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M-PESA and Mobile Money in Kenya

I’ve now been in Nairobi for two weeks and have settled in well.  I moved into my fairly upscale apartment in Kilimani, a section of Nairobi that is the beating heart of the tech and social enterprise scene here.  Up until last Saturday, I was sleeping on a mattress on the floor.  The landlord wanted to deliver a new bed frame, so I needed to let the movers into the apartment.  It was a total gong show getting this frame up the stairs, and I had to help them move it.  When it was all done, I was instructed to call the landlord and confirm that the job was finished.  After I hung up, the phone of the lead mover made a sound, they all smiled and went on their way.  In the ten seconds that elapsed after my call, the landlord successfully paid the movers via M-PESA, the ubiquitous mobile money platform in Kenya.

For those have never heard of mobile money, it is exactly as it sounds: money that can be transferred from on cell-phone to another via an SMS platform.  The most popular platform is called M-PESA, offered by Safaricom, the leading telecom provider in Kenya with almost 80% market share.  Created in March 2007, M-PESA is a dominant force in the country.  As of late 2009, an estimated two-thirds of the households in Kenya had at least one person using M-PESA.  A recent report titled “Mobile Money: The Economics of M-PESA” details a research effort that surveyed 3,000 users.  Here, the authors, William Jack and Tavneet Suri, describe the model:

Safaricom accepts deposits of cash from customers with a Safaricom cell phone SIM card and who have registered as M?PESA users. Registration is simple, requiring an official form of identification (typically the national ID card held by all Kenyans, or a passport) but no other validation documents that are typically necessary when a bank account is opened. Formally, in exchange for cash deposits, Safaricom issues a commodity known as e?float or e?money, measured in the same units as money, which is held I an account under the user’s name. This account is operated and managed by M?PESA, and records the quantity of e?float owned by a customer at a given time. There is no charge for depositing funds, but a sliding tariff is levied on withdrawals (for example, the cost of withdrawing $100 is about $1).

E?float can be transferred from one customer’s M?PESA account to another using SMS technology, or sold back to Safaricom in exchange for money. Originally, transfers of e?float sent from one user to another were expected to primarily reflect unrequited remittances, but nowadays, while remittances are still a very important use of M?PESA, e?float transfers are often used to pay directly for goods and services, from electricity bills to taxi?cab fares. The sender of e?float is charged a flat fee of about 40 US cents, but the recipient only pays when s/he withdraws the funds.

It is effectively a system of cashless payments and money transfers without the need for a bank account.  In essence, it functions as either a replacement for or a compliment to a traditional current account.  Much of the country, however, has limited access to bank branches or ATMs, making M-PESA the alternative to opening an account with a bank that may be located far away.

Customers can register for service on their phones and deposit money at one of the 25,000+ agents located throughout the country.  Agents can be independent retailers, stores, or any other business establishment.  The person gives the money to the agent, who then transfers the e-money to their phone.  The person can then transfer money to another M-PESA user or pay for goods or services rendered from a business.  Some people use it to pay school fees, or electric bills, or even taxi fare.

The impact on the country has been significant, and will continue to be a model for future mobile money programs.  According to the authors, M-PESA has had several rippling effects that have changed the way the country operates. Continue reading