It turns out you don’t have to be unbanked to like M-Pesa

I had the opportunity earlier this month to visit the mecca of mobile payments, which –with all due respect to the recent accomplishments in Cupertino — remains Nairobi, Kenya.

The “Kenyan miracle” in payments has been well documented, particularly in terms of how Safaricom’s M-Pesa ™ product has brought basic electronic payment capability to millions of formerly unserved consumers in the lower income and geographically remote segments of Kenyan society (the word pesa means “money” in Swahili, so this is literally mobile money, a nice example of the kind of descriptive and explanatory branding we love at Glenbrook).  This is accomplished by adding a prepaid mobile wallet with a cash balance alongside the prepaid value already stored on wireless phones to fund voice and data usage.  The value in the mobile wallet can then be transferred to other wallet holders using a simple set of text-based menu options. While M-Pesa started and still embodies the phenomenon, other players have entered the market in Kenya, ranging from other wireless telcos to innovative banks, raw start-ups, and the Kenyan postal service (acting mainly as a distribution channel).  In addition, the success of M-Pesa is driving investment in mobile money systems across Africa and in many developing economies around the world.

Coming to Kenya already armed with a basic understanding of M-Pesa (or at least I thought so) allowed me to focus on some areas where the system is a bit different than I may have heard, or where it is evolving in new and perhaps unexpected directions.  While there are other mobile money schemes in Kenya with some of these features, M-Pesa is currently the most advanced.  Here a few things that caught my attention:

All kinds of people use M-Pesa.  While the system was built to provide basic financial services for low income and those lacking access to the banking system (such as employees temporarily working far from home), its widespread adoption has made it a useful tool even for Kenya’s banked population (there are over 40 licensed commercial banks in Kenya, including some global and pan-African names) and upscale urbanites (Nairobi is a city of 3.5 million people that serves as the commercial hub for all of East Africa).

While I’m not aware of any public data by which to gauge this phenomenon, I found in my meetings that payments professionals would express the view, for example, that it was easier and more secure to use M-Pesa than a debit card when withdrawing cash from their bank account (yes, many, if not most, ATMs in Kenya display an M-Pesa acceptance mark next to those of the national and global networks and transactions can be initiated cardlessly with an inexpensive feature phone enabled with M-Pesa).  Many Kenyans appear to value the ability to quarantine some daily spending money on their phone rather than potentially expose their total account balance by using a debit card.

In addition, POS card acceptance is far from ubiquitous in Kenya, being focused mainly in large cities and verticals like travel, petroleum and major chain stores.  Thus, even consumers with bank accounts and payment cards will occasionally take advantage of being able to use M-Pesa for electronic payments in places like small retail shops and independent restaurants, where payment by card is often not an option (though POS penetration for mobile money is still low at this stage).

As a result, banks are responding.  As a former retail banker myself, I can’t imagine that this situation hasn’t been alarming to the local banks.  While a bank might make its peace with the fact that it had ceded a low income, agrarian portion of the population to a telco, the very sight of a well dressed customer using M-Pesa at one of her own bank’s ATMs in downtown Nairobi must have triggered angina among bank executives.

It now appears that many of the banks have acquiesced to the realities of the market.  A majority of them maintain an API-based connection to M-Pesa that allows customers to do things like transfer funds between their bank account and their M-Pesa account; from there, the funds can be sent onto other M-Pesa users.  The latter transaction can be an important convenience when paying small vendors, household employees, and other independent laborers and service providers, many of whom are unbanked in Kenya.

A notably different and more combative response has now been deployed by Equity Bank, which is considered an innovator among Kenyan financial institutions.  Equity has obtained a license to operate as a mobile virtual network operator (MVNO) and buys telecom services on a wholesale basis from one of Safaricom’s smaller competitors.  It then uses the creative new approach of adding a second SIM card – a so-called “thin SIM” – to the handsets of its bank customers, allowing them to continue to use their existing wireless provider while conducting mobile money transactions tied to their balances held at Equity Bank (via the second, thin SIM card, which sits on top of the mobile operator’s SIM).  Challenges are pending with various regulatory and technical bodies, but one must admire the ingenuity of Equity’s solution, which clearly speaks to the power of mobile money in Kenya.

