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Network-less mobile banking By Chris Marshall

In February 2011 Michael Joseph, former CEO of Kenyan mobile phone operator Safaricom, was appointed by the World Bank to spearhead the expansion of mobile banking worldwide. Joseph grew Safaricom from five employees to a business with an 80% share of the Kenyan mobile phone market. But his most lasting legacy is undoubtedly the introduction of M-PESA, the company’s flagship mobile payment system, and the most successful of its kind in the world. M-PESA facilitates more transactions each day in East Africa than Western Union does in a year, globally.

Joseph’s appointment highlights the growing importance of mobile banking to businesses and donors alike. But it also signals a shift in thinking about how to provide poor communities with access to financial services. In sub-Saharan Africa, one in five households have access to formal financial services, whether bank accounts, microcredit or insurance. The majority of people rely on informal methods of saving, sending and receiving money. Whether storing savings at home or sending money to family living in rural areas, the majority of Africans take disproportionate risk when managing their finances.

The precedent set by M-PESA suggests that mobile banking is beginning to change this. M-PESA allows account holders to deposit funds into an electronic kitty through a network of over 20,000 agents. M-PESA is not a service designed for the unbanked population, but it is used by them. Since its launch in March 2007, the number of users has grown to 13 million. Users can send – and receive – money to another M-PESA user through their mobile phone. As the service has gained popularity it has evolved. Kenyans can now pay for utility bills, groceries and even goods from the internet using the service.

The growth of mobile banking challenges previous assumptions that low-income populations are not a viable constituency for business. Low income populations are not averse to innovation, but simply to risk. Evidence from Kenya indicates that once risk is eliminated, people quickly demand more sophisticated products and services. ‘Initial [mobile] banking uptake focuses on low value transactions (e.g. mobile transfers and payments), but customer needs for higher margin products develop quickly’, concluded a report published by Bain & Company, the global consultancy firm

Individuals, businesses and charities have integrated M-PESA into the services they offer. Musoni, a Kenyan microfinance institution, operates a completely cashless business model. All disbursements and payments are conducted through M-PESA, and rival services including Airtel Money and Orange Mobile Money. Kilimo Salama – KiSwahili for safe agriculture – is a scheme which enables farmers to insure farm inputs against crop failure caused by adverse weather. Insurance payouts are disbursed via M-PESA.

The lessons for other countries are clear. Regulation plays an important role. In Kenya, Safaricom and the Central Bank of Kenya reached a compromise where the former could act as a formal channel for taking cash deposits without adhering to cumbersome banking regulations. A large network of dedicated agents, brand recognition and trust in the service are all crucial. But Safaricom’s 80% market share gave them a cutting edge that most other networks cannot rely on. Transferring the M-PESA model has proved difficult.

In Nigeria, for example – Africa’s most populous country – competition between mobile service providers is fierce. The mobile market is fragmented. But in December 2010, the Nigerian central bank sanctioned a number of licences for mobile banking platforms. They have insisted on “inter-operability” – i.e. a system that allows people to make transactions across mobile networks. Network-agnostic services, they argue, will offer a better service to customers, allowing them to transact with anyone, regardless of network.

“[It] seems unfortunate for a customer to have to interconnect two mobile money platforms by cashing out from one platform on which it is receiving money and cash into another on which it needs to make a payment. Let’s cut out the cash in the middle” Ignacio Mas, Bill & Melinda Gates Foundation.

There is some pressure for “inter-operability” in Kenya, but Safaricom claims that it “[risks] killing innovations in the money transfer market”. The Central Bank of Kenya has backed the company. But in countries where the mobile phone market is not dominated by a single service provider, network-agnostic mobile banking services could be a more productive approach to replicating M-PESA success. The progress of mobile banking in Nigeria will be a telling indicator for the viability of mobile banking elsewhere in Africa.

Chris Marshall
Guest blogger