Saturday, February 12, 2011

The M-PESA success story

It is undoubtedly true that the mobile phone is one of the really revolutionary inventions of our times, with the potential to transform human lifestyles and the way we even do business. Fundamental to its success is its ability to bridge the last-mile connect and deliver numerous services.

I have already blogged about its potential to revolutionize the way people manage their finances. The most famous example of this is the M-PESA - an SMS-based money transfer system that allows individuals to deposit, send, and withdraw funds using their cell phone - that was launched in March 2007 by the Kenyan cell-phone company Safaricom. Today M-PESA reaches approximately 65% of Kenyan households. Similarly, in the Philippines, Globe Telecom operates GCASH, and in South Africa WIZZIT facilitates mobile phone‐based transactions through the formal banking system. An excellent working paper by William Jack and Tavneet Suri documents the rise of M-PESA.

M-PESA is not a banking service. It does not pay interest on deposits nor make loans. It allows users to deposit money into an account stored on their cell phones, to send balances using SMS technology to other users (including sellers of goods and services), and to redeem deposits for regular money. In this sense, M-PESA transfers fungible cellphone talk time.

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 in an account under the user’s name. 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. Charges, deducted from users’ accounts, are levied when e-float or e-money is sent, and when cash is withdrawn.

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. To facilitate purchases and sales of e-float, M-PESA maintains and operates an extensive network of over 23,000 agents across Kenya. M-PESA agents hold e-float balances on their own cell-phones, purchased either from Safaricom or from customers, and maintain cash on their premises. They only have to predict the time profile of net e-float needs, and maintain the security of their operations.

M-PESA caters to a specific category of small transactions. The paper finds that the volume of transactions effected between banks under the RTGS (Real Time Gross Settlement] method is nearly 700 times the daily value transacted through M-PESA, and the average mobile transaction is about a hundred times smaller than the average check transaction (Automated Clearing House, or ACH), and even just half the size of the average Automatic Teller Machine (ATM) transaction.

The paper documents many advantagees of mobile phone money transfers. They include facilitation of trade, making it easier for people to pay for, and to receive payment for, goods and services; provide a safe storage mechanism, and thereby increase net household savings; facilitates inter-personal transactions and thereby improve the allocation of savings across households and businesses by deepening the person-to-person credit market; by making transfers across large distances trivially cheap, it improves the investment in, and allocation of, human capital as well as physical capital (say, promote migration); it enhances the ability of individuals to share risk; it enables timely money transfers and thereby provides always-on access to money; empower women, and so on.

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