Banking the unbanked of Kenya and beyond: A brief history of M-Pesa
Long before Apple Pay or WePay, Bitcoin or Ethereum, M-Pesa brought the idea of “digital currency” into the mainstream conscience.
By: Jeff Quigley
Adopting the Swahili word for money, “pesa,” and preceded by an “M” for mobile, M-Pesa was born in Kenya as a phone-based alternative to physical bank branches. It effectively put a virtual bank teller in its users’ pockets, and enabled Kenyans to deposit and withdraw money from an electronic wallet stored on the phone itself. From that “e-wallet,” users could then top-up their mobile phone’s airtime, pay bills, purchase goods and services, and send money to other phones via text message. Over time, M-Pesa would go on to offer an even wider array of mobile financial services, including virtual savings accounts, loans, and international remittances. In some countries, M-Pesa can even be used to pay taxes and collect social security payments.
M-Pesa was launched on March 6th, 2007 by telecommunications giant Vodafone and Safaricom, Kenya’s leading mobile network operator, after receiving a grant from the United Kingdom’s Department for International Development. The initiative was designed to support financial inclusion efforts globally, and Vodafone and Safaricom initially sought the grant to create a mobile phone-based microfinance service for rural Kenyans to borrow and repay money without having to visit physical banks that could be tens, if not hundreds, of kilometers away.
Shortly after trialing a prototype of the microlending service on the outskirts of Nairobi, it became apparent that the pair had stumbled onto something much larger. Michael Joseph, who was Safaricom’s CEO at the time, reflected on the realization in a blog post he published on the 10th anniversary of M-Pesa:
“What we found in practice was that people who received the loans were sending the money to other people hundreds of miles away. In hindsight, we had inadvertently identified one of Kenya’s biggest financial challenges. […] In order to send money to their relatives, people would travel for days to get home or give the money to a bus driver. These people didn’t have access to financial services, and in rural areas there was little, if any, traditional banking infrastructure. If people did use banks, the cost took a big chunk out of their wages. So we took a chance, and re-engineered the loans system to focus squarely on transmitting money from one phone to another.”
Since the majority of M-Pesa users were unbanked, the telecoms had to devise a way for the average Kenyan, whether living in a rural or urban setting, to top up their digital account with hard cash. Apart from high fees, traditional banks suffered from lack of physical presence — especially in far-flung areas. Branches could be entire cities and towns apart. M-Pesa turned to local mom-and-pop shops and roadside kiosks to scale rapidly, regardless of geography. Joseph continued:
“We wanted to have a ‘branch’ on every street corner, so we needed to recruit a huge network of agents. Our aim was that customers would visit those agents with cash, then, through a series of SMS messages, convert that money into electronic funds that securely sat on their SIM cards. Then, via SMS, they could transfer that money to anyone else, who would then visit their local agent and withdraw that cash again. The transaction needed to take place in seconds and the transaction cost would need to be very low.”
As neither Vodafone nor Safaricom held banking licenses, the companies also had to come up with a complex legal and operational structure that would satisfy the Kenyan Central Bank and allow their innovation to flourish. The fact that digital money was something new to Africa worked in the companies’ favor, as did engaging the regulator at a very early stage before a wider launch beyond the initial pilot program. After much back and forth with the government bankers, M-Pesa received a letter of no objection, and launched 10 days later.
Safaricom set a target of 350,000 M-Pesa users in its first year of service. It wound up attracting 1.2 million. In FY2019, Vodacom reported 37 million active M-Pesa users and 400,000 M-Pesa agents in seven countries (Kenya, the Democratic Republic of Congo, Egypt, Ghana, Lesotho, Mozambique, and Tanzania). That massive user base carried out over 11 billion transactions in 2019, averaging more than 500 transactions a second in the month of December 2018 alone. M-Pesa boasts the kind of market penetration that tech giants like Apple and even Amazon can only dream of — more than 96% of Kenyan households now use the service.
Following M-Pesa’s lead, many of Africa’s other telecom giants entered the mobile money fold. Sub-Saharan Africa boasts approximately 150 million active mobile money accounts, accounting for roughly half of the world’s total active mobile money user base. Sub-Saharan mobile money transactions totaled US$26.8 billion in 2018, of a worldwide total of US$40.8 billion. With GSMA predicting smartphone penetration to reach 66 percent in the region by 2025, those figures are sure to increase further.
For companies like Telcoin, partnering with Africa’s mobile money platforms will contribute to even greater financial inclusion, by significantly lowering the cost to receive money directly into a digital wallet that the recipient is already using in their daily life. As regulations evolve, Africa could also become the next frontier for mass adoption of another kind of digital money — cryptocurrencies.
Telcoin is actively engaging potential telecom and mobile money partners across Africa, in addition to those we’ve already partnered with. We look forward to the day that we can announce remittance service into the likes of M-Pesa, and we’re striving to become one of the next great financial inclusion efforts in Africa.
Telcoin. Send money smarter.
