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.

1.  M-PESA facilitates trade, making it easier for people to pay for and receive goods.

Utility payments, schools fees, and the delivery of a bed frame at 10 AM on a Saturday morning can all be paid via mobile money.

2.  By providing a storage mechanism M-PESA can increase household savings.

In the absence of a savings account, people have nowhere to save.  The summer after my sophomore year I worked at Champs Sports Bar in Durham, North Carolina.  I brought home my tips every day and put them in my sock drawer.  I can personally attest to the fact that cash in a savings account lasts longer than cash in your sock drawer.

3.  Facilitates inter-personal transactions, which can improve the allocation of savings across households.

People can lend one another money for business loans or other purposes through a person-to-person credit system, increasing the return on investment and helping to solve the problem of access to financial services at the base of the pyramid.

4.  Improves investment in and allocation of human capital as well as physical capital.

In other words, people are more likely to move to pursue higher-paying jobs in other areas (like Nairobi) and invest in skills that earn a higher rate of return when they know that they can easily transfer the money back home.  In fact, I used to live with two Swedish guys who were involved with Tigo’s mobile money program in Ghana, Rwanda, the DRC, and Chad.  According to them, the existence of this culture of urban-rural remittances is probably one of the reasons M-PESA was so successful in the first place.  It has since moved beyond its original intended function of providing a domestic remittance service.

5.  Affects the ability of individuals to share risk.

Members of a savings group formerly needed to be in close proximity with one another, but M-PESA has changed that.  However, this could be a double-edged sword, since distance reduces accountability when it comes to repaying debts.

6. Reduces the waiting time for money transfer

When you need money now, you need it now, not tomorrow.  Being able to transfer money immediately means you can get the money you need without having to go to the post office to pick it up, or visit the local Western Union, which may not be so local.  This mitigates the negative shocks that come from waiting.  The example used by the authors is of the father who has a mild health problem and needs the money put away for school fees to pay for medical care.  Without M-PESA, he might have to pull a child from school, which would create a situation that is much more difficult to rectify than having to repay a relative or friend.

These are just some of the apparent benefits of the program right now.  What other opportunities exist remains to be seen.  It is, however, an exciting time to be in Kenya, which one might argue is at the forefront of mobile payments in the world (though Asia – in particular, my second home, the Philippines – is far along as well).  It is safe to say that a larger percentage of future posts on Develop Economies will discuss the different ways that mobile money is changing the game for everyone in Kenya.