The world's ‘un-banked’ need payment innovation, but it won’t come from banks

M-PESA is a mobile money transfer service that has experienced “wild” success in Kenya. Yesterday the Freakonomics blog put up a post examining how M-PESA has achieved such success. The service is owned by Safaricom, a telecom with “monopoly power” and is “35% government-owned,” but perhaps it’s biggest advantage is that it is not a bank.

The post explains that prior to its launch “only 14% of Kenyans participated in the formal banking sector”, and due to regulation the country’s banks were unable to offer banking services to those in rural areas. Today roughly half of all adults in Kenya use M-PESA. However, because of their special situation and lack of competition, they have “sky-high prices, little incentive to innovate, and a limited range of services to customers.”

While it may be true that M-PESA’s success has been in large part due to a combination of regulation and monopoly power that is not necessarily going to be repeated elsewhere, this story illustrates the huge need for financial innovation in so many parts of the world and the willingness of the worlds ‘un-banked’ to use products that offer them even a semi-decent service. It is clear that there is a huge demand for financial innovation amongst the ‘un-banked’, and even more importantly, it is clear that this innovation will not come from banks.

 “It’s not easy to do business in Kenya. … In fact, Kenya ranks 121st out of 185 countries in the World Bank’s ‘Ease of Doing Business’ survey.”

“On the other hand, there are some amazing examples in recent years of businesses that have managed to accomplish a lot very quickly. In particular, the wild success of mobile banking in Kenya has changed the way people use money here.  Launched just 5 years ago, Kenya’s leading mobile money transfer service, M-PESA, now processes a total of about $5 billion in transactions per year, equivalent to an astounding 15% of the country’s GDP. Before it launched, only 14% of Kenyans participated in the formal banking sector. Today, about half the adult population uses M-PESA.”

“So what’s the secret to being the most successful bank in Kenya, where it’s supposedly so hard to do business? The answer is: not being a bank!

“Apparently, as mobile phone usage in Kenya began to skyrocket in the early 2000s, some banks started to offer mobile banking on mobile phones. But it didn’t work. Most of Kenya’s population lives in rural areas, and most bank branches are in cities, so there was no way for most people to conveniently deposit money. At the time, the only legal way for banks to reach these potential customers was to set up more branches, which was too costly. So mobile banking didn’t really take off.”

“When M-PESA launched in 2007, Safaricom, which is partially owned by the telecom giant Vodafone, was far from a disruptive upstart. Rather, it had three enormous advantages over the banks, which it still has today. First, it had huge market share in Kenya. Second, it was not regulated as a bank. Third, it was 35% government-owned.”

“Monopoly power also allowed Safaricom to price out competitors with similar technology, like the banks, by charging them prohibitively high prices to do mobile banking on Safaricom phones. Most importantly, perhaps, was that because Safaricom was not a bank, it didn’t have to worry about bank regulations. So to solve the problem of distribution, they outsourced deposit and withdrawal services to commissioned third-party agents who, in turn, could recruit sub-agents of their own. This proved to be a cheap way to set up tens of thousands of agents all over the country, making M-PESA a practical option for Kenya’s rural populations.”

“By acting like a bank, they were able to serve customers who clearly demanded basic banking services. By not actually being a bank, they avoided the regulations that made it so hard for real banks to reach new customers. Monopoly power and government capture enabled them to maintain this advantage and keep competition low.”

“M-PESA is clearly a great achievement for the Kenyan consumer: millions of people who had no access to any kind of formal banking now perform basic banking services directly from their mobile phones.

 You can read the post in it entierty here.

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