{"id":20684,"date":"2016-11-18T17:59:29","date_gmt":"2016-11-18T22:59:29","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/currenc-e-m-pesa-transforms-kenyan-economy\/"},"modified":"2016-11-20T11:34:58","modified_gmt":"2016-11-20T16:34:58","slug":"currenc-e-m-pesa-transforms-kenyan-economy","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/currenc-e-m-pesa-transforms-kenyan-economy\/","title":{"rendered":"Currenc-E: M-Pesa Transforms Kenyan Economy"},"content":{"rendered":"

M-Pesa: The \u2018M\u2019 stands for mobile and \u2018Pesa\u2019 is Swahili for money. <\/em>This simple yet sophisticated technology took Kenya\u2019s economy by storm.
\nDigitally Democratizing Retail Banking\u2019s Business Model<\/strong><\/p>\n

Upon initial launch as a microfinance product, Safaricom noticed consumers using M-Pesa for banking uses, and relaunched M-Pesa as a mobile payment platform. In 2010, 9 million Kenyans had accounts; by 2016, this number has swelled to over 21 million.[1]<\/a><\/p>\n

By requiring only an SMS-enabled mobile phone and a national identification card, M-Pesa drastically lowered consumers\u2019 barrier to banking entry. Value is also created for consumers in the form of safety: in Kenya and other emerging markets, it is common for consumers to be robbed of their physical cash, and M-Pesa eliminates this risk.[2]<\/a> Additionally, although not intended to serve as a savings account, M-Pesa allows customers to save safely by eliminating the need for customers to store a large concentration of their lifetime earnings in their home, where the cash could be subject to theft or destruction (e.g. house fire). Lastly, M-Pesa provides rural consumers who are not near one of Kenya\u2019s relatively scarce physical banks with closer access, as relatives are able to visit banks on behalf of family members and connect capital through M-Pesa.[3]<\/a><\/p>\n

Safaricom is also reaping the benefits of M-Pesa by generating revenue through transaction fees. Each time a customer withdraws cash (e-float -> cash), the agent records a fee of 40 cents per transaction.[4]<\/a> Agents are incentivized through a number of volumetric measures, and so an agent is driven to increase the number of customers who are both using and actively transacting through M-Pesa.<\/p>\n

Agents Keep the Machine Going<\/strong><\/p>\n

M-Pesa\u2019s operating model depends heavily on the quality and quantity of its agent network. As seen in Figure A, the agent serves as the intermediary between the customer and M-Pesa\u2019s bank account. It is important to note that unlike a traditional retail bank, M-Pesa does not manage nor have custody of the assets in the bank account, as those funds become pooled and managed by two regulated banks.[5]<\/a><\/p>\n

Figure A –\u00a0<\/strong>Stanford University<\/p>\n

\"Figure<\/a><\/p>\n

The speed at which M-Pesa targets customer growth vs. agent growth is incredibly important for network effects to occur, as the system needs to be balanced at its onset. If there were disproportionately more customers than agents, customers would have longer idle times and churn would likely be greater.[6]<\/a> On the other hand, if there were more agents than customers, agents would have higher lead times and the economic costs could outweigh gains and lead to agent churn. Since agents are compensated through volume, one-way M-Pesa can monitor this relationship is through transactions per agent per month, which optimally would hover near 1,000 transactions per agent (Figure B). A common issue that has led other mobile payment companies to fail is not maintaining this relationship.<\/p>\n

Figure B<\/strong> – McKinsey & Co.<\/p>\n

\"figure-b\"<\/a><\/p>\n

Though the M-Pesa structure is fairly efficient for consumers, there is room for improvement for agents. Unpredictable demand adds substantial liquidity pressure on the agent, and bank fees and transport fees can cut into margins. There are also scaling concerns \u2013 up until 2015, M-Pesa could only handle up to 320 transactions per second, and operations would slow on weekends and holidays.[7]<\/a> This could lead to costly outages which would directly impact an agent\u2019s revenue.<\/p>\n

 
\nImproving Upon a Proven Operating System<\/strong><\/p>\n

M-Pesa clearly has a strong operating model; it was one of a handful of mobile payment systems to not only survive but also thrive in frontier and emerging market economies. Despite this success, I believe there are a few pain points in the operating cycle that M-Pesa can alleviate.<\/p>\n