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Happy Birthday M-Pesa

Everyone says their fintech will change lives. This one did.

One of the world’s most influential and important fintechs has just passed another milestone. Africa’s first mobile payment service, M-Pesa, is celebrating its 15th anniversary, having grown to connect more than 50 million customers and nearly half a million businesses across seven countries. M-Pesa now processes more than 61 million transactions a day, making it Africa’s largest fintech provider, and it has attracted 42,000 external developers to create additional services for the platform. Whichever way you look at it: Wow.

Nick Read, the Vodafone Group CEO was quoted on the evolution of the platform, noting how it grew from peer-to-peer money transfer, to payment of utility bills, to enabling the payroll of businesses and to financial services such as micro-loans. It has been a platform for innovation for sure, including Fuliza (the world’s first mobile overdraft), M-Shwari (mobile only banking), Pochi La Biashara (a wallet) and the M-Pesa Bill Manager.

Read also highlighted that nine million customers and 320,000 businesses have downloaded the M-Pesa Super App since its launch, providing access to a broader range of services including savings, insurance and credit. That super app, by the way, has just been awarded “Best Mobile Innovation for Connected Living” in the Global Mobile Awards presented at the 2022 Mobile World Congress (MWC) in Barcelona.

The super app tells us something about where M-Pesa might be going. But where did it come from?

Genesis

M-Pesa was launched in Kenya on 6th March 2007, so I thought now might be a good time to explore its early history to see if there are any lessons that can be learned for the entrepreneurs of today who are looking to launch population-scale propositions.

Let us begin with the book “Money, Real Quick – The story of M-PESA“, in which Tonny Omwansa and Nicholas Sullivan tell the story. It’s an excellent summary of the the history and the people involved, and has many case studies that clearly illustrate the incredible impact of it had on Kenyans and (always my favourite part of technology stories) some of the unexpected consequences of its introduction.

The history is first and foremost about people, beginning with Nick Hughes. Nick was then Head of Social Enterprise at Vodafone which owned 40% of Kenya’s Safaricom, with then had just over half of the mobile phone market. Nick had had the idea of using mobile phones to make the distribution of microfinance loans in Africa more efficient and he submitted a proposal to the UK Department for International Development (DFID) for matching funding. This was granted back in 2003, and M-Pesa was born. Nick then brought in what the book refers to as “UK-based consultants” to develop the idea.

(Modesty forbids me from mentioning who these midwives to monetary revolution were. Oh wait, no it doesn’t: it was Consult Hyperion, a company which I helped to found.)


As an aside, I recently asked Paul Makin, who led the UK-based consultants work on the original feasibility study for M-Pesa, why he thought that the scheme had been such an enormous success and he told me that people felt that M-Pesa belonged to them – it reached out to them – whereas the banks had always been intimidating, demanding people prove themselves before they deserved to be banked. From the start M-Pesa was, as he put it, “welcoming, doing what people actually needed, and it was available where they were, not where we wanted to serve them”.


Anyway, back to the story. Nick brought in Susie Lonie, also from Vodafone. Susie had been working on mobile commerce in the UK, and in 2005 she was sent to Nairobi to get the pilot up and running. Together they steered the project for pilot to launch and, to my mind, fully deserved their Social and Economic Innovation awards from “The Economist”, which praised their “outstanding contributions” in this field back in 2010.

The very forward-looking CEO of Safaricom, Michael Joseph, quickly realised that something big was going on and drove the team on to scale. He focused his attention on developing the agent network. Safaricom already had agents, of course, because they used them to sell airtime, but Michael realised that they needed to increase the size of the network substantially, and quickly. I strongly recommend anyone interested in the topic to read the book to see how this was done and the issues that needed to be managed: agent incentives, float management, trading and so forth. Suffice to say that becoming an M-PESA agent became an attractive proposition.

As soon the system went live it was immediately apparent that the market was using it in ways that had not been part of the original business model. In particular, businesses began to use it. They started to deposit cash (as a kind of “night safe”) as well settling transactions and paying wages. What’s more, some big businesses started accepting M-Pesa for payments (including the national airline, the power utility and insurance companies).

Consequences

There are now more than 200,000 SMEs using M-Pesa’s API, more than half a million businesses that transact more than £5 billion per month and M-Pesa has a network of partners that allows subscribers to send and receive money from more than 200 countries and territories. A non-bank payment system has changed people’s lives in ways that could not have been envisaged by the people who created it. So looking back, what general lessons can we draw from this amazing success?

Well, there was a solid technology platform. Omwansa and Sullivan refer to telco control of the secure tamper-resistant hardware at the heart of the system (the SIM) and tensions arising because the banks wanted access to it. The consultants that modesty forbids me from mentioning had recommended going down the hardware security route just as I am sure that today they would recommend the same approach for implementing central bank digital currency (CBDC).

In the case of M-Pesa this meant writing new “SIM Toolkit” software and re-issuing Safaricom SIMs to customers who wanted to use mobile payments. Safaricom decided to make the investment required to go down this high-security route rather than use SMS or USSD, hoping that it would act as an anti-churn factor in a SIM-based market. This was at the time a brave (and expensive) decision, but one that has been repaid many times over.

I think, however, that the key lesson concerns the regulatory environment that allowed M-Pesa to flourish and how, despite the banks’ reservations about the scheme, once it was successful banks were able to use it to offer financial services to a new customer base. The commercial banks had begun to offer new services over the M-PESA network, thereby demonstrating that mobile money could deliver financial inclusion. As the banks began to offer more services, and became part of the M-PESA ecosystem as savings accounts and super agents, it seems to me that the whole financial sector was invigorated. Dynamic partnerships (such as the one with Equity Bank that led to M-KESHO savings accounts) delivered products that simply would not exist in a “traditional” bank environment. These included pensions, micro insurance, “layaway” and more. In essence, as Omwansa and Sullivan said in their book, a new financial sectoremerged.

This is why, for me, the most interesting part of the story comes once the scheme had reached five million subscribers (more than all 43 of Kenya’s commercial banks combined) back in 2008. At that time the acting Finance Minister said he was not sure that M-PESA would “end up well”. There was more than a suspicion that the worries expressed were not around consumer safety and protection but the banks’ concerns about competition. In the unrest that had followed the previous year’s elections, many consumers had withdrawn money from commercial banks and deposited it with M-Pesa, which they judged to be less risky. When you think about it, that was a cusp in the evolution of monetary institutions.

No-one was sure who was supposed to be regulating M-Pesa, but Michael Joseph was always admirably clear that M-PESA was not a bank, it was a payment system, and should be regulated as such. What’s more, the figures showed very clearly that despite the vast number of transactions flowing through M-Pesa, the total amount of money was still inconsequential compared to daily inter-bank settlement. Anyway, the Central Bank studied the scheme in detail and this ultimately led to the Permanent Secretary in the Ministry of Finance, Joseph Kinuya, saying that the service “safe and reliable”.

(He also said “there is nothing wrong with competition”. Hear hear.)

In the course of its first decade, M-Pesa had already evolved to the point where it had taken 1 in 50 Kenyan household out of poverty. I do not believe that a bank-led solution would have triggered this revolution in which banks benefitted just as much as others did.

As the CEO of Kenya Commercial Bank is quoted as saying in the Omwansa and Sullivan book, “if you don’t respond it’s a threat, but if you embrace it, then it’s an opportunity”. This is the same narrative we saw around the evolution of fintech as it stepped up to take over from bank R&D departments everywhere!

M-Pesa is an example of a fintech that really did change lives and it deserves its special place in history.

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