Sparked by the advent of the M-Pesa service, Kenyans are
adopting mobile payments in their droves, ending reliance on costly
and often archaic methods of remitting money for millions of
people. However, the M-Pesa phenomenon is but one aspect of
technology’s role in revolutionising payments in Kenya.
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Kenya’s financial services sector is undergoing a
revolution for which much of the credit at the retail payments
level goes to M-Pesa, the country’s pioneering mobile phone-based
money transfer service launched in March 2007.
This is the key finding of a large-scale national survey
commissioned by FinAccess, a public-private sector initiative
jointly managed by the Central Bank of Kenya and FSD Kenya, an
independent trust promoting development of inclusive financial
markets in Kenya. The survey undertaken in February and March 2009
encompassed people from all walks of life who were asked detailed
questions about which financial services they use and why.
Compared with results of the previous FinAccess survey undertaken
some two-and-a-half years ago (2006), Kenya has made considerable
progress in improving access to finance services. Indicatively, the
proportion of people without access to any form of financial
services has fallen from 38.4 percent to 32.7 percent of the
population.
More significantly, the usage of formal banking services increased
markedly from 18.9 percent to 22.6 percent while even more notable
is access to ‘formal other’ institutions such as M-Pesa which
increased from 7.5 percent to 17.9 percent. Combined, the formal
banking and “formal other” results means that the total proportion
of people able to access a service from formal financial sources
increased dramatically, from 26.4 percent to 40.5 percent.
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By GlobalDataIn an assessment of the FinAccess survey findings, FSD Kenya
commented that M-Pesa must be credited with driving much of this
dramatic change.
“M-Pesa has changed the landscape of domestic remittances in
Kenya,” stressed David Ferrand, a director of FSD Kenya.
A short message service (SMS) based solution, M-Pesa was developed
by UK mobile network operator (MNO) Vodafone in conjunction with
UK-based technology developer Sargentia.
M-Pesa is offered by Vodacom affiliate, Kenyan MNO Safaricom, which
has a market share of about 80 percent. According to FinAccess 47.5
percent of Kenya’s adult population has a mobile phone with the
level rising to 72.8 percent in urban areas.
Technology used in the M-Pesa service is the SIM Toolkit which
involves an application on the SIM card accessed via the mobile
phone’s menu. To register for the service mobile phone users must
swap their exiting SIM card for and M-Pesa-enable card.
To use the service customers exchange cash at an M-Pesa agent for
electronic money which loaded on the customer’s M-Pesa account.
Customers can then transfer the money to another registered
customer’s M-Pesa account via SMS.
Once the recipient receives the SMS confirmation, cash can be
withdrawn from an M-Pesa agent. Subsequent to the launch of M-Pesa
in Kenya, Vodafone has introduced similar services in Tanzania and
in Afghanistan where it is branded as M-Paisa.
Major impact
Indicative of M-Pesa’s impact, in its 2006 survey FinAccess found
that just 16.5 percent of respondents received money transfers but
by 2009 this figure had grown more than threefold to 51.8 percent.
In 2006 the most popular means of transfer was using friends and
family members but, after launch, M-Pesa has now become the most
popular means of money transfer and is now used by 39.9 percent of
all Kenyan adults.
FSD Kenya itself has recently completed a study on the use of
M-Pesa on behalf of the Central Bank of Kenya. According to FSD
Kenya, at the end of 2008 Safaricom offered the service though
6,104 M-Pesa agents (10,000 by third-quarter 2009), a significantly
higher number than the 876 bank branches serving Kenya’s population
of almost 38 million of which 51 percent is urbanised. Of the total
bank branches at the end of 2008, 353 (40 percent) were in Nairobi
which has a population of some 3 million people.
Agents, of which the total number reached some 10,000 in the third
quarter of 2009 play a key role in ensuring the success of M-Pesa.
To deal with the large number agents, of which 80 percent are
single-person businesses, Safaricom has employed a system of
aggregation involving a limited number of medium and large airtime
retailers who in turn appoint and deal directly with small M-Pesa
agents.
To assess the agent network at grass roots level international
nonprofit organisation and World Bank affiliate the Consultative
Group to Assist the Poor (CGAP) recently studied 20 agents with 125
locations focusing on small stores of the kind found in urban slums
and rural areas, which make up the vast bulk of M-Pesa
agents.
Among key findings is that M-Pesa agencies are profitable,
generating 3.2 times more profit per day ($5.01) than selling
airtime ($1.55). On average the agents CGAP studied did 86
transactions per day.
CGAP also stressed that the agency concept is not without its
challenges particularly in the area of agents’ costs.
The number one cost for most agents was liquidity management.
Agents reported numerous expenses, including bank charges,
transport costs, and fees to aggregators. On average, liquidity
management consumed 30 percent of total expenses.
CGAP also stressed that being an M-Pesa agent requires capital with
the typical agent studied having $1,605 tied up in the agent
business, mostly in cash and electronic money float. Notably, this
is 12 times greater than the $129 capital they had invested in
airtime and, putting this in further perspective noted CGAP, $1,605
is equivalent to Kenya’s per capita GDP.
High consumer satisfaction
In its study FSD Kenya asked M-Pesa users to compare the service
with their previous national money transfer service. Over 95
percent of users found M-Pesa to be faster, more convenient, safer
and cheaper.