Coming soon to a store near you.  These days we find that payments players around the world just won’t stay in their boxes, and the same is true for M-Pesa.  Just when we had come to understand it as a peer-to-peer (P2P) transfer system (akin to Venmo, Chase QuickPay or Square Cash in the US), Safaricom has made a major push into the retail POS domain with a service called Lipa Na M-Pesa (essentially “pay with mobile money), a merchant-facing acceptance service.

Consumers can now buy directly with their phones at participating merchants and skip the process of “cashing out” value from their mobile wallets before going shopping (quite analogous to the process by which ATM cards were morphed into debit cards in the US and other developed market).  A large number of merchant outlets have now been connected, although activation is limited and volume is initially low as Kenya begins the long process of consumer education that is always required when electronic payment is first brought to the POS.  To complete the electronic round trip, M-Pesa uses its bank integrations to make it easy for merchants to transfer the value they have collected using Lipa Na M-Pesa into their traditional business banking accounts.

It’s worth noting that when M-Pesa first moved beyond P2P transactions, it focused on electronic bill payment before attacking POS retail.  Traction appears to be quite good for that domain, led by the major domestic billers (utilities, lenders, etc.).  For a society still in the early stages of electronifying payments, reducing the need for people to travel to many different locations in order to settle invoices with cash may be the most significant early step, particularly for those that live in remote or high crime areas.

It’s not just for payments anymore.  Like bankers in the developed world, the executives running M-Pesa have recognized that possessing a consumer’s main transaction account is an ideal platform from which to offer a broader range of financial solutions.  The company is aggressively rolling out such a suite of basic banking products under the name, M-Shwari.  The branding here is a bit more abstract – shwari means “calm” or “peaceful” in Swahili – but the explanation on the M-Shwari web site is clear and concise:  

“M-Shwari is the revolutionary new banking product for M-Pesa customers that allows you to save and borrow money through your phone while earning you interest on money saved.”

Accounts are opened and managed entirely through the mobile phone and funds are moved into and out of M-Shwari using, you guessed it, M-Pesa.  The focus appears to be on encouraging savings (with interest paid even on very small balances), but short-term (i.e., 30-day) micro-loans are also available.  Loan qualification is based in part on an individual’s historical use of M-Pesa, M-Shwari saving accounts, and Safaricom voice and data services.  The latest addition to the product suite is called “locked savings,” which we in the US would understand as a time deposit or Certificate of Deposit (CD), with maturities ranging from one to six months.

Safaricom is actually obtaining these bank product capabilities through a partnership with Commercial Bank of Africa (CBA), which is also made clear on the web site.  CBA provides white label consumer banking services to M-Pesa without much fear of cannibalizing its own customers who are primarily businesses.  This is an interesting example of collaboration between the mobile money and bank worlds.

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I hope that by this point, fellow admirers of Clayton Christiansen’s work will have recognized a fairly classic pattern of low-end disruption in Safaricom’s entry into financial services.  Rather than mounting a frontal attack on the banks, M-Pesa began as rather non-threatening effort to provide the most basic services to a rural population that most banks were not even attempting to serve (contrast this approach with the virtual declaration of war against bankcards initially made by the Isis/Softcard MNO consortium in the US).

From there, M-Pesa has headed upmarket, expanding its reach along several dimensions – finding ways to attract and add value for banked customers (ATM access, account-to-account transfers), while expanding the utility of the service for all existing users (bill payments, POS acceptance), and adding value product extensions for the original customers (savings accounts and loans).

If bill payment and POS usage begin to ramp, one could imagine a new set of services targeted to business users, particularly in the SMB segment where bank-based services seem somewhat less entrenched.  It will be fascinating to watch this system evolve over the next several years.

This post was written by Glenbrook’s Bryan Derman.