M-Pesa And The Secret Of Mobile Payments

Mobile payments have been described in many ways in the developed world – innovative, game-changing, the next big thing and (among the more cynical) the great big hype.  But rarely in that description list is the phrase “life-changing.”

But for a little under 20 million Kenyans – not to mention millions of others spread around the world from Tanzania, to India, to Afghanistan, to Romania – mobile payments, in the form of the M-Pesa service – and the opportunities it has made possible –  have been exactly that.

In fact, mobile payments have been changing the financial landscape of Africa since the 2007 launch in Kenya. Named for the Swahili word for money, M-Pesa allows for easy funds transfers via SMS text messaging. Eight years after its launch, Kenyans can do almost everything from routine grocery shopping to settling their utility bills to paying their doctors via text message.

Market Platform Dynamics CEO Karen Webster sat down with the “father of M-Pesa,” Michael Joseph, who will be inducted into the Payments Hall of Fame at The Innovation Project 2015 on March 19. Today, Joseph is Vodafone’s Director of Mobile Money, but in 2006 he was CEO of Safaricom and was about to bring M-Pesa to the world.

“I am not the mastermind behind it,” Joseph modestly pointed out in the interview. “Instead, I would call myself the father of what really is the mother of M-Pesa,”Joseph joked with Webster.

He is, however, the person who recognized the product’s potential when it was brought to him in 2006 by its inventor, though admittedly he did not immediately foresee its full scope.

“I recognized the potential of M-Pesa and what it could do but I didn’t think it would be that big,” Joseph said. “We trialed it in 2006 for something else. Originally it was designed for the microfinance industry for the disbursement and repayment of microfinance loans, that was the original intention.”

But it quickly became apparent to the Safaricom team that M-Pesa – as well suited to microlending as it might be – could actually have a much bigger role to play on the larger stage of micro-transactions. However, tapping into that big potential required a very big vision – and a team willing to do the impossible.

“When we started out, we didn’t know it would be so successful. We thought we should have maybe 200 thousand or 300 thousand customers,” Joseph recounted. “Where the success came was really in the execution. I set the target and the bar very high and said ‘we need a million customers by the end of the year.’ My team didn’t think they could do it, but I said we’re going to have to do it.  And that was the magic number that made it go viral.”

Kenya is the most M-Pesa adopting country in the world, but Tanzania is catching up with 55 percent of its consumers using and an increasingly large part of the mobile money tally Vodafone is bringing in. Joseph also singled out Zimbabwe as seeing stronger adoption and India – after initial difficulties – really beginning to move toward ignition, too.

And M-Pesa’s success is unique.

Though mobile payments in sub-Saharan Africa will generate $1.5 billion in fees for mobile-money providers by 2019 – according to the Boston Consulting Group – other M-Pesa-like mobile-money startups are in a race with conventional banks and mobile operators to capture customers – and are often unsuccessful.

And certainly part of M-Pesa’s success is that it bet on mobile money in the developing world before anyone else. But their track record is based on much more than being first to market – they were also the first to really understand what the needs of consumers in the developing marketplace were.

They also recognized that to be successful, providers have to make big investments in cash-in/out networks and be patient for the payoff. Financial returns are lean and take time to develop.

“It’s a tiny, tiny percentage [of schemes that] are successful,” Joseph conceded. “The main reason is that it requires a big ubiquitous distribution network, where when somebody receives money it’s secure, even if they don’t want to cash out, but if they want to, they know they have the ability to walk down the road a couple of meters and and do their cash out,” Joseph told Webster in response to her question about why M-Pesa has succeeded where so many have struggled.

And that ability has to be there, especially when one is entering the developing world market with the goal of serving an initial customer that is at the “base of the pyramid,” economically speaking. Generally speaking, these are consumers who are unbanked and almost entirely cash-based who didn’t start out looking for a digital payments systems, but instead a reliable way to transfer and access cash.

“Particularly at the bottom of the pyramid, people want to have the ability to do a cash out. They might not want to actually do a cash out, but they want to have the ability, they want to know with comfort that if they want to they could. In our early days, the money went in, transferred and cashed out. Today, the money stays in sometimes weeks now, because the people are using it as digital currency,” Joseph explained.

And ubiquity is not the only challenge new players to the mobile space face in the developing world, Joseph noted.

“Because the initial target market is the base of the pyramid, you need to price it very low,” he said. “The transaction fee needs to be very low so it takes some time before you start to see some financial results.”

For an example, he noted that many customers want to use M-Pesa to pay their monthly health insurance costs – which come in at about $1 U.S. – a big transaction fee would quickly destroy any value mobile might offer. As a result, he said, this isn’t a business where players are going to see big profits in their first six months, which tends to be the initial expectation and kills off any momentum before it can even get started.

“People can’t stay the course, they start to look for a financial return that’s not going to come for quite some time.”

These challenges to the side, Joseph is confident that 2015 will be a year in which mobile payments players are going to see some successes in emerging markets.

“Slowly, as operators are now in a very competitive environment and start to understand what is really required to be successful and what success brings, you will see people putting more effort and planning into it,” Joseph predicted.

Because success really is bringing amazing things to markets it serves.

“If you just look [at] what’s happening in Kenya and Tanzania where the most mature markets are – people who have small businesses are selling online because they can use M-Pesa and have a payment mechanism in countries when people don’t have credit cards or debit cards.”

And more than an opportunity for commerce, M-Pesa is also allowing people to pay for education, their utilities and their health care providers. The mobile platform gives consumers the ability to take out microloans for things like solar panels, meaning people who lived with no or limited electricity now have regular access to it.

“There are now a myriad of ways people are making use of the low cost transaction platform that we have,” Joseph explained. “With small denomination payments, it is becoming much more economical for a lot of places to start taking mobile money type payments and for consumers to use them.”

And, ironically, it’s even leading a largely unbanked population to embrace traditional banking.

“Initially, banks are very fearful of mobile money, and they try block it and stop it from being launched,” Joseph explained to Webster, “because they are afraid we will take business away from them.”

The reality, however, is that M-Pesa is in the business of making transfers that the bank couldn’t in an economically efficient fashion. M-Pesa created a reason for people to work with banks.

“Once you bring people into the financial services field, as we are doing, banks start to get involved. In fact, every single bank in Kenya and Tanzania is connected to the M-Pesa system,” Joseph offered. “So [consumers] can move money from [their] traditional bank account into [their] M-Pesa account, and vice versa.”

M-Pesa has what banks in the developing world lack: a ubiquitous network that allows people access to the physical money in their accounts at an easy to reach location. Linking the account suddenly gives consumers that access they often lack, and has – in Kenya, at least – made traditional banking more appealing.

So what’s next?

Joseph believes that M-Pesa’s future will be in its ability to help consumers move money cross-border and participate in international commerce. He singled out Romania as a country where consumers aren’t using mobile money domestically but are embracing it in a big way to conduct commerce across borders and around the world.

In the shorter term future, Michael Joseph will be at Innovation Project 2015, where he and a panel of experts will be discussing why so many try and yet so few succeed in getting mobile payments off the ground. And, why the path to success has to include a simple solution to solving a huge and palpable problem for consumers created by someone who simply won’t take no for an answer.