M-PESA: Power in Your Handsets!

If “Power in your hands” is the mantra of political empowerment, then “Power in your handsets” will be the new age mantra of economic empowerment. That pretty much summarizes the remarkable revolution created by M-PESA, the mobile money transfer service provided by Safaricom in Kenya.  But it is also a sort of cruel injustice if we were to quantify M-PESA’s achievement in a single phrase however catchy it might sound. This is a story that needs to be told. M-PESA (literally mobile money, PESA is Swahili for money) is built on a simple notion that mobile networks are far-flung than bank networks.  M-PESA allows its users to carry out any banking transactions without the need to visit a bank at all. All transactions – deposit, withdrawal, account to account money transfer – can simply be done using mobile phones. It is in a sense a national bank, sprawling across all the corners of the nation; albeit without any formal branches.

The Inside Story

M-PESA was officially launched in March 2007 by Safaricom, an affiliate of Vodafone with technical support from Sagentia and Microsoft. Three years after its launch M-PESA now operates in three countries (Tanzania and Afghanistan are the other two) with more than 18000 banking agents and renders service to about 9.6 million users. The banking agents are the lifelines of the organization, who render the service in rural and remote corners of the country where no bank can afford to have branches. The transactions take place in the form of e-floats, which are essentially a form of credit note and equals to a particular amount of real money. The user deposits money with the agent and in return gets a certain amount of e-float sent to his account by SMS or he swaps the e-floats stored in his account with the agent for a certain amount of money. The agent once in a while visits the nearest bank to sell or buy e-floats depending upon the demand from his clients.
The services don’t stop there. E-floats can be transferred to another person, not necessarily an M-PESA account holder, via simple user interfaces in your mobile phone. E-floats can be used to pay utility bills, recharge mobile phones, and buy commodities in the local market. One can also withdraw money from one of those charmingly named “Pesa-Point ATMs” even if he/she doesn’t have a debit card. The most remarkable thing about these services is that it is availed through user friendly interfaces like USSD (Universal Supplementary Service Data, which is a form of real-time messaging that we most commonly see in balance query codes – for instance, *123# or *121# in Airtel.)

Technology that touches lives

Ever since its launch, M-PESA has had a momentous impact on the rural economy. Their no-hassles fast, cheap and secure money transfer is used widely by urban migrants who transfer money to their dependents back in the country-side. The service has become so popular that the amount of money transferred per month via M-PESA is to the tunes of tens of millions of Kenyan shillings. The fast access to money has averted families from slipping into poverty and depravation who otherwise would have to resort to expensive or insecure forms of money transfer. The resulting liquidity not only triggered a new leash of life into the rural economy, but also empowered the household women who now have more freedom over how to spend their money. The most interesting development was of course how Faulu, a micro financing institute in Kenya tapped into the potential of M-PESA. Faulu used e-floats as the currency for loan lending and repayment. E-floats reduced the hassles in the loan cycle by doubling up banking agents as debt collectors. The accessibility of banking agents meant that the debtors don’t need to travel all the way to the banks to repay their loan. And not surprisingly, loan repayment rates have increased substantially after the advent of e-floats.

The Challenges and the Prospects

M-PESA was not without its share of challenges. The main challenge was and is the availability of cash at a time with an agent. These kind of operational risks are imminent in M-PESA because of the nature of transactions involved. In any given time, the majority of money transfers happen from the wealthy urban areas to the country side. So there is surplus cash with urban agents where there is no demand and there is a huge demand for cash in the rural areas where most recipients are. There will be days when the agents will run out of cash and have to travel (usually long distances) to the nearest bank to sell his e-floats and collect cash. So a lot of innovative planning and foresight is required from the M-PESA officials and the agents to avert such regional cash crisis.
But the more profound risk is that M-PESA is not hedged against bank failures. M-PESA is not a bank and its accounts are not bank accounts. They don’t pay interests on deposits but charge a nominal fee for withdrawal and transfers. M-PESA maintains their entire client’s cash in a normal current account with one or more national banks. This ambiguous market positioning – being a non-financial company providing a financial service – has already raised many eyebrows. In 2008, a lobby of Kenyan banks tried to topple M-PESA by questioning their transparency; a ploy which failed when M-PESA came unscathed in the Kenyan government’s auditing.
M-PESA has already hit regulatory road blocks in India because it is not tied up with any bank or NBFCs (Non Banking Finance Company). If launched, M-PAISA the Indian version of M-PESA, – can accrue a lot of benefits to the marginal communities. For instance, the transfer of money under social security programs like NREGA can be now done more securely by reducing the reliance on contractors. This direct-to-people approach can drastically reduce the instances of corruption that plagues NREGA. And not to mention the other benefits like women empowerment, better household monetary management that the Kenyan experience has already illustrated.
But our regulators do have a point here. Tie-ups with banks or financial institutes can only enhance the efficiency of M-PESA. It can provide the much needed transparency and accountability to the service. Such tie-ups can elevate M-PESA account on par with status of a bank savings account. This will make operational costs cheaper and resulting in the reduction of charges levied for withdrawals and mobile transfers. Account holders can also accrue other benefits attached with bank accounts like interests on deposits. And finally the cash reserves of the bank can be effectively used to buttress against regional cash crises. With some tweaking, M-PESA is well poised to rescript the success story all over again in the sub-continent and elsewhere. Most importantly M-PESA has evolved into a framework that can be easily emulated across the globe. Or as they say, the magic is in the air!

Nallasivan V

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