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This story appears in the December 2008 issue of Cards&Payments.
The Kibera slum outside Nairobi, Kenya's capital, packs roughly 1 million people into an area about the size of New York's Central Park. Residents rarely venture out after dark because most of the district lacks electricity. And the unpaved roads become impassible when it rains.
Not surprisingly, no bank branches or post offices exist in Kibera. But at least 30 agents of mobile operator Safaricom, Kenya's largest telco, have outlets there. And they are doing a brisk business handling the funds the slum residents send home to their families in the Kenyan countryside.
"It goes directly to the person they are meaning to send their money to," says Olga Morawczynski, a doctoral student at the University of Edinbough who has studied the telco's M-Pesa service on the ground in Kenya, tells Cards&Payments. "They are sending it to their wives in the villages. There is no middle man anymore, and it reduces the risk of something happening to that money."
Safaricom's M-Pesa mobile-banking and payment service drew nearly 2 million customers in its first year after launching in March 2007. Since February, more than 2 million more users have signed up, transferring a reported US$100 million per month.
"The growth that we've seen in the last 18 months has been astonishing, but it's sort of 10 times where we thought the business plan was. That's how quickly it has grown," says Nick Hughes, head of international payments at United Kingdom-based Vodafone Group, which owns 49% of Safaricom and developed M-Pesa.
The service is becoming increasingly well-known in the payments industry as an example of nonbanks using the broad reach of mobile phones and networks to fill the void left by banks and their meager infrastructure of branches and cash machines in developing countries.
But Kenya, where mobile subscribers outnumber bank account-holders by at least three to one and more than 80% of the population is unbanked, is not the only place in Africa or elsewhere in the developing world where mobile operators are seizing the initiative.
Mobile funds transfers and other m-banking and payment services are gaining a foothold in South Africa and in some other poor countries, including the Philippines. There, mobile operators Smart Communication and Globe Telecom for several years have enabled subscribers to exchange funds by text.
Vodafone last summer launched M-Pesa in Kenya's neighbor Tanzania, where fewer than one in 10 adults has a bank account but more than one-third of the population carries mobile phones. It also expanded the M-Pesa concept to Afghanistan.
"We're looking at other markets," says a Vodafone spokesperson. That reportedly includes India and the Democratic Republic of Congo, although banking regulators in India are blocking Vodafone's move.
Rival Mobile Money
Rival telco Orange, a brand of the France Telecom Group, also sees an opportunity to expand into banking with its extensive operations in Africa and other developing markets. It launched a trial of its Orange Money service in Ivory Coast last spring and intends to roll out the service nationwide. And it has said it would introduce Orange Money in Senegal, Mali and Jordan this year or next, although no specific launch dates are set.
Orange also has talked about launching the service to more than a dozen countries in Africa, the Middle East and beyond. Perhaps to appease regulators, Orange is quick to point out it will partner with banks for the service, but it would remain the dominant player.
As with M-Pesa, Orange Money users can do more than just make person-to-person payments. In Ivory Coast, for example, they can pay electricity bills, top up prepaid mobile airtime and even make retail payments with some merchants that accept the Orange Money electronic value. They make the purchase with the merchant just as they would conduct a P2P funds transfer with a friend.
More Orange Money services could be on the way in Ivory Coast or elsewhere. Orange and a partner recently received a $1.7 million grant from the Bill and Melinda Gates Foundation to develop a mobile microfinance service.
Vodafone decided to launch M-Pesa in Kenya only as a simple P2P funds-transfer service, but it has grown into more than that, says Hughes, who spoke in late October at a luncheon sponsored by U.S.-based Consultative Group to Assist the Poor, a self-styled "microfinance think tank" affiliated with the World Bank.
"The intention is to move it into other areas," he said. "We're already doing salary payments. We're doing bill payments, so we've got utility companies signing up."
Last month, Vodafone was planning to extend the service to one of Kenya's ATM networks. Users would type in a special code to withdraw money from their M-Pesa accounts. No cards would be needed.
The operator also hopes to open up the service to international remittances, enabling Kenyans working in the UK and elsewhere to send funds to families in their home countries. And it likely will expand M-Pesa to the point of sale. Many of the 3,500 M-Pesa agents in Kenya are merchants that sell groceries, petrol and other goods.
