M-Pesa’s rollercoaster ride

M-Pesa, the world-famous mobile payment system, has effectively become a type of credit card for poor communities in East Africa. The payment system has had unbelievable success in this region and other emerging market regions, prompting interest in it from many sectors in the world.

But M-Pesa is much more than a mobile payment system. It’s a blueprint for a future mobile-based currency, used by every corner and every community in the world. It’s also testament to how emerging market countries are using technology and innovation to overcome barriers. It’s an example of how countries, that are largely behind the technological curve, can suddenly leapfrog into the future.

Since the mobile currency’s development in the mid 2000s and Kenyan commercial launch in 2007, M-Pesa (the M is for “mobile” and Pesa is Swahili for “money”) has gone from strength-to-strength both in Kenya and Tanzania.

In Kenya, payments made using the M-Pesa system now account for more than 20 percent of the country’s Gross Domestic Product (GDP). According to a paper written for the Gates Foundation and published in November 2010, use of the service has been adopted by nearly 13-million households. The most marked progress being made by the system has been among Kenya’s poor and rural populations — particularly among those with no access to conventional banking.

M-Pesa was initially intended as a micro-financing and microloan service with the backing of cellular giants Vodafone, in partnership with its Kenyan subsidiary Safaricom. The idea was that the system would allow borrowers to receive and repay loans through a network of airtime sellers. But M-Pesa has evolved into a banking system, now being used as a saving mechanism and a means of transferring funds from cellphone user to cellphone user.

The service was also launched in Tanzania by Vodacom has seen similar success, with about seven million registered users, 1.6 million of whom are active.

In Afghanistan, where the service was launched as “M-Paisa”, there has been successful adoption, albeit in slightly different areas. The pilot project for M-Paisa in that country was as a means of paying a beleaguered police force. Almost immediately it was discovered that 10 percent of the salaries had been paid to ghost employees and that the middle levels of police management had been pocketing the money for themselves. Users in Afghanistan can now even use the service to buy airline tickets

Although M-Pesa has become a dominant economic force in East Africa, it has had difficulty matching its success in other regions.

It has failed to take hold in Africa’s powerhouse economy, South Africa. This is despite the fact that the service was backed by the country’s number one carrier Vodacom, mainly in partnership with major banking group Nedbank — seeking to take advantage of the fact some 13 million of the country’s economically active citizen’s do not have access to a bank account.

Vodacom had initially hoped to have reached about 10 million of these potential clients by 2013, but as of May 2011 had only registered 100 000 users, compared with the six million customers who make use of the company’s service in Tanzania.

It has not take hold, despite a roll out to three thousand outlets from which users can transform hard cash into electronic funds. It is early days however, and all this may change. But perhaps it has been slower to take hold because of the country’s relatively established banking system (compared to that of sub-saharan African countries).

M-Pesa as a money transfer service has also seen a rocky start in India. In 2009, the service ran into trouble with regulators insisting on a tie-up with a licenced bank.

By late 2010, the stumbling blocks had been overcome and the service had been launched across a number of pilot villages in the northern province of Rajasthan in association with HDFC Bank. The tie-in with HDFC has not however hampered the efforts of reaching M-Pesa’s usual rural targets. In areas where it is not viable for the bank to set up a branch, the banks has set up a network of business consultants who are authorised to collect small deposits and give out micro-loans.

The complexity of a phone carrier working through a bank, working through a series of bank-licensed operators somewhat diminishes the simplicity and ease of use of the network of carrier licensed airtime vendors which has made the service so successful in East Africa.

Ultimately, the service appears to work best in poorer developing countries where carrying large amounts of cash is dangerous and sending any amount of money between two distant points can be difficult.

M-Pesa means that funds can easily be transferred between members of families split by migrant labour. More developed emerging market countries like South Africa and India can still, however, learn from the way the model has been developed in places like Afghanistan.

But the real power of M-Pesa is not what is happening now. It’s what it could be in the future. We talk about paying through everything with our phones. This is happening in emerging market countries, right now.