Term paper
- M-PESA Hand-in date:
14.12.2023
Campus:
BI Oslo
Examination code and name:
EBA 36003 Financial Technology
Programme:
Bachelor of Science in Data Science for Business
Content
Table of Contents
CONTENT ............................................................................................................................... I
INTRODUCTION ..................................................................................................................... 1
BACKGROUND OF M-PESA ..................................................................................................... 1
HOW M-PESA WORKS ............................................................................................................ 2
IMPACT ON THE KENYAN ECONOMY AND SOCIETY ................................................................. 3
CHALLENGES AND FUTURE DEVELOPMENTS ........................................................................... 4
CONCLUSION ......................................................................................................................... 5
BIBLIOGRAPHY ...................................................................................................................... 6
Page i
Introduction
M-PESA's introduction into the Kenyan market in 2007 marked a significant
milestone in the evolution of financial services. This pioneering mobile money
platform didn't just offer a new way to transact; it addressed a critical gap in the
market by providing banking solutions to those previously excluded from the
financial system. By leveraging the widespread use of mobile phones, M-PESA
transformed them into virtual wallets, making financial services accessible and
convenient. This essay examines M-PESA's operational framework, its substantial
impact on Kenyan society and economy, the challenges it faces, and contemplates
its future direction in an ever-evolving fintech environment.
Background of M-PESA
The M in M-PESA stands for Mobile and PESA is the Swahili word for money.
M-PESA is an innovative mobile banking service introduced in 2007 in Kenya as
a joint venture between Safaricom and Vodaphone (What Is M-Pesa?, 2023). The
technology has seen widespread adoptance in a relatively short time, with over 51
million users across seven different countries in Africa (M-PESA, 2023).
The choice to base M-PESA on mobile phones was strategic, leveraging their high
popularity even in rural areas where traditional banking infrastructure is limited
(CS181 Project, 2011). Mobile phones serve as an accessible and personal tool for
millions, making them an ideal platform for delivering financial services. This
decision capitalized on the existing mobile network, enabling instant
communication and secure financial transactions through a technology already
integrated into daily life. By utilizing mobile phones, M-PESA provided a direct
response to the infrastructural challenges faced by traditional banks, such as the
need for physical branches and the associated costs that often exclude the
underbanked.
M-PESA was conceived with the intention of providing financial services to
underbanked and unbanked populations, who were previously marginalized by
conventional banking systems (CS181 Project, 2011). These traditional systems
often failed to meet their needs due to prohibitive transaction fees, the
inconvenience of traveling to physical bank locations, and restrictive minimum
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deposit requirements. Initially launched as a platform for sending and receiving
money, M-PESA rapidly gained popularity, prompting its evolution into a
comprehensive financial tool. Now, it encompasses a suite of services including
savings accounts, retail payment processing, and credit facilities (M-PESA, 2023).
This expansion reflects its adaptability and responsiveness to market demands,
evidencing a significant shift in financial service provision within its operational
territories.
How M-PESA works
M-PESA, introduced as a virtual banking system, has democratized access to
financial services through its mobile phone-based platform (What Is M-Pesa?,
2023). The system is supported by a network of authorized agents, often small
business owners, who facilitate cash deposits and withdrawals, crediting and
debiting customer M-PESA accounts respectively. This turns a mobile phone into
a de facto digital wallet, enabling transactions including funds transfer, bill
payments, and salary disbursements, all secured via PIN-protected SMS. To
initiate service, individuals register with an agent, presenting a government-issued
ID for identity verification and receiving an M-PESA enabled SIM card if they do
not already possess one. After creating a secure PIN, users can engage with the
system immediately. This streamlined registration process, removing the need for
formal bank accounts and excessive documentation, has significantly enhanced
financial inclusion, particularly benefiting those in remote regions or with limited
access to traditional banking infrastructure.
Figure 1 - A figure showing how M-PESA works. From
https://cs.stanford.edu/people/eroberts/cs181/projects/2010-11/SmartPhones/pt4.html#cite_note-0
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The scope of the service has expanded significantly since its introduction in 2007
(M-PESA, 2023). M-PESA now offers many of the more “complex” services and
solutions offered from traditional banks. This includes retail payments, bill & tax
payments, savings accounts, insurance and even the possibility to build a credit
score to secure a loan. From relying solely on SMS-messaging, there are now
several apps available to increase ease of use for the customers.
Impact on the Kenyan economy and society
M-PESA's introduction in Kenya has been pivotal in fostering financial inclusion,
revolutionizing how Kenyans engage with the economy (CS181 Project, 2011).