Though in developed economies most mobile operators and banks interested in mobile payments are looking to Near Field Communication technology to enable consumers to tap their phones on contactless readers connected to POS terminals, that is not realistic in Africa and other developing regions where terminals are scarce, say observers. Making mobile payments using a text message-based scheme such as M-Pesa is much slower than NFC, but it makes sense in poorer countries, they say.
"I can see that's a logical development," says Howard Wilcox, an analyst with UK-based Juniper Research. "You can see if somebody has sent you some money, and you go into the supermarket to redeem that money with an SMS code. That code is verified, (and) you have a certain stored value with that supermarket."
Of course, mobile operators are not the only ones launching mobile-banking and mobile-payment services to the unbanked. Among other players, banks and international payment card companies also are interested.
But besides their scant payments infrastructures, especially in small towns and villages, banks in poor countries are at a disadvantage against mobile operators over fees consumers pay for P2P payments and related services.
Undercutting Banks
Telcos often price their m-banking services low because they usually save money each time subscribers use the service to top up their prepaid airtime compared with commissions the operators would pay to agents (
In the case of M-Pesa in Kenya, Safaricom charges just 30 shillings (US$0.37) for registered users to send funds to recipients also belonging to Safaricom. Senders must be registered and are issued a Safaricom SIM card for their phones. Recipients need not register, but the fees rise substantially if they do not.
But mobile banking and payment schemes led by telcos have come under greater restrictions in other countries, especially more-regulated markets, such as India and South Africa.
Vodafone had planned to expand M-Pesa to India by now, but the central bank wants banks involved. The telco argues it does not invest the M-Pesa funds, so the central bank should not consider M-Pesa a mobile-banking service. Vodafone calls it strictly a payments service.
In South Africa, mobile-banking schemes must at least have banks as partners. That is why m-banking service Wizzit hooked up with the little-known South African Bank of Athens before launching its funds-transfer service four years ago.
The country's four big banks all offer some type of mobile banking, and in some cases they can use open-loop bankcards to withdraw funds from ATMs or do prepaid retail purchasing. Philippine operator Smart introduced a MasterCard prepaid card connected with its SmartMoney accounts several years ago.
Visa Inc. also has been trying to spread its brand to payments linked to mobile funds transfers, including, most recently, in a test in India. As with MasterCard, Visa already supports domestic funds transfers in other countries, through branches and ATMs and over the Internet.
The problem is, card-acceptance points are few and far between in many places in India and other developing countries, although Visa has made a point of saying recipients will not always require cards to withdraw or spend their money.
Prospective P2P Stateside
Both Visa and MasterCard, along with some American banks and other payments players, are targeting the U.S. and its large unbanked and underbanked population for P2P payments.
Some observers, however, doubt P2P or mobile bill payment is ripe for growth in the United States. Consumers have too many other ways to pay; there is too much infrastructure, says Edward Kountz, senior analyst for U.S.-based JupiterResearch, now part of Forrester Research.
"The U.S. is going to be a laggard," he says. "That is motivated, in part, by access to other services."
Perhaps over the longer term, the convenience of the mobile phone will win out, Kountz says. Moreover, the banks and card companies are not just targeting the unbanked with P2P.
In any case, the options for transferring funds are much less numerous in Kenya and other developing countries, to say the least.
Survey results last year suggest 58% of Kenyans who sent money home to their villages used friends and family as couriers. But half of respondents also considered that method the riskiest for remitting funds. The money often does not make it to its final destination, says Morawczynski, the graduate student, who had to interrupt her study of M-Pesa last December when post-election violence wracked the Kibera ghetto.
And M-Pesa is not without its problems. Agents in the villages on the receiving end of the mobile funds transfers sometimes run out of cash and have to trek to the nearest bank, a trip that often takes many hours and is not without risk.
But M-Pesa continues to grow in popularity, mostly by word of mouth. In fact, many Kenyans have taken to using M-Pesa as a savings account, giving up the tin boxes they had hidden at home with their stashes of cash, says Morawczynski.
All of this naturally has not escaped the notice of Kenyan banks.
"They're definitely concerned," Morawczynski says. "There is a huge amount of pressure on the central bank to regulate this."
Regulators and banks no doubt will be dealing with the same types of concerns in countries across the developing world. As mobile phones and networks continue to reach into once-remote villages and through crowded slums, consumers will seek ways to exchange funds quickly and safely. CP
