Cashing in on Kenya

“Are you going to use M-Pesa?” asked Walter.

Walter, a Nairobi-based friend of my traveling companion Jennifer, had just given her a cell phone for her use during our month in Kenya. He asked this question after Jennifer said she needed to visit an ATM.

“You don’t need an ATM in Kenya, just use M-Pesa.” Walter took the phone from Jennifer’s hands and selected M-Pesa from the drop-down menu. “It’s everywhere. For every one ATM you see, there are two to three M-Pesa kiosks.”

“I’m sorry, Walter, what is M-Pesa?”

M-Pesa (“M” for mobile, and “Pesa” Swahili for money) is a mobile-phone based money transfer and microfinancing service, launched in Kenya in 2007 by Vodafone for Safaricom, Kenya’s dominate mobile provider. It was initially created as a means for microfinance borrowers to easily receive and repay loans.

I first heard about M-Pesa through Kiva, a Silicon Valley-based non-profit which connects underserved entrepreneurs worldwide with access to loans. While Kiva works through a network of field partners in administering the loans, they launched an SMS-based pilot, Kiva Zip in late 2011 to directly connect U.S. lenders (for as little as $5) and Kenya-based borrowers with 0% loans through M-Pesa. I was never clear why this efficient exchange only worked in Kenya, so hearing Walter mention M-Pesa had me intrigued.

I quickly learned that M-Pesa has grown way beyond its microfinance roots. It is currently the world’s most successful money transfer service, enabling millions of people who don’t have a bank account but do have access to a mobile phone to send and receive money, top-up mobile airtime and make day-to-day purchases for a small per-transaction fee.

“So how would this work?” Jennifer asked.

Walter explained that a customer goes to an M-Pesa authorized agent, easily found by the bright green signage and logo. She deposits cash in exchange for electronic money, which shows immediately on her mobile phone. All transactions are secured by entering a PIN number, just like an ATM, and both parties receive an SMS confirming the transferred amount. The funds recipient either adds to his electronic “bank” of money, or redeems it for cash by visiting one of the authorized agents.

Changing the whole way money is exchanged across an entire country in a short period of time is pretty revolutionary. Safaricom has 17 million Kenyan users, and 80% use their phone for mobile payments. In fact, 25% of the country’s GNP flows through M-Pesa. The service has expanded to Tanzania, Afghanistan, South Africa, Egypt, India and Eastern Europe, but I wondered why it hasn’t spread more broadly. Likely key to M-Pesa’s success in Kenya is Safaricom’s dominance in the mobile space, the large amount of remittances (more common between rural and urban Kenyans than with Kenyans abroad), and the initially limited government regulatory involvement.

But the future could unfold very differently, very quickly. Just recently, Safaricom announced their strategic decision to remove all exclusivity provisions from their M-Pesa contracts. The 85,000 M-Pesa agents will be free to engage with rival money services offered by hungry competitors Airtel, Orange, and yuMobile.

In the end, Jennifer chose not to register with M-Pesa– we wouldn’t be making a lot of transactions during our stay, so we’d stick with withdrawing cash via the old-fashioned ATM.

I love a good emerging market “leapfrog” story. I’ll be keeping a watch on M-Pesa and the whole money transfer space going forward.

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