NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, August 13, 2015

Most people probably don’t think of Kenya as an innovation and technology hub, but in 2007 it became the launching pad for M-Pesa, a transformative mobile phone-based platform for money transfer and financial services. Since then, M-Pesa has undergone explosive growth: in 2013, a staggering 43 percent of Kenya’s GDP flowed through M-Pesa, with over 237 million person-to-person transactions. M-Pesa is nearly ubiquitous in the daily lives of Kenyans due to a range of services that include money deposit and withdrawal, remittance delivery, bill payment, and microcredit provision.

The idea that would result in the creation of M-Pesa was born after researchers funded by the UK’s Department for International Development (DFID), the foreign aid arm of the British government, noticed that Kenyans were transferring mobile airtime as a proxy for money. DFID researchers saw potential in this idea, and facilitated a connection with mobile service providerVodafone . Vodafone had been considering ways to support microfinance through its mobile platform, as access to banking and credit was limited in Kenya and transporting cash was both risky and slow. Nick Hughes, Vodafone’s Head of Global Payments, developed the M-Pesa idea and applied for funding through a DFID challenge fund. Vodafone and DFID ultimately made matching investments of £1 million.

Groups that typically have limited access to formal financial services have benefited from the financial products offered through M-Pesa. In particular, its short-term Pay Bill Account service allows users to fundraise for a variety of purposes, including expenses relating to medical needs, education, and disaster relief. M-Pesa has also empowered business creation—many small companies rely on M-Pesa for nearly all transactions, or provide a service that is a derivative of the platform itself.

In Kenya, M-Pesa has been so successful that traditional banks have come to see it as a serious competitor. At first, these banks sought to limit M-Pesa by seeking regulations from the Kenyan government, but increasingly they have begun to offer mobile banking services that attempt to disrupt M-Pesa’s monopoly of the mobile money market. To compete, many of these services are offered with transaction fees that are even lower than M-Pesa’s. As more players enter the system, the mobile money market may become even more widely accessible.