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Reaching the Unbanked: The Dynamics of M-PESA

By Nidhi Mardi

Edited by Shambhavi Singh, Senior Editor, The Indian Economist

Do you constantly find yourself in a hassle of finding the exact denomination of currency while making payment to auto-rickshaw drivers, local vendors etc.? If your answer is affirmative, then you are a part of a majority of urban Indians struggling with inconvenience of carrying change. Another problem is the lack of access to banking and financial services to a majority of rural Indians with less than 5% of the villages having a banking outlet. The principle macroeconomic problem of financial inclusion calls for an urgent need of innovative technology to cater to the needs of modern Indians in a market of a falling rupee. An effective alternative can be found in the successful Kenyan business model, Safaricom’s M-PESA.

Launched in early 2007 by Safaricom (Vodafone group), M-PESA is one of the most successful mobile money transfer service in the world. The product is called M-PESA as “Pesa” is the Swahili term for money and “M” stands for mobile. It is basically an SMS based system used to deposit funds, make payments, transfers, as well as withdraw funds. This service however does not require a bank account and can be done via any of the 11,000 agent outlets across the country. The service was initially developed by the Vodafone group and the initial six month pilot phase was funded by the UK Department for International Development. It started as an effective method for microfinance loan repayment, but later became more popular as a P2P payment method as well as a way of sending national remittances. As per data collected by Isaac Mbiti and David N. Weil (National Bureau of Economic Research) within eight months of its inception in March 2007, over 1.1 million Kenyans had registered to use M-PESA, and over US $ 87 million has been transferred over the system. By September 2009, over 8.5 million Kenyans had registered to use this service and US $ 3.7 Billion had been transferred over the system since inception. This growth was accompanied by the exponential growth of M-PESA agents, i.e., service locations, which grew up to 18000 locations by April 2010. However Kenya has only 491 bank branches, 500 post bank branches, and 352 ATMs. The groundbreaking success of M-PESA is a success story to learn from especially for developing economies like India.  In a country where 85% of the adult population has access to mobile phones and a modern tech savvy urban population obsessed with Smartphone applications, M-PESA cannot have a bleak future in India.

However here we must also look into the economic and social repercussions of the system. Can the Indian economy with a current account deficit of $5.2 billion and with an inflation rate which the RBI Governor, Raghuram Rajan, terms ‘uncomfortable’, really sustain this model? A recent research conducted by African Development Bank (AfDB) claimed that Kenya’s dominant money transfer service fuelled inflation to such an extent that it forced the Kenyan Central Bank to impose monetary policy. The idea is that financial innovations like M-PESA fuel the pace of monetary transactions while increasing the cash in circulation, causing more people to enter the financial sector and ultimately causing the demand for goods to outstrip their supply. The result is inflation and an effect on the government’s money creating power. The inflation in Kenya shot upto 19.7 in November 2012 before the Central Bank intervened with its monetary policies. “The increase in the velocity of money induced by these activities may have in turn propagated self-fulfilling inflation expectations and complicated monetary policy implementation”, said AfDB in a brief on inflation dynamics in selected East African Countries. The idea is that a system like M-PESA increases the cash in circulation and when the velocity of money increases, it increases the money supply beyond the policy makers’ expectations, which results in inflationary pressure. Can the RBI and Indian economy effectively tackle with this fruit of financial inclusion? The answer remains unknown, but one must not forget that the system has its own merits.

M-PESA will act as an effective tool in exposing and monitoring the money that is kept “under the mattress”, in an economy plagued with black money and corruption, as it did in Afghanistan. In Afghanistan, the system helped to detect the inadequacies in the previous model for payment of salaries to Afghan National Police officials. However, the success of M-PESA was due to the fact that Safaricom had market leadership of 70%, while in India the economy is divided in its loyalty to its various mobile service providers. Secondly, the stringent banking regulations in India set by the Reserve Bank of India are also effective barriers to this system. As per these regulations, a person who wants to enjoy the services of mobile banking, must necessarily possess a bank account. The entire idea of M-PESA is to allow registered transactions to occur at a fee of 50 cents as against a bank commission of $5 for a $50 transfer. Hence, this idea may not work at a low cost in the Indian scenario.  As per empirical and statistical evidence provided by Isaac Mbiti and David N Weil (2009) it can be concluded that the increased use of M-PESA lowers the propensity of people to use informal saving mechanism such as ROSCAS  and raises the probability of it being banked. Further, M-PESA causes a decrease in the prices of competing money transfer services like Western Union. The velocity of M-PESA is estimated between 11.0 and 14.6 P2P transfer per month. The M-PESA system has been introduced in India and currently dwells in the states of West Bengal and Jharkhand. The system is started by Vodafone in collaboration with ICICI Bank and considers itself to be a semi-closed mobile wallet linking a bank account to a customer. Skeptics believe the system may not work in India considering the recent stunted performance of Airtel money transfer scheme.

M-PESA is an innovative example of solutions that can be used to tackle the problem of financial inclusion in India. However, there are myriad applications in the market that work on the concept of mobile money. Such features can be added to the M-PESA model to create a service suited to the needs of urban dwellers. Some examples include voice enabled mobile payments, linking loyalty cards to mobile money accounts, using facial recognition for mobile payments etc. Hence, India has a long way towards tackling with its problem of financial inclusion. However, the need of the hour is to develop effective technology based solutions to tackle with this problem. M-PESA is just one model of such an effective business model that made Kenya a role model in effective mobile based payment systems.

Nidhi is currently pursuing Economics in Lady Shri Ram College, Delhi University. She has a keen interest in global economic affairs. An avid reader, she loves writing on various topical issues in economics, politics and international affairs. She loves travelling and considers herself much of a movie buff.