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Mobile Payments Go Viral: M-PESA in Kenya

Journal 32: Applied Finance

Ignacio Mas, Dan Radcliffe

M-PESA is a small-value electronic payment and store of value system that is accessible from ordinary mobile phones. It has seen exceptional growth since its introduction by mobile phone operator Safaricom in Kenya in March 2007: it has already been adopted by 14 million customers (corresponding to 68 percent of Kenya’s adult population) and processes more transactions domestically than Western Union does globally. M-PESA’s market success can be interpreted as the interplay of three sets of factors: (i) preexisting country conditions that made Kenya a conducive environment for a successful mobile money deployment; (ii) a clever service design that facilitated rapid adoption and early capturing of network effects; and (iii) a business execution strategy that helped M-PESA rapidly reach a critical mass of customers, thereby avoiding the adverse chicken-and-egg (two-sided market) problems that afflict new payment systems.

M-PESA was developed by mobile phone operator Vodafone and launched commercially by its Kenyan affiliate Safaricom in March 2007. M-PESA (“M” for mobile and “PESA” for money in Swahili) is an electronic payment and store of value system that is accessible through mobile phones. To access the service, customers must first register at an authorized M-PESA retail outlet. They are then assigned an individual electronic money account that is linked to their phone number and accessible through a SIM card-resident application on the mobile phone. Customers can deposit and withdraw cash to/from their accounts by exchanging cash for electronic value at a network of retail stores (often referred to as agents). These stores are paid a fee by Safaricom each time they exchange these two forms of liquidity on behalf of customers. Once customers have money in their accounts, they can use their phones to transfer funds to other M-PESA users and even to non-registered users, pay bills, and purchase mobile airtime credit. All transactions are authorized and recorded in real time using secure SMS, and are capped at around U.S.$800.

Customer registration and deposits are free. Customers then pay a flat fee of around U.S. 35¢4 for person-to-person (P2P) transfers and bill payments, U.S. 30¢ for withdrawals (for transactions less than US $30), and U.S. 1.1¢ for balance inquiries. Individual customer accounts are maintained in a server that is owned and managed by Vodafone, but Safaricom deposits the full value of its customers’ balances on the system in pooled accounts in two regulated banks. Thus, Safaricom issues and manages the M-PESA accounts, but the value in the accounts is fully backed by highly liquid deposits at commercial banks. Customers are not paid interest on the balance in their M-PESA accounts. Instead, the foregone interest is paid into a not-for-profit trust fund controlled by Safaricom (the purpose of these funds has not yet been decided).

M-PESA is useful as a retail payment platform because it has extensive reach into large segments of the population. Figure 1 shows the size of various retail channels in Kenya.6 Note that there are over five times the number of M-PESA outlets than the total number of PostBank branches, post offices, bank branches, and automated teller machines (ATMs) in the country. Using existing retail stores as M-PESA cash-in/cash-out outlets reduces deployment costs and provides greater convenience and lower cost of access to users.


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