Nilay Patel, Editor-in-Chief
IN THE VILLAGE OF Sori along the banks of Kenya’s Lake Victoria, fishing has long been the lynchpin of the local economy. Jobs here are largely divided by gender: men catch the fish, and the women process the meat, take it to market, and handle finances.
As detailed in a 2012 study from the SIT Graduate Institute, residents of Sori traditionally kept their money at home. Theft was a constant concern, and many of the women interviewed reported their husbands misappropriating their savings. For many, traditional banks were either too far away, or demanded minimum deposits the villagers could not afford.
All that changed in 2007 with the introduction of M-PESA, a mobile service that allows Kenyans to store and transfer their money using only a cell phone. Funds can be exchanged over the network using SMS messages, meaning it works on almost any mobile phone. M-PESA agents spread throughout the country allow users to convert their credit to cash and deposit or withdraw from their accounts. The majority of Sori women interviewed for the study now keep their savings in M-PESA accounts, safe from criminals and wasteful purchases.
M-PESA also revolutionized how the women sold their goods. Prior to M-PESA, the women worked only in cash. To sell their fish, the women would have to travel by bus to markets, trips that cost them money and time. Since the adoption of M-PESA, the women send the fish to market by bus and receive payment remotely. "Where it may have taken a woman a week to sell two bags of fish in Nairobi, she now spends one morning buying and sending the fish on a bus to Nairobi for sale by her customers," reports the study. With their newfound savings, women reported being able to make long-term investments: sending their children to better schools and building themselves more durable homes to withstand seasonal floods.
When we asked Bill Gates to edit The Verge this month, he pointed to digital banking solutions like M-PESA as a technology that will revolutionize the lives of the poor in the near future. "In the next 15 years, digital banking will give the poor more control over their assets and help them transform their lives," he wrote in his annual letter. "By 2030, 2 billion people who don’t have a bank account today will be storing money and making payments with their phones. And by then, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance."
Mobile money is a fast-growing industry across many parts of the developing world. But can it really transform the lives of those living on just a few dollars a day?
OF THE 2.5 BILLION people in the world who have no access to a traditional bank, approximately 1 billion have a mobile phone. The widespread adoption of mobile phones has enabled some of the poorest economies on earth to leapfrog ahead of developed nations when it comes to tech-driven financial solutions. A report in The Atlantic noted that adults in Sub-Saharan Africa are three times more likely to use mobile money as their counterparts in Europe and the Americas. In fact, another recent report found nine African nations now have more mobile pay accounts than traditional bank accounts.
Kenya is frequently cited as a successful example of how mobile money can dramatically transform a country’s economy. In 2006, less than 30 percent of adults in the country had access to formal financial services. Thanks to M-PESA, today that figure stands above 65 percent. Developed by telecom giants Vodafone and Safaricom with the blessing of the Central Bank of Kenya, by 2010 M-PESA was considered the most successful mobile money service in the developing world. In 2014, the service processed over $20 billion in transactions, a figure equal to more than 40 percent of the nation’s GDP.
Widespread adoption has bolstered Kenya’s economy, says Dr. William Jack, a professor of economics at Georgetown who, along with Dr. Tavneet Suri of the MIT Sloan School of Management, has studied the service and published several papers on its impact. "There is unequivocal proof that M-PESA has a positive impact on people’s financial health."
Those financial benefits convinced many, including the Gates Foundation, that mobile money was a powerful tool in the fight against global poverty. "People being able to participate on their phone, no matter where they live, even if they’re in a remote rural village in Tanzania or Kenya, they’ll be able to save small micro-payments," Gates toldThe Verge during an interview in New York. "They can participate on the economy through their phone, but also in the fall when it’s time to pay the school fees, they’ve saved the money for the year. That’s transformative for their family."
But as banks, governments, and telecommunication companies have learned, replicating the success of M-PESA in other developing nations is not so simple.
BETWEEN 2010 AND 2013, mobile money services began a push to expand in countries like India, Nigeria, and Brazil, but onlookers were dismayed by the pace of adoption. "There have been about 200 of these experiments around the world, and maybe only four or five have been successful," Michael Joseph, director of mobile commerce at Vodafone, told Financial Times.
"People saw what happened in Kenya and were excited for mobile money to take the rest of the world by storm," says Claudia McKay, a senior financial sector specialist with CGAP. "People thought it was this magic service that would pull us all out of poverty, but it wasn’t working like it did in Kenya anywhere else in the world. Do you know the hype cycle? Well the last few years have been our trough of disillusionment."
One of the primary reasons M-PESA took off so rapidly was that it was offered by Safaricom, the nation’s dominant mobile carrier. "People had already come to trust them with their money," says Dr. Jack. "And the lack of competition, and fragmentation, made it much simpler to grow."
Kenya’s institutional dysfunction also proved to be an advantage when it came to mobile money adoption. An underdeveloped banking industry, unreliable roads, and an unstable government made M-PESA an appealing option. "All the reasons it worked there are the same reasons that it wouldn’t work if you tried to bring it to the more developed and tightly regulated markets," says Peter Wennemacher, a mobile banking analyst with Forrester Research. "The government and the financial institutions [in Kenya] were comfortable with a lot more risk."
That risk included the use of M-PESA by criminals to move illicit proceeds. Laundering dirty money was now as simple as sending a text message. "Most countries would hesitate to help a massive channel for illegal transfers like that to develop," says Abhishek Chauhan, a mobile banking analyst with Frost & Sullivan. "People were aware that this was being used by drug lords and smugglers."
