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M-PESA: Mobile Money for the "Unbanked"

Turning Cellphones into 24-Hour Tellers in Kenya

Innovations: Technology, Governance, Globalization | August 2, 2007

CREDIT: Michèle™ (CC).

In March 2007, Kenya's largest mobile network operator, Safaricom (part of the Vodafone Group), launched M-PESA, an innovative payment service for the unbanked. "Pesa" is the Swahili word for cash; the "M" is for mobile.

Within the first month Safaricom had registered over 20,000 M-PESA customers, well ahead of the targeted business plan. This rapid take-up is a clear sign that M-PESA fills a gap in the market. The product concept is very simple: an M-PESA customer can use his or her mobile phone to move money quickly, securely, and across great distances, directly to another mobile phone user. The customer does not need to have a bank account, but registers with Safaricom for an M-PESA account. Customers turn cash into e-money at Safaricom dealers, and then follow simple instructions on their phones to make payments through their M-PESA accounts; the system provides money transfers as banks do in the developed world. The account is very secure, PIN-protected, and supported with a 24/7 service provided by Safaricom and Vodafone Group.

The project faced formidable financial, social, cultural, political, technological, and regulatory hurtles. A public-sector challenge grant helped subsidize the investment risk. To implement, Vodafone had to marry the incredibly divergent cultures of global telecommunications companies, banks, and microfinance institutions—and cope with their massive and often contradictory regulatory requirements. Finally, the project had to quickly train, support, and accommodate the needs of customers who were unbanked, unconnected, often semi-literate, and who faced routine challenges to their physical and financial security. We had no roadmap, but created solutions as we went and persevered when a pilot slated to take several months took almost two years.

Why and how does a telecom company like Vodafone start a banking project like this? It's not part of Vodafone's core business; it was not developed in a core market (Kenya is a relatively small market in Vodafone's terms); and it has little to do with the voice or data products that drive Vodafone's revenue streams. Telecom companies are young and fast moving; banks are old, traditional, conservative, and slow moving. And, having generated the concept and decided at the corporate level to implement it, what are the practical issues that need managing to get the project off the ground and into commercial operation? These are the questions we seek to answer here.


The backdrop to our case study lies in the development debate. As part of the Millennium Development Goals, many of the world's leading nations have committed to reduce poverty by 50 percent by 2015.

Traditionally the realm of state organizations, donor agencies and nongovernmental organizations, development is today understood to be unachievable without the engagement of the private sector. There are now more than 2 billion mobile phone users world-wide and for the vast majority of people the first phone call they ever make will now be on a mobile device. When I joined Vodafone in 2001, I welcomed the opportunity to work in a sector that is witnessing one of the fastest adoptions of a new technology the world has ever seen. Vodafone is a relatively young, technology-based service organization that is keen to proactively manage its impact on society. Part of my initial job in Vodafone was to help it understand its role in addressing issues like the Millennium Development Goals.

In my role at Vodafone, I had become aware of a promising approach to tackling sustainable development, one in which I was sure Vodafone could significantly and legitimately play a role. This approach is simple: access to finance facilitates entrepreneurial activity. In turn this creates wealth through economic activity, job creation, and trade. There has been much positive discussion in recent years about donor agencies seeking new ways to deliver funds to those who need it most, directly and in a more efficient manner, so that the capital is productively deployed. Witness the number of large, private sector-derived Foundations and Trusts that are addressing poverty alleviation through enterprise, bringing the rigors of an investment-style approach to the debate. These range from the Gates and the Soros Foundations to new social investment funds. At the core of these initiatives is a willingness to find more effective ways of delivering assistance—a hand up, not a hand out.

Getting cash into the hands of people who can use it is limited on the supply-side rather than demand-side; there is no shortage of funds, but it's the ability to move money from the sender to the receiver that is the stumbling block. Since the creation of money, the ability to move it from A to B—the so-called "velocity of money"—has been a fundamental cornerstone of economic activity. But the issue is exactly how money transfer is made to happen in an emerging market where the infrastructure is poorly developed and where very few people have or even want bank accounts. Under such circumstances, moving cash is risky, expensive, and slow. Enter telecom network operators, who can adapt mobile technology to deliver financial services in a fast, secure and low cost way, especially in developing parts of the world where microfinance institutions have begun to spread and begun to build an infrastructure.

Getting Funding

I started my M-PESA journey at the World Summit for Sustainable Development in 2003. After spending an afternoon contributing to a debate about how private sector organizations are driven by short-term goals and thus don't typically address long-term sustainable development, I was approached by a representative of the U.K. government who controlled a challenge fund project set up by the Department for International Development (DFID). Our discussion centered on the following: Private sector organizations such as Vodafone are legally bound to use their shareholders' capital to achieve the best returns. But many organizations use internal competition to allocate funds to their projects, and this competition is based on potential returns on investment. As a result, any initiatives that relate to the development agenda usually get squeezed out. Without wishing to overgeneralize, often the only place within an organization where the development agenda can ascend is in departments that are more concerned with stakeholder engagement, government relations, policy debate and corporate reputation. How could firms raise executive-level interest and get funding to develop products that will be non core and long term but do have some sort of sustainable development theme?

