Mobile Payments and Microfinance

For the last couple of years, CHyp has been working on a mobile payments and microfinance project for Vodafone. It’s called M-PESA, and it highlights the way in which digital money can really make a difference. There’s going to be a presentation on M-PESA at the Forum this year, but I thought I’d also use it to bring out a few points about digital money for discussion. Some of them were covered in an article that Dave Birch and I wrote for the Journal of Internet Banking and Commerce.

At the end of last year, Africa had 135 million mobile subscribers. By the end of 2010, it will have 400 million subscribers. Many African countries have vastly more mobile subscribers than they do Internet connections or bank account holders. Thus, there are substantial populations with mobile phones but no access to financial services.

Mobile phones can be used very effectively to deliver financial services to these populations. As a report called Micro-Payment Systems and their applications to mobile networks — commissioned by the Information for Development Program (infoDev) in partnership with the International Finance Corporation and the GSM Association—makes clear, in many developing countries a large proportion of the population are excluded from the banking system and forced to use cash. This is far less secure and flexible than e-payments.

In brief, the M-PESA service launched in Kenya towards the end of last year is a partnership between Safaricom, Vodafone Group Services, local microfinance organisation Faulu Kenya and the CBA bank. It uses a secure SIM toolkit application on mobile phones to transfer money between pre-paid electronic money accounts. People load these accounts through the same top-up network that they use to load their mobile pre-paid value. Using a simple menu on the phone (in English or Swahili), customers can transfer money to anyone else in the system, including “human ATMs” who will, for a small fee, provide old-fashioned metal and paper.

One of the first uses of the system is to support the distribution of microfinance loans and to collect the repayments on those loans, but as it is a general-purpose cash-replacement service one would expect to see it spread. Indeed, the ability to purchase air time using M-PESA has been taken up enthusiastically.

M-PESA is a valuable case study of digital money in action. It involves replacing cash with electronic money, it is for the mass market, it radically reduces transaction costs (for the least well off), provides new functionality including remote payments and, most of all, it provides an infrastructure that delivers capability and efficiency to the microfinance world, allowing them to stimulate new growth, new business and new opportunities.