M-PESA, Kenya’s mobile phone-based money transfer service, exploded onto the scene in 2007. In just three years, it has attracted over 9.5 million customers, in a country with only 8.4 million bank accounts. Every month, more than US$320 million flows through M-PESA in person-to-person transfers, and the numbers keep rising. By nearly all accounts, M-PESA has been an admirable success and has expanded access to basic financial services to millions of underserved Kenyans. M-PESA has captured the world’s attention not only because of its success, but also because it is offered by an unlikely financial services provider—Safaricom, Kenya’s largest mobile network operator.
The success of Kenya’s M-PESA has raised the question of how most effectively to regulate nonbanks—most notably mobile network operators (MNOs)—who contract directly with customers to issue electronic value against receipt of equal funds (“e-money”).
MNOs like Safaricom are well-placed to reach customers with affordable financial services due to their existing customer base, marketing capabilities, physical distribution infrastructure, and experience with high-volume, low-value transactions (e.g., the sale of airtime) (Ivatury and Mas 2008). Yet, despite these advantages, regulators are often reluctant to permit MNOs to directly contract with customers for the provision of financial services. Taking money from the public, even for purposes of effecting payment rather than for saving, is uncomfortably close to accepting public deposits—an activity almost always reserved for prudentially regulated financial institutions, such as commercial banks. Funds kept with such banks are protected by strict prudential requirements (and related supervision) to ensure systemic stability and deposit security, and these same requirements would typically apply to electronic value issued by banks in exchange for deposited funds.