One angle could be to position such projects in the Research & Development (R&D) department. This would work in many sectors where new products take a long time to reach market, but many technology-based companies—and Vodafone is no exception—tend to keep R&D focused on the technology rather than the marketplace. Financial services in emerging markets are not about new technology; in fact, even at the early concept stage we expected to use a very basic application of mobile communication, called SMS (or text messaging), certainly not the sexiest aspect of mobile technology, especially in the core European markets where Java applications, 3G and smartphones were all in vogue. This wasn't about new technology, it was about a new application of existing technology.

Enter the role of challenge funds. What if a firm could use somebody else's capital to overcome the internal competition (one hurdle down) and a compelling proposition could be shaped that would give the company some comfort that the project was addressing a market of potential future value?

And so it was in a conference hall in Johannesburg that I first gave serious consideration to using a challenge fund to circumvent the constraints of our new product development processes. I must make it clear, these corporate processes are there for a very good reason—the management framework brings discipline to project development and helps ensure that funds are spent wisely for the shareholders. But equally it is also important to find ways to initiate new areas of business that are higher risk; in this regard I believe that challenge funds have a strong role to play.

A Public–Private Partnership Opportunity

In 2000, the U.K. government's DFID established the Financial Deepening Challenge Fund (FDCF), making available £15m for joint investments with the private sector on projects that help improve access to financial services. Twenty-eight projects have been funded in South Asia and Africa. The money was awarded on a matched basis (50 percent of total costs) and a competitive bid process. Vodafone's contribution could be in the form of people, budgeted at an agreed rate. The FDCF fund managers and the proposal assessment team were looking for innovation. This could involve the development of a product or service that was not previously available in a target market, a new service that gave customers access to goods or services that would previously have not been available, or the application of a technology that reduced the costs of service provision. Many of the successful applicants were large, well-known private sector companies that faced challenges similar to Vodafone's in pursuing what would perceived as low-yield projects.

I spent a few weeks in mid-2003 putting together a proposal, whilst focusing on two things: broad support for the concept from a couple of very senior executives in the company, and the buy-in of my colleagues on the ground in East Africa (FDCF's target zone). Both were fundamental to progress. If somebody at the top of the company doesn't provide executive sponsorship, things won't happen and the project would eventually be relegated to the scrap-heap of PowerPoint presentations. And at a practical level, it quickly became clear that we faced a resource issue on the ground. Safaricom is a very successful company, growing very quickly, and its employees are all extremely busy growing the mobile customer base, operating the network, and supporting customers with voice and text products. Expecting the Safaricom team to engage in a complex project alongside their day jobs would be a mistake. Instead, I decided to provide a dedicated project manager who could lead all aspects of the development, integrating with the relevant departments of Safaricom from IT, Operations, Customer Care and the senior management team.

When I submitted the proposal, there were many unknowns. Much of the proposal was weighted towards completing a preliminary needs assessment and not a functional specification of a new product. The entrant of a telecom company into a funding competition for the financial services sector took a few members of the FDCF proposal review team by surprise, but we overcame some initial cynicism and were awarded funding of nearly £1 million, which was matched by Vodafone.

A few weeks later, contracts were signed and we set about organizing a series of open workshops in Nairobi and Dar es Salaam. Invitees included banks, microfinance organizations, other technology services suppliers, nongovernmental organizations with an interest in micro-credit, and representatives from the telecoms and finance sector regulators. We asked a question: Assume that the technology can do anything you want it to; what are the biggest challenges you face in growing your business or increasing access to financial services? We were able to identify two broad findings: (1) improved internal management processes would allow organizations to speed up and improve the efficiency of delivery; and (2) it should be very simple for customers to get access to finance.

The natural inclination of a service organization is to think about the consumer first so we focused on number two. A pilot partnership was created between us (the network operators), a microfinance institute (MFI), and a commercial bank. The view was that each could bring to the project a different set of competencies, which would improve access to finance for the unbanked population. Network operators bring connectivity and a huge reach through the airtime reseller distribution network; a microfinance organization understands the market need for microloans and other financial services but is typically not a regulated bank; and a commercial bank brings the discipline and compliance aspects of storing and managing customers' funds.

The proposition started to firm up around the design and test of a platform that would allow a customer to receive and repay a small loan using his or her handset. We wanted to allow the customer to make payments as conveniently and simply as they do when they buy an airtime top-up, so a central feature of our proposition was to use the distribution network of Safaricom airtime resellers (or Agents in M-PESA terms) to facilitate this process. This service should also bring business efficiencies for the MFI and allow it to grow its business more quickly and to more remote locations than is possible using traditional paper processes.

Nick Hughes and Susie Lonie each wrote one part of this case study. Hughes is the Vodafone executive who started this project in 2003. He now heads a mobile payments team with the task of growing the business globally. Lonie is a mobile-commerce expert who managed the project from design to pilot to commercial operation.

The full M-PESA case study is available as a PDF in our Policy Library.

© 2007 Nick Hughes and Susie Lonie. Republished from the winter & spring 2007 issue of Innovations with kind permission.

Read More: Business, Communication, Development, Finance, Technology, Kenya, Africa

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