"The Central Bank took a very hands-off approach," says Dr. Jack. For example, regulators tolerated a near complete lack of deposit insurance. The bank accounts that M-PESA stored funds in were federally insured for 100,000 Kenyan shillings. But Safaricom pooled everyone’s deposits together into just a few accounts. In the event of default, it would be impossible to pay everyone back or determine who got some of the small amount covered by insurance.
Additionally, in countries like India, where a robust banking sector already exists, mobile payments have been less successful. There, the ability to launch mobile payment services was restricted to established incumbents. "The banks are inclined to protect their existing revenue streams; there is less motivation to innovate," says Wennemacher. "And to be fair, there are a lot of regulatory pressures that some of the tech innovators don’t face."
AFTER THE TROUGH OF disillusionment comes the slope of enlightenment, and there is good reason to believe that in the last two years, mobile money has found its stride, learning from its mistakes in the post-M-PESA boom. There are now well-established markets with multiple competitors across Africa, Asia, and Latin America. Research from the Groupe Speciale Mobile Association (GSMA), which has received funding from the Gates Foundation, shows the number of mobile money services across the globe expanding from just 64 in 2010 to 219 at the end of 2013.
In Bangladesh, where state-sanctioned mobile money services launched in 2010, mobile money services have more than tripled in size over the last two years. A similar story has played out in the archipelago nation of the Philippines, where a trip to the nearest bank can take days and may require a boat ride. A 2012 IMF study found that not only was mobile money far faster and safer than traditional banking in the Philippines, but it was also less expensive: fees on remittance using banks averaged 2.5-10 percent; on mobile, that same transaction had an average fee of just 1 percent.
But whether or not mobile payments can significantly address global poverty is up for debate. "I think there is some evidence that the basic deposit, withdraw, and send functions help poor people to have more choices, more convenience, more privacy, and more security in their financial lives," says CGAP’s McKay. "But people thought it was a magic service that would pull us all out of poverty. I would not say that mobile money in and of itself is going to pull people out of poverty. That would be going too far."
AFGHANISTAN HAS PAID POLICEMEN WITH A LOCAL VARIANT OF M-PESA, AND TANZANIA ACCEPTS TAXES OVER MOBILE
In the short term, mobile banking could address a number of critical issues, including corruption. "When you’re dealing in cash in economies with a lot of corruption, half of your wages are gone before you see that money," says Julie Ask, an analyst with Forrester Research who has written extensively on mobile money. "With the government using mobile to pay your wages, you can avoid a lot of that." Afghanistan has paid policemen with a local variant of M-PESA, and Tanzania accepts taxes over mobile.
And in the longterm, experts believe layering additional services on top of a basic mobile financial platform could make a significant impact on poverty. In Kenya, M-PESA has begun partnering with banks and companies to offer a richer array of services and financial products. "Once these services get going, then there will be competitive innovation in offerings like special savings or credit plans related to farming or education," says the Gates letter. In Kenya that looks like M-Shwari, a partnership between M-PESA and the Commercial Bank of Africa. In the two years since it launched, M-Shwari has attracted 9 million customers with a combined $1.47 billion in savings. Customers can earn interest on their money and, if they develop good credit, access loans to help them make big purchases or start a business.
Utilities are another service being layered on top of mobile money. In many parts of rural Kenya, villages aren’t on the electrical grid — 35 million people depend on kerosene lamps for light and borrow power from car batteries to charge cell phones. Now, a company called M-KOPA is offering Kenyans low-cost solar panels, and M-PESA is at the heart of their business.
M-KOPA sells its devices for a small down payment, about $30, with the rest paid out in installments over a year. Inside each solar panel is a SIM card connected to a nationwide cell network powered by Safaricom. People can use M-PESA to pay their bills. If they miss a payment, they can’t draw power, but can easily switch that back on when their finances stabilize. The flexibility of this system has allowed a population to access modern energy that was previously out of reach.
AT THE END OF their letter, Bill and Melinda Gates note that the innovation in mobile money will eventually "trickle up" from developing to developed nations. Indeed, mobile banking innovation is also happening in the United States in response to banks increasingly abandoning lower-income customers.
A mix of new regulations and record low interest rates means small savings accounts areno longer profitable for traditional banks in the US. As a result, more and more Americans are joining the ranks of the unbanked. In New York City, a startup called One Financial is trying serve these individuals and recreate the success of M-PESA.
"After the financial crisis, a lot of major banks shut down branches in less wealthy neighborhoods because they weren’t as profitable," explains One Financial co-founder Vinay Patel. That has led to the closing of nearly 2,000 bank branches, more than 90 percent of which were in poor neighborhoods. "For many of their customers, that now means they don’t have a bank and are served only by check-cashing and payday loan stores with extremely high fees."
Patel says that even though the old banking model with expensive branches and extensive infrastructure is no longer viable within low-income communities, on mobile it can still be a profitable market segment. One Financial is hoping to offer customers a virtual bank that exists primarily as a phone app. They can use a mobile device to deposit checks, receive their wages directly, check their balance, or transfer funds. A debit card takes care of paying at merchants and withdrawing cash from ATMs.
As Gates told The Verge, "It starts to be economic to bank the very poorest. Not with branches or ATMs, but simply with the cellphone." He further elaborated the point in his letter, noting that "because there is strong demand for banking among the poor, and because the poor can in fact be a profitable customer base, entrepreneurs in developing countries are doing exciting work." That’s increasingly true no matter what part of the world you live in — anywhere traditional banks can’t or won’t serve a large portion of the populace, the technology in our pockets is helping fill the gap.
The Verge
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