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Kenyan mobile money transfer service shows the way

M-PESA (pesa meaning “money” in Swahili) targets unbanked, prepaid mobile subscribers, enabling them to transfer money securely using their mobile phones. The service has more than one million customers today.

As well as person-to-person money transfers, M-PESA is being used for everything from school fees to buying goods and services. Some commercial organizations are also using the service to pay salaries to casual and remote field workers such as truck drivers. Individuals who are nervous about carrying cash are using it to move funds securely and quickly.

Targeting four out of five Kenyans

The system is designed to facilitate secure, convenient and low-cost money transfer in both a consumer model (person to person) and enterprise (business to consumer and vice versa). Just one in five adult Kenyans has a bank account.

Cash remains important in these markets, and moving cash around can be relatively expensive.
M-PESA began as public-private initiative with the fundamental objective of determining whether mobile connectivity could deepen the provision of financial services for people in emerging economies. In 2005, Vodafone and Safaricom, Vodafone’s affiliate in Kenya, won funding for a pilot scheme from the UK government’s Financial Deepening Challenge Fund competition. The success of the pilot led directly to M-PESA’s commercial launch in Kenya in March 2007.

Simplicity and security

The product is very simple. A customer registers for the service by providing some basic information such as national ID and date of birth, and has a virtual wallet enabled for them on their SIM. Once enabled, a customer can go into more than 1,200 retail locations and load cash into a virtual wallet on their SIM.

They can then use simple, menu-based commands from their SIM to send money to other mobile phones (even to non– M-PESA-registered customers), pay a bill, buy airtime or make a withdrawal. The system is very secure, with each customer having to register a four-digit personal identification number in all transactions to use the service. The transaction messages are all encrypted. The service has customer support available 24/7 with real-time visibility on transaction activity and trained Safaricom support staff.

In Kenya the service has been positioned as a payments service, not a financial one, enabling the regulators to authorize Safaricom’s activity appropriately.

All the customers’ balances are pooled and banked as a float with the Commercial Bank of Africa. Money transfers are an important part of Kenyan life. When surveyed, 17 percent of respondents had sent or received transfers from within Kenya. And of those who have received transfers, 28 percent listed transfers from family or friends as their main source of income.

It is also planned to extend the service into international remittances and allow Kenyans in the UK to send money to M-PESA subscribers in Kenya.

The response to M-PESA has been outstanding, with registrations running at more than 6,000 per day. Already the system is being used to allow bulk disbursement of payments from organizations to employees, and has been trialed to allow the disbursement and repayment of microloans.

Mobile phone penetration continues to grow quickly in Kenya and other similar markets. Vodafone and its partner network operators regard value-added services such as M-PESA as central to owning the relationship with customers over the long term in these growth markets.
The model has many benefits as a standalone revenue opportunity – Safaricom charges for each transaction – but also allows the network operator the chance to reduce churn and gain new customers through related services, for example by partnering with financial institutions to offer services such as loans and savings.

Encouraging experiences

The experience of M-PESA is encouraging in terms of its rapid adoption. Making the service proposition clear, need based and easy to understand has been central to its early success. Providing a very simple user interface has also been a cornerstone of design phase work. The future success and scale of the service will ultimately depend on how valuable it is to customers.

Some possible challenges include a mandated obligation from the regulators to connect to a formal clearing system. Vodafone is building a centralized team to take this service into new markets as well as moving forward with different business models to meet different regulatory requirements, such as the need to partner with regulated financial institutions.