Everyone says their fintech will change lives. This one did.
One of the most influential and important fintechs in the world has just taken a new step. Africa’s first mobile payment service, M-Pesa, celebrates 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 daily, making it Africa’s largest fintech provider, and has attracted 42,000 external developers to build 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 has evolved from peer-to-peer money transfer, to paying utility bills, to enabling payroll for businesses and financial services such as micro-loans. It has been an innovation platform 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 pointed out that nine million customers and 320,000 businesses have downloaded the M-Pesa super app since its launch, providing access to a wider range of services including savings, insurance and credit. This great application, by the way, has just been awarded “Best Mobile Innovation for Connected Living” in the Global Mobile Awards presented at the Mobile World Congress (MWC) 2022 in Barcelona.
The super app tells us something about the destination of M-Pesa. But where does it come from?
M-Pesa was launched in Kenya on March 6, 2007, so I thought now might be a good time to explore its early days to see if there were any lessons for today’s entrepreneurs looking to launch population-wide proposals.
Let’s start with the book “Money, Real Quick – The story of M-PESA”, in which Tonny Omwansa and Nicholas Sullivan tell the story. It’s a great summary of the story and the people involved, and has plenty of case studies that clearly illustrate the incredible impact it had on Kenyans and (still my favorite part of tech stories) some of the aftermath unexpected from its introduction.
History is above all that of people, starting with Nick Hughes. Nick was then head of social enterprise at Vodafone, which owned 40% of Safaricom in Kenya, which then held just over half of the mobile phone market. Nick had come up with 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 in 2003 and M-Pesa was born. Nick then brought in what the book calls “UK-based consultants” to develop the idea.
(Modesty forbids me to mention who these monetary revolution midwives were. Oh no, they weren’t: it was Consult Hyperion, a company I helped found.)
By the way, I recently asked Paul Makin, who led the work of UK-based consultants on the initial feasibility study for M-Pesa, why he thought the program had been such a huge success and he told me that people felt M-Pesa belonged to them – he reached out to them – whereas banks had always been intimidating, demanding that people prove themselves before they deserved to be banked. From the start, M-Pesa was, as he put it, “friendly, doing what people really 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 was working on m-commerce in the UK and in 2005 she was sent to Nairobi to set up the pilot project. Together they steered the pilot project to launch and, in my opinion, fully deserved their social and economic innovation awards from “The Economist”, which hailed their “outstanding contributions” in this area in 2010.
Safaricom’s very forward-thinking CEO, Michael Joseph, quickly realized something big was happening and led the team to scale. He focused his attention on developing the agent network. Safaricom already had agents, of course, because they were using them to sell airtime, but Michael realized they needed to increase the size of the network substantially and quickly. I highly recommend anyone interested in the subject to read the book to see how it was done and the issues that needed to be addressed: agent incentives, float management, negotiation, etc. In other words, becoming an M-PESA agent has become an attractive proposition.
As soon as the system went live, it immediately became apparent that the market was using it in a way that was not part of the original business model. In particular, companies have started using it. They started depositing money (like a kind of “night safe”) as well as settling transactions and paying salaries. Additionally, some large businesses have started accepting M-Pesa for payments (including the national airline, electric utility, and insurance companies).
There are now over 200,000 SMEs using the M-Pesa API, over half a million businesses processing over £5 billion per month and M-Pesa has a network of partners that allows subscribers to send and receive money from over 200 countries. and territories. A non-bank payment system has changed people’s lives in ways that those who created it could not have envisioned. So, looking back, what general lessons can we draw from this incredible success?
Well, there was a solid technology platform. Omwansa and Sullivan refer to telecom operators’ control of the secure, tamper-proof hardware at the heart of the system (the SIM card) and the tensions resulting from banks wanting access to it. Consultants whom modesty forbids me to mention had recommended going down the hardware security route just as I am sure they would recommend the same approach today for implementing central bank digital currency (CBDC ).
In M-Pesa’s case, that meant writing new “SIM Toolkit” software and reissuing Safaricom SIM cards to customers who wanted to use mobile payments. Safaricom decided to make the investment to go this high-security route rather than using SMS or USSD, hoping it would act as an anti-churn factor in a SIM-based market. It was a brave (and expensive) decision at the time, but one that has been repaid many times over.
I think the main lesson, however, concerns the regulatory environment that allowed M-Pesa to thrive and how, despite banks’ reservations about the system, once it was successful, banks were able to use it to offer financial services to a new customer base. Commercial banks had started offering new services on the M-PESA network, demonstrating that mobile money could deliver financial inclusion. As banks started offering more services and became part of the M-PESA ecosystem as savings accounts and super agents, it seems to me that the whole financial industry has been invigorated. Dynamic partnerships (like the one with Equity Bank that led to the M-KESHO savings accounts) have provided products that simply wouldn’t exist in a ‘traditional’ banking environment. These included pensions, microinsurance, “lay-aside” and more. Basically, as Omwansa and Sullivan said in their book, a new financial sectorhas emerged.
This is why, to me, the most interesting part of the story comes when the system reached five million subscribers (more than Kenya’s 43 commercial banks combined) in 2008. At the time, the Minister of Acting Finance said it was unsure whether M-PESA would “finish well”. There was more than a suspicion that the concerns expressed were not about security and consumer protection, but about banks’ competition concerns. In the unrest following the previous year’s election, many consumers withdrew money from commercial banks and deposited it with M-Pesa, which they deemed less risky. When you think about it, it was a turning point in the evolution of monetary institutions.
Nobody knew who was supposed to regulate 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. Moreover, the figures showed very clearly that despite the large number of transactions passing through M-Pesa, the total amount of money was still inconsequential compared to the daily interbank settlement. Anyway, the Central Bank studied the scheme in detail and it eventually led the Permanent Secretary of the Ministry of Finance, Joseph Kinuya, to declare that the service was “safe and reliable”.
(He also said “there’s nothing wrong with competition.” Listen, listen.)
In its first decade, M-Pesa had already evolved to the point of lifting 1 in 50 Kenyan households out of poverty. I don’t believe that a bank-led solution would have triggered this revolution from which the banks have benefited as much as the others.
As the CEO of the Kenya Commercial Bank said in Omwansa and Sullivan’s book, “If you don’t respond, it’s a threat, but if you accept it, then it’s an opportunity.” It’s the same narrative we’ve seen around the evolution of fintech as it intensified to take over the R&D departments of banks everywhere!
M-Pesa is an example of fintech that has truly changed lives and deserves its special place in history.