Is M-PESA Replacing Cash in Kenya?

The widespread use of credit and debit cards in the developed world and more recently mobile phone payments in the developing world is bringing increasing attention to the idea that, perhaps not far into the future, we may see the first “cashless society.”  Kenya, with the cutting edge M-PESA mobile phone payment service, may leapfrog the card-based path to cashless transactions followed in most developed economies to become one of the first countries to become cashless or at least “cash-lite.”  Moving toward a cash-lite strategy may have multiple benefits for the poor, including a one, two, three punch improvement in financial management, security and transaction costs.

But how far away is Kenya from the goal of cash-lite?   Between July and August 2011, Bankable Frontier Associates (BFA) conducted an intensive field study within an urban and a rural pilot area to study the mode and size of intra-day cash flows at the customer-to-merchant interface and the merchant-to-supplier interface.    

Granular data shows that cash is still king

Our field team interviewed and mapped 3,489 businesses in urban areas and 773 in rural areas, equivalent to one merchant for every 13 households in urban and one merchant for every 10 households in rural areas.   We then selected 60 retail merchants to collect detailed data over four days, recording the size, frequency and payment medium of transactions. 

Chart 1:  How cash-lite are urban and rural Kenya?
(Share of transactions done with each payment type, with number of transactions observed in parenthesis)
  
Note that we only recorded transactions that were done in-person, so we did not collect, for example, any repayment of credit done via mobile money.

We discovered that, despite Kenya’s reputation for being a leader in mobile money, cash is still king.   As shown in Chart 1, 99% of all retail transactions we captured were done in cash, with most of the remainder done through informal credit arrangements. In contrast, the Payments Council in the UK reports that 59% of consumer transactions were done in cash and accounted for less than one third of transaction values. However, this does not mean that electronic payment is not available from some merchants.  Our census data indicated that 18% of retail merchants accept mobile money, while about half will provide short term credit for goods.  

Mode of payment varies by transaction size

The 1% of transactions that were done with mobile money accounted for some of the largest payments in the sample.  The average transaction size for a mobile money transaction was US$ 75 - in a cash flow environment where two-thirds of transactions were below US$ 3 and the median transaction size was about US$ 1.  Fewer than 10% of all transactions in the research were greater than $10. 

It seems then that M-PESA has yet to replace cash as a means of exchange for purchases, even in the environments where it has come to dominate the person-to-person remittance space.   In our next posting, we’ll unpack what is holding back customers and merchants alike from adopting mobile money as their payment mode of choice for a broader set of their transactions.