financial services into their lives:

- mPesa allowed people to very easily store and transfer money, without the need to travel to cities to open a bank account.This made accessing financial services more affordable, on the whole, for many households. (Affordability)

- People could just use their feature phones and visit their local agents, who were very conveniently located. In contrast, bank branches were few and far away from rural locations. (Accessibility)

- There was no hassle regarding filling up forms or dealing with tons of paperwork or standing long hours in queues. (Time)

- The system was also very easy to use and was based on simple text messages (Expertise)

mPesa is a powerful example of how breaking down the barriers to consumption, by leveraging innovative technology and business models, can help alleviate poverty and bring prosperity.