There should have been no surprise that the breakthrough in mobile payments emanated from the Valley. However, it was Kenya’s Great Rift Valley and not California’s Silicon Valley that pioneered a behavioural change which even the most tech-savvy Westerners are only starting to adopt.
The mobile banking revolution in sub-Saharan Africa was born out of necessity. A lack of traditional banking infrastructure has stifled the economy in many countries where citizens have been unable to get loans, even tiny amounts of debt, due to the lack of banking services. The vast majority of transactions are still made using cash.
Yet one part of the economy has boomed as the mobile phone industry has rushed to invest in African networks.
Vodafone saw the potential to develop a system for use on basic mobile phones to disperse micro-loans in rural areas. What started as a development project quickly transformed into a genuine business model as M-Pesa (Swahili for cash) was launched by the British network’s Safaricom unit in Kenya in 2007. The system became a full-blown banking service allowing people to transfer money between phones, pay for items and even receive wages all on a handset so basic that the most advanced app on the phone is the game Snake.
M-Pesa exploded in popularity and the concept has expanded to all corners of the world since. Morgan Stanley, the US investment bank, estimates that 40 per cent of the Kenyan economy now passes through the M-Pesa system with 17 million people using it. M-Pesa has quickly added millions of customers in other markets, including Tanzania and India.
This is a product for the unbanked – it is for people at the bottom of the pyramid and it’s a true mobile wallet
Michael Joseph, head of M-Pesa for Vodafone, says: “This is a product for the unbanked – it is for people at the bottom of the pyramid and it’s a true mobile wallet.”
Mr Joseph says M-Pesa reduces churn for the network as people are unlikely to up sticks to a rival if they do their banking from their phone which makes it hard for traditional payment providers to compete as mobile companies can offer the service for free as it increases loyalty. “We can make the transaction fee as low as we want because our product is voice and data. Other companies would need to make money from it; we just need to break even,” he says.
The success of mobile money services has had a widespread social impact. It has replaced collection plates in churches and is now used to distribute aid money to people who really need it. Soldiers in the Congo are being paid straight to their mobile phones and have realised they had not been receiving a full salary, when it was paid in cash, causing tension in the ranks. Mobile payment systems have also been used to trap kidnappers, who demanded to be paid straight to their phones, and officials taking bribes on to their handsets.
Enrique Velasco-Castillo, an analyst with Analysys Mason, says: “M-Pesa solved a critical need for people in some emerging markets – the ability to send money to family or friends in other parts of the country that were underserved by financial institutions. Also, services such as M-Pesa use very simple, yet widely available, communications mechanisms, including text messages, which means people can access them from even the most basic handsets.”
There is no surprise that M-Pesa has also been the subject of much imitation with 220 payment services popping up around the world since it took off. Morgan Stanley says MTN’s Mobile Money in Uganda has transferred a quarter of a billion dollars since 2010, accounting for 11 per cent of the country’s GDP. MTN’s revenue related to mobile money transactions rose 75 per cent in the first half of 2013 with 25 million transactions handled a month.
Millicom, the Swedish company, sees a huge opportunity for mobile money given 80 per cent of the population in markets where it operates, from Rwanda to Paraguay or Honduras, is unbanked. It expects its revenue from mobile payments to rise from $40 million in 2012 to the $1-billion mark by 2017.
The impact of such thriving activity has not gone unnoticed in the West. Shaygan Kheradpir, chief executive of Juniper Networks, who was previously head of technology and operations at Barclays, noted the success of the system and took inspiration to launch the British bank’s Pingit money-transfer service. “You can’t buy a beer in Nairobi without M-Pesa. We were not doing that here. They were leapfrogging us. So we developed Pingit. With the smartphone, the cloud and payment system you can reimagine it all,” he says.
Indeed M-Pesa has just been launched in Romania, arguably the first time a payment technology developed for the sub-Saharan African market has been taken up in Europe.
Yet a number of fledgling services have proved unreliable and have security problems. In some cases, the consumer has proved indifferent. The Central Bank of Nigeria, for example, launched its own mobile payments platform, but only 13 per cent of the population had used it two years after launch.
“We expect significant consolidation to take place in the coming months,” says Mr Velasco-Castillo. “Although there are many players, new and established alike, vying for a segment of the payments market, it is a low-margin and high-volume industry in which only the most established and trusted companies can survive in the long term.”
