10 Myths About M-PESA: 2014 Update

M-PESA, its 12.2 million active customers, and 81,000 agent outlets have fundamentally altered the landscape of financial services in Kenya. More than half the adult population now uses M-PESA, which has contributed to a dramatic increase in the percentage of adults with access to formal financial services since 2009, when just 41% of adults had access. Now, this figure is at 67%.

Back in 2010, CGAP debunked some common misconceptions about the mobile money service. Overall, there is now a much better understanding of how M-PESA works, but there are still some misconceptions.

1. Myth: M-PESA customer funds are held by Safaricom.

Many policymakers we speak with around the world are still concerned about the safety of M-PESA customer funds. The truth is that M-PESA funds are not held (nor used) by Safaricom. The funds are held by a trust which is owned by Vodafone, deposited in several commercial banks, and cannot be accessed by Safaricom. In the event of Safaricom going bankrupt, the creditors of Safaricom would not have access to the M-PESA funds. Safaricom is not even allowed to use the interest earned on these accounts. Instead, it has established the M-PESA Foundation to spend the interest. The Foundation aims to promote education, health and environmental conservation in Kenya.

2. Myth: since 43% of Kenya's GDP is sent through M-PESA, it must pose a systemic risk.

Many publications from the Economist to the Financial Times have quoted the large percent of Kenya’s GDP that flows through M-PESA. However, this statistic is misleading. First, the value of mobile money transactions quoted includes all aggregate flows both into and out of the mobile money system – so at the very least this statistic is double counting. More importantly, GDP is a measure of the value of goods and services an economy produces and does not represent the amount of money that had to flow through it to pay for these goods and services. In actuality, M-PESA flows are roughly equal to the transaction flows of one of Kenya’s larger commercial banks. According to the Central Bank, mobile money contributes to 6.59% of the total national payments throughput value (including both gross and retail) but a staggering 66.56% of the total NPS throughput volume. This means that M-PESA is important, but does not necessarily pose a systemic risk. However, M-PESA’s reach across all economic segments of Kenyans, coupled with its high usage for financial transactions, means that the product’s security can influence public perceptions of safety and security of financial transactions.

3. Myth: Since M-PESA is so popular, most transactions in Kenya must be going through it.

Actually, cash is still king in Kenya. Although 62% of Kenyans are active mobile money users, among the 300 low-income households that took part in the recently released Kenya Financial Diaries, just 1% of expenditures (mostly airtime top-ups) and 3% of all transactions were made electronically. Although a broader ecosytem is growing to facilitate usage of M-PESA at merchants and to pay school fees, for example, it is still primarily used to send and receive money, buy airtime top-ups and as a transactional storage account.

4. Myth: M-PESA-related fraud and crime mostly impacts customers.

Fraud remains a concern, but maybe not in the way you think. Safaricom has aggressively tackled the fraud issue, which has helped to contribute to reduced incidences of fraud for customers. However, fraud is the #1 issue most burdensome to agents, not only in Kenya but throughout East Africa. This is followed closely by the threat of armed robbery. Providers have done little to protect agents against these risks, especially in providing safety against armed robbery.

5. Myth: M-PESA costs virtually nothing to send money to a friend.

M-PESA is certainly a low-cost option for sending money from one part of Kenya to another, especially compared with alternatives like sending money on a bus. However, M-PESA’s price structure for person-to-person transfers is non-linear, even though the costs to Safaricom are the same regardless of the amount sent (as long as cash-in or cash-out is not involved). More interesting still, Safaricom recently slashed P2P prices on low-value transfers, while raising them at the high end. This was likely a response to Equity’s planned launch of the FinServe MVNO, and may be based in part on evidence that consumers sending large values will be willing to pay more for the service than those sending low values. It also raises the question of how high Safaricom’s margins are, if they were able to reduce prices by as much as 67% overnight.

6. Myth: M-PESA agents are the most profitable in the world.

The Helix Institute of Digital Finance's Agent Network Accelerator Survey reports that the world’s largest mobile money agent network is well-managed and generates healthy transaction levels. Kenyan agents do a median of 46 transactions a day. However, they make just $70 profit per month which is less than Uganda’s $78 per month and significantly lower than Tanzania’s $95 per month. This is most likely due to the fact that until very recently, Kenyan agents were restricted to just transacting for Safaricom and not its competitors while in neighboring countries (especially Tanzania), agents can transact across multiple providers.

7. Myth: Poor people don’t use M-PESA.

It’s true that low-income and unbanked households were not early adopters of M-PESA. But, they caught on quickly. In 2008, fewer than 20% of the population living outside Nairobi on less than $1.25 per day used M-PESA. By 2011, this share had expanded to 72 percent. More recent data suggests that active mobile money users are no more likely to be literate or numerate than the national average, further indicating that the service is accessible and used by lower income households. Unfortunately, rural residents, those below the poverty line, and women are less likely to use the newer value-added services such as Lipa Na M-PESA (merchant payments) compared with their counterparts who are urban, above the poverty line and male.

8. Myth: M-Shwari, the saving and loan product, is an M-PESA product.

M-Shwari is a savings and loan product that has proven enormously popular since its launch in November 2012. Commercial Bank of Africa (CBA), who offers the product via M-PESA, now has 897,000 loan accounts, more than any other bank in the country, and 5.6 million deposit accounts, 26% of the country’s total. Each individual customer has a separate bank account within CBA that is subject to all the normal regulatory requirements of any other bank account. This means that these are customers of CBA, deposits are held by CBA and loans are in the books of CBA. M-PESA merely provides access to this simple account through its menu.

9. Myth: M-PESA is only being used to offer financial services.

An increasing number of organizations (at least 55 by CGAP’s latest count) are leveraging M-PESA’s infrastructure to make basic, essential services and utilities – in energy, health, education and water, for example – more accessible to people at the base of the economic pyramid (what we’re calling Digital Finance Plus). Angaza Solar and Grundfos Lifelink are two such examples. These services leverage M-PESA’s “rails” to make payments easier for customers and less expensive for providers.

10. Myth: Safaricom is so dominant that no competitor can threaten its quasi-monopoly status.

M-PESA has faced limited competition but that may be changing fast. The Kenya Communications Authority recently authorized a series of new MVNO licenses, including to Equity Bank (through its subsidiary Finserve Africa). Equity Bank will use SIM overlay technology to give it reliable access to the mobile channel through which it will serve customers – without relying on Safaricom. This could put Equity in a prime position to challenge Safaricom’s dominance. Safaricom is feeling the heat, vigorously challenging the proposed move and defending its turf. Perhaps partly in response to the recognition of changing times, Safaricom recently announced that it will allow its agents to work for other mobile money services, a move that its competitors have been fighting for, for years.

All these new developments may bring headaches to the Kenyan regulators but are fascinating for those of us interested in the potential of digital financial services for financial inclusion, and carry significant potential benefits for consumers and market competition.