“Given this competitive position the strong growth in M-Pesa user
numbers becomes much easier to understand,” noted Ferrand.
Underscoring M-Pesa’s cost-appeal CGAP reported in June 2009 that
sending KES1,000 ($13.50) through M-Pesa was 27 percent cheaper
than the Kenyan Post Office’s PostaPay, and 68 percent cheaper than
sending it via a bus company. According to FinAccess, in 2006, the
year prior to M-Pesa’s launch 58 percent of remittances were sent
by hand and 27 percent bus.
These cost differentials may have altered somewhat as a result of
Safaricom’s decision in August 2009 to change from a variable fee
structure of from 2 percent to 5 percent of the value sent to a
fixed fee of KES100 per transaction. The maximum permissible single
payment via M-Pesa is KES50,000, significantly higher than the most
common remittance amount of about KES1,500.
Indicative of the rapid uptake of M-Pesa, the number of registered
users reached 1.6 million 12 months after its launch, 5 million at
the end of 2008, 6 million by mid-2009 and 7 million by the third
quarter of 2009. Adding to M-Pesa’s appeal have been more recently
added services including utility services payments.
FSD Kenya’s survey also indicated that customers are using M-Pesa
as a complement to their existing payment services which FinAccess’
data shows is often a mix of products and services from formal and
informal providers. The most popular reason for sending money was
to provide regular support to the recipient, usually monthly with
the majority of remittances are sent to family members.
Availability of the M-Pesa service has also been the primary driver
of a substantial increase in the recorded volume of domestic
remittances which are dominated by an urban to rural flow. Based on
FinAccess findings the 51.8 percent of Kenyans received money from
persons inside Kenya, up from a mere 16.5 percent in 2006. The
proportion of Kenyans sending money to other people in Kenya
increased from 16.9 percent to 35.3 percent during the same
period.
Foreign remittances, however, remained modest with Kenyans
receiving foreign funds increasing from 2.8 percent of the
population in 2006 to 4.3 percent in 2008 and those remitting funds
overseas increasing from 0.7 percent to 0.8 percent in 2008.
Formal payments sector expands
For all its significance, M-Pesa is not the only important advance
being made in Kenya’s payments market. In particular, the Kenyan
public is also being increasingly better served by the formal
banking sector. For example, according to FinAccess the number of
bank branches in 2008 was up by 57 percent from 558 in 2005.
The number of ATMs increased even more significantly, from about
600 in 2006 to 1,424 at the end of 2008, though usage increased at
a slower pace, from 7.8 percent of the population in 2006 to 13.4
percent in early-2009.
The government is also looking to further encourage growth in the
retail financial payments market and to this end reports FSD Kenya
introduced legislation to permit banks to use agents in its
2009/2010 national budget. FSD Kenya’s Ferrand noted that, as
experience in Brazil has shown, this can dramatically change the
way in which banking services are delivered. Using low-cost
wireless POS devices, explained Ferrand, thousands of shops and
other outlets across the country could become points of presence
for banks and potentially offers a much lower cost and more
accessible channel to the market.
Kenya is also making strides in the high-value transaction market
segment. The Central Bank of Kenya (CBK) and the Kenya Bankers
Association have agreed, from 1 October 2009, to stop processing
high-value payments using cheques and electronic funds transfers
(EFTs) through the Nairobi Automated Clearing House (NACH).
The change applies to local payments of KES1 million and more and
foreign currency payments with values of $35,000, €30,000 and
£15,000 and higher. From 1 October large value payments will be
processed through the real time gross settlement system, the Kenya
Electronic Payments and Settlement System (KEPSS). Though KEPPS is
primarily aimed at large value transactions there is no minimum
value stipulation.
The capping of cheque and EFT payments values marks a major advance
in the modernisation of Kenya’s payments infrastructure which began
in 1998 with the automation of the NACH. The result of the 1998
development was reduction of clearing time from a high of 14 days
to three days currently.
The second and third phases in Kenya’s payment system modernisation
process were the launches of: Kenya National Payments System
Framework and Strategy Document in September 2004 and KEPSS in July
2005.
Implementation of the KEPSS helped phase out the previous
paper-based inter-bank settlement system and, stresses the CBK
“completely transformed the management of liquidity in the banking
industry.”
According to the CBK, the Kenya shilling leg of payments processed
by the KEPPS’ increased from a total of KES8.563 trillion and
142,445 payment messages in 2006 to KES17.269 trillion and 273,941
payment messages in 2008.
Road ahead
Overall the promise of technology to transform Kenya’s financial
landscape is already being met, believes Ferrand. Another
significant development is the recent completion of the first
international fibre optic cable which holds the promise of greatly
enhancing Kenya’s telecommunications infrastructure.
“Arguably it isn’t so much the international link which will
directly impact on financial inclusion but the ‘pull’ effect on
improving domestic communications across the country,” said
Ferrand.
On the retail payments front Ferrand stressed the positive impact
of technology evidenced by M-Pesa’s success.
“Other mobile operators have launched or plan to launch rival
systems,” he added. “Currently focused on providing money
transfers, these new systems have the potential to impact across
the whole retail financial system.”
