Mobile Banking and M-pesa in Developing Countries

With the advent of technological innovation, life of mankind has changed significantly. Mobile phone is one such innovation that has brought all humans closer with their ability to talk, share and communicate. Now we have such a huge platform to connect with each other and this platform can be further used in several other areas. One such use is Mobile money transfer (M-pesa) which can be used in all the developing countries where there are millions of mobile users and banking facility is not accessible.(It has started in India this March)

 M-pesa model was first launched in Kenya in 2007. It emerged there as a very successful model having around 14.6 million subscribers which is equivalent to 64% of Kenya’s adult population. One of the best advantages of this model is that it allows you to transfer, withdraw and deposit money with the use of text messages i.e. the basic mobile service like messaging acts as the building block for this service. This service can be very effective in developing countries which have significant number of traditional mobile users. Currently lot of emphasis is being laid on the mobile banking but the medium is through internet which is not present in most parts of the country. Furthermore, poor people cannot afford to buy smart phones and are not educated enough to implement such systems into their day to day lives.


 M-pesa provides solution to these problems. It was launched by ‘Safaricom’ affiliate of Vodafone with the backing of Citibank and Commercial bank of Africa. In the first month of its launch, it was able to register 20000 customers which rose up to 2 million users within a year. Within three years of its launch, there was a 400% increase in the no. of users which touched 10 million by the end of 2010. Kenya is a country in which two third of the population has an income of less than $2 per day. Still, the scale of acceptance that M-pesa has received is difficult to believe.

 Process Flow

The presence of a telecom operator plays a critical role in its implementation. M-pesa business model requires a very good network of agents who facilitate the money transaction to the mobile. Firstly, the customer of the mobile operator registers for the usage of M-pesa by registering and using his identity proof. After the registration, the SIM card is replaced with M-pesa enabled SIM card. Now, to load the money on the SIM the user has to visit the nearest agent and deposit cash. This cash is transferred to mobile money called ‘e-float’.E-float can be transferred or be used to make payments via encrypted SMS. E-float can be saved on the phone for further transfer or can be used for payment at any outlet.

 After going through its model, it leaves a question mark about how people will perceive it.  A survey reveals that about 90% of the people felt that their money is safe, 81% found it easy to use, while 84% felt that M-pesa has changed their lives and loosing it would create an impact on their daily lives.

 There must certainly be factors that triggered the use and success of M-pesa. Some of them are:

  • Large market share of the mobile operator present which creates a network effect and thus proliferation of number of users and customer adoption.
  • Mobile operating company should share a goodwill and must have a very positive image in the market.
  • Relationship with banks is also paramount. Since central bank decides and takes regulatory measures it is imperative that both of them work in synchronization.
  • Pricing is yet another factor that is to be considered. Since the users are mostly poor with average income of less than $2 per day so transaction charge should be minimal. The profitability of this model should be based on volumes or the no. of users.
  • Its predominant users are those who don’t have a bank account or they are not accessible to banks.

M-pesa can regulate the economy in many ways. This is a very powerful tool in local economy where people generally resist buying because of discomfort caused by carrying cash. In many developing countries, most of the people from rural areas go to cities to work. M-pesa can be a very powerful tool through which they can transfer money to their family or friends in a secured way. This not only reduces the risk of theft but also will push earning member towards more saving.  M-pesa can also be utilized for insurance sector. Most of the labourers working in the construction site risk their lives since they work in hazardous conditions. So, by tying up with insurance companies mobile operator can attract people towards this usage as well.

Political: Mobile banking service should be provided by the banks which are licensed. The agents working for mobile operator have to follow certain set of guidelines released by the main banking institution. Security is another aspect that has to be considered. All the messages/SMS should be encrypted so that these messages are decipherable only at the receiver’s end. Daily transaction limit has to be set keeping in mind that it neither exceeds the limit of the poor nor is it too less. It should be optimised so as to bring out a meaningful transaction.

Economic: Economic aspect of M-pesa is humongous. As discussed above, M-pesa can regulate the economy since it increases the flow of money from the people. It will have its effect at both micro and macro level. If implemented, it does a lot good for its users. e.g.: M-pesa implemented in Kenya is one of the major growth regulators for the country. It constitutes around 25% of gross GDP. Handset can be priced as low as $25 by awarding contract to hardware companies. Since this model’s revenues will be based on its number of users, the operators will have to focus on volume. In India, only 6% of rural India has access to cell phones. Since most of the mobile companies are focusing on rural markets today, the situation is likely to change in future. In the remote areas mobile recharge shops are proliferating at a good pace. Similarly, the involvement of agents will provide a source of employment to lot of people. Moreover, mobile operators can track the transactional data and with the use of analytics it could be utilized by marketers.

Social: Mobile banking is a field which requires a lot of awareness especially in the rural areas. Making people aware of the mobile banking and ensuring them about its safe usage is very important. Without the positive response from people and society it is very difficult to sustain this model in the long term. A good strategy could be providing some services for free to its users. Illiteracy is another issue that has to be considered while releasing this technology in the rural areas. This can be tackled by service providers using user friendly applications. NGOs can also come forward and companies can make it a part of their CSR activity to teach people so as to make them capable enough to use this service.

Technology: One of the biggest challenges of the service providers is to create a platform which not only caters to the functional needs but also makes it simple and user friendly. Some of the devices might support J2ME while others support only SMS. It has to be ensured by the service provider that technology should work in all phones from Nokia 1100 to an iPhone. Security is another concern that has to be addressed jointly by mobile application developers and bank’s IT departments. They should be enabled with anti theft system and messages should be encrypted and decrypted so as to ensure the safety of money transfer.

Mobile banking is the future of banking in developing countries. To keep it more precise, we can infer that it is a hope for rural sector. With the immense population in developing countries, it could be the future of mobile phone operators where they can widen their business while focusing on the bottom of the pyramid. But to keep this sector alive the biggest challenge will be to keep mobile devices simple, user friendly and friction less. This will be the key to success of mobile banking industry in the future. 

About the Author:

Shubham Agarwal

He is presently pursuing his MBA from IMT, Ghaziabad.


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