Last week, I wrote on the reasons for the success of M-PESA in Kenya. A number of comments and responses mentioned that perhaps it was the environment of Kenya that was the major reason for its success. Kenya has an underdeveloped banking infrastructure, high poverty and large migrant population. The value proposition of M-PESA was tailor made for Kenya and hence is extremely successful. I do not deny these contributing factors but at the same time there are several other developing countries which are similar to Kenya and I not sure if it would be easy to emulate M-Pesa’s success in those developing countries.
Continuing with the case study on M-PESA, I would be evaluating the socio-economic benefits of M-PESA in this final part of the case study. There is a little know fact that the M-PESA service was originally conceived as a service to support the Micro Finance Institutions (MFIs). The idea was to develop a platform that would allow a customer to receive and repay small loans using his or her handset. The use of mobile technology in MFIs lowers the cost of business (read collections) leading to lower interest rates. However, the money transfer service turned out to be the bigger draw and together with MFI support, it brought many benefits. The key benefits of mobile money transfer are:
Developing countries are severely constraint by the physical infrastructure of the financial institutions which means that a large part of its population is excluded from the formal banking system. Kenya has just 840 bank branches and 1,510 ATMs that are certainly not sufficient for the its 38 million people. M-PESA with its 15k agents is much more accessible to an ordinary Kenyan. M-PESA helped the Micro Finance Institutions (MFIs) to go deeper into remote areas very quickly without substantial increase in the costs.
Financial inclusion has a multiplier impact on the lives of people drawn into the formal financial system which leads to social inclusion. When the poor people get access to financial services, their cash flow management gets better, their financial planning is enhanced and their savings are increased with increased options for providing for themselves for their old age. M-PESA has brought many unbanked customers under the formal financial system.
Enhanced Economic Activity
Getting cash into the hands of people who can use it is limited on the supply-side rather than demand-side; more than the shortage of funds, it’s the ability to move money from the sender to the receiver that is the stumbling block. Since the creation of money, the ability to move it from A to B—the so-called “velocity of money”—has been a fundamental cornerstone of economic activity. But the issue is exactly how money transfer is made to happen in an emerging market where the infrastructure is poorly developed and where very few people have or even want bank accounts. Mobile Money Transfer platform is instrumental in substituting the banking infrastructure as in most of the emerging markets, the mobile phone penetration far out numbers the bank account penetration (by a ratio of 3:1, i.e. for every one bank account holder, there are three mobile phone owners).
M-PESA has been instrumental in driving growth and development in Kenya. The World Bank estimates that reducing remittance commission charges by 2-5% could increase the flow of formal remittances by 50-70%, boosting local economies. Reducing the cost of each individual remittance would enable the delivery of lower value remittances than today’s average transfer value of US$200. M-PESA has resulted in higher remittance and hence higher economic activity leading to faster growth. CGAP in its survey has found that the incomes of rural recipients increased by 5- 30% since they started using M-PESA.
Reduced Cash in the Economy
In the absence of formal banking system, most of the transactions are cash based giving no audit trail to the regulators. M-PESA brought in the transparency in the money transactions by reducing the cash economy and digitizing the transactions. M-PESA is equivalent of credit card or debit card which allows the regulators to monitor the trail. There is more visibility on the money flows as the remittances move from informal channels to formal channels.
M-PESA provides unbanked mobile phone users with a secure platform which uses simple, tailored menus on their phone to send fully encrypted and PIN locked messages to a thoroughly audited financial accounting system.
It was observed by CGAP that M-PESA not only increased the MFI activity but is also used as a medium of storage of money. Informal saving channels are much less secure than formal saving facilities. Those who can afford it least suffer the highest risk. Both the banked as well as unbanked customers of M-PESA are using it as storage medium as it is easily accessible. There are many more agents of M-Pesa than bank which means that the customers need not travel long distances to withdraw cash.
With M-PESA, there is no need to carry cash and hence the risk of the cash getting lost or stolen is not there.
Many people in emerging economies have to travel far from home to find work and need to be able to send money back to their families so they can pay bills. The cost of money remittance is very high in most of the parts of the world ranging from 3 to as high as 10%. This is the reason why more people depend on informal channels (through friends and family) to remit money or physically deliver the money. Traditionally, this has meant high fees, risky unregulated services, or long expensive trips carrying cash in an unsafe and unpredictable environment. It has been observed that M-PESA users needed to make fewer trips back home to deliver money and the transaction size also came down with frequent transfers. Unlike bank, the M-PESA service is accessible 24X7 and money can be sent anytime, anywhere.
Mobile technology can lower the cost of remittances as it removes the need for physical points of presence and ensures a timely and secure method of transaction.
M-PESA has been a great success with a lot of benefits to the individuals, society and the Government. However, there are a few aspects of Mobile Banking/ Mobile Money Transfer that the regulators need to ponder on
- Can the regulator allow a non-banking institution to get into the banking domain by accepting deposits and doing most of the functions of a bank without applying the same level of regulations on it as the banks have it?
- How does the regulators and financial institutions plan to bring interoperability in mobile banking?
- How do the unbanked customers of mobile banking build their credit history?
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