Last week we learned how Celtel has brought mobile telecommunications to many African countries and thus created enormous value for Africans.
We also talked a bit about the companies that rely on the mobile telecommunications platform to bring other much-needed services to African countries. One such company we encountered was mPesa.
This week, let’s take a closer look at how mPesa works, the business model innovations they leverage, and the value they create.
mPesa was launched by Safaricom, a mobile telecommunications company and the Kenyan subsidiary of Vodafone.
The idea for mPesa was born after an interesting development was observed following the mobile revolution in Africa.
As we have learned, telecom companies have incorporated various changes in their business model to better serve African consumers, given their unique circumstances. One of the changes was to operate a prepaid model. Customers would buy minutes of talk time in advance at retail stores, instead of paying a phone bill at the end of each month.
This was necessary because in most African countries the per capita income was quite low and poverty was quite widespread. The prepaid model allowed customers to buy what they could afford. And it also meant that telcos didn’t have to worry about bills not being paid at the end of each month.
The interesting development that has taken place is that people have started using talk minutes as a form of currency.
Most African countries at the time had very little financial infrastructure. Bank branches were few and far between, and mainly in urban areas. The banks also did not want to serve the low-income population.
Most people didn’t have a bank account. Saving money and sending money from place to place used to be very difficult and tedious tasks. If someone worked in town and wanted to send money home, they had to physically travel. They also had to carry cash, which made them vulnerable to theft.
The introduction of mobile services and the ability to pre-purchase talk minutes has made it easier and safer for people using talk minutes to perform certain transactions.
If they wanted to save money, they would buy talktime minutes, to later convert them into money when they needed it.
If they wanted to transfer money from place to place, they transferred it in the form of talk minutes.
It was a rudimentary system, but it worked better than the existing options.
Realizing that people needed better banking and financial services, Safaricom launched mPesa in Kenya in 2007.
Thanks to the mobile revolution, most people already had a mobile phone.
The mPesa system allowed people to save and transfer money using their mobile phones, through simple text messages.
This was facilitated with the help of human agents, who operated like living, breathing ATMs. Agents would be stationed throughout Kenya in easily accessible locations. These can be neighborhood retail stores, mobile top-up stores, local barbers/bakers/butchers, etc.
Customers would visit an agent, pay cash, and see money credited to their mobile money accounts.
If they wanted to withdraw money, they would first send an SMS requesting money and fill in the password. Then they went to meet an agent and received the money they requested.
In a country like Kenya, which had very little financial infrastructure, this mobile banking system worked wonders.
Millions of customers have signed up and started using mPesa.
Most households quickly got a mobile money account, even if they didn’t have a formal bank account. In 2016, 96% of Kenyan households had a mobile money account.
Billions of dollars of transactions started to be made through the mPesa system.
Access to financial services has also helped many people gain better control over their finances, which has helped them escape poverty. Being able to save and transfer money safely protected households from disruptive events (such as illness, accidents or crop failure) that could send them below the poverty line.
According to a 2016 research paper published in the reputable journal Science, the take-off of mPesa has lifted 194,000 households out of poverty in Kenya since its inception in 2007.
The researchers also found that families, who lived closer to where an mPesa agent was stationed, were less likely to end up living in extreme poverty.
Today, mPesa has expanded to several African countries. They have around 50 million customers, who transact $314 billion through the system. More than 604,000 agents are deployed in these countries.
mPesa’s offerings have also extended to other financial services, beyond just storing and transferring money, such as loans, wealth management, insurance, credit scoring, remittances , etc.
More than $1.5 billion a year in remittances are transferred via mPesa.
mPesa customers have also secured more than €1 billion in credit in the past year alone.
What started as a text-based system for feature phones has now also evolved to be operated through smartphone apps.
Thus, mPesa has reached some very impressive milestones in its 15 years of existence.
In a continent with a large number of non-consumers looking for better financial access and very little infrastructure to begin with, they have broken down the barriers to consumption (affordability, accessibility, expertise and time) in a very efficient, thus allowing people to derive the necessary financial services in their lives:
– mPesa made it very easy for people to store and transfer money, without having to travel to cities to open a bank account. This has made access to financial services more affordable, overall, for many households. (Affordability)
– People could just use their feature phones and visit their local agents, which were very conveniently located. In contrast, bank branches were few and far from rural areas. (Accessibility)
– There was no problem filling out forms or dealing with tons of paperwork or spending long hours in queues. (Time)
– The system was also very easy to use and was based on simple text messages (Expertise)
mPesa is a powerful example of how breaking down barriers to consumption, leveraging innovative technology and business models, can help reduce poverty and bring prosperity.