Previously, the sparse banking infrastructure coupled with inadequate
transportation meant that the vast majority, especially those in rural areas, were
excluded from the formal financial system. This exclusion not only limited their
ability to send and receive money but also impeded their capacity to save and
invest in future productivity. With the advent of M-PESA, Kenyans quickly
transitioned from traditional and inefficient methods of money transfer, such as
via bus or post, to this swift and secure mobile platform, which effectively
broadened economic participation.
The economic benefits of M-PESA for Kenyan households are manifold. The
service has significantly reduced the risks and inconveniences associated with
cash transactions, thereby stimulating commercial activity (CS181 Project, 2011).
Moreover, it has provided a safe mechanism for savings, protecting individuals
from the losses due to theft or accidents that were commonplace when hiding
money at home. The convenience of M-PESA has also supported labor mobility,
enabling individuals, particularly men from rural families, to work in distant cities
and send money home with ease, thus widening their employment opportunities
and supporting their families' livelihoods more effectively.
Furthermore, M-PESA has enhanced the resilience of Kenyans against
emergencies by enabling swift financial aid to relatives in need, mitigating the risk
of losing labor power essential for rural family survival (CS181 Project, 2011). In
times of health crises or famine, the ability to transfer funds instantly with MPESA means that families can address urgent needs promptly, reducing the
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potential for exacerbated health issues or death due to delayed financial support.
This rapid mobilization of resources has had a substantial impact on improving
the welfare and economic stability of Kenyan households.
Figure 2 - how Kenyans sent money in 2006 and 2009. From
https://cs.stanford.edu/people/eroberts/cs181/projects/2010-11/SmartPhones/pt4.html#cite_note-0
The figure above illustrates the rapid change from pre-M-PESA in 2006 to 2009
with M-PESA introduces commercially.
Challenges and future developments
Despite its success, M-PESA faces several challenges. Regulatory hurdles have
emerged as the service expands, particularly concerning compliance with
international financial standards and local banking laws (Wanjau, 2011). The
system also grapples with security concerns, including fraud and hacking threats,
which necessitate continuous enhancement of cybersecurity measures.
Additionally, the reliance on network stability and mobile technology means that
service interruptions can have widespread repercussions. There is also the
challenge of maintaining affordability while ensuring profitability, as transaction
fees are a sensitive issue for low-income users.
As M-PESA continues to evolve, it is anticipated to follow the trajectory of
broader fintech trends, though these projections remain speculative. The potential
adoption of blockchain technology could be explored to enhance transaction
security and transparency, reflecting the industry’s pivot towards decentralized
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ledger systems. M-PESA may also expand its suite of financial services,
potentially introducing personalized insurance and wealth management solutions,
mirroring the sector's shift towards holistic financial ecosystems. Utilizing big
data analytics to offer tailored financial advice and products could also be on the
horizon, aligning with the fintech industry's drive towards data-driven
customization. Expansion into new markets, particularly in regions with similar
economic profiles to Kenya, could be assumed, considering the global trend of
digital financial solutions filling gaps left by traditional banking. Lastly, strategic
partnerships with banks, fintech startups, and e-commerce platforms might
emerge, as collaborative approaches are increasingly adopted to create more
integrated and robust financial service offerings. These potential developments are
conjectural, based on current fintech innovations and market dynamics, and would
depend on various factors including regulatory environments, market readiness,
and technological advancements.
Conclusion
M-PESA's journey reflects a transformative shift in the delivery of financial
services, achieving remarkable strides in economic inclusion and empowerment. It
has reshaped the financial landscape, allowing users to manage finances with
unprecedented ease. While M-PESA has encountered and continues to face
regulatory, security, and technological challenges, its trajectory suggests an
alignment with future fintech innovations, potentially incorporating new
technologies and expanding its range of services. As it stands, M-PESA is a prime
example of how targeted financial technology can contribute to societal progress
and economic development, offering insights into the potential for similar
innovations to make a global impact.
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Bibliography
CS181 Project. (2011). Retrieved 1 December 2023, from
https://cs.stanford.edu/people/eroberts/cs181/projects/201011/SmartPhones/pt4.html
M-PESA. (n.d.). Vodafone.Com. Retrieved 5 December 2023, from
https://www.vodafone.com/about-vodafone/what-we-do/consumerproducts-and-services/m-pesa
Wanjau, M. (2011). M-PESA: REGULATORY FRAMEWORK.
https://www.wto.org/english/tratop_e/serv_e/wkshop_june13_e/wanjau_e.
pdf
What Is M-Pesa? Definition, How the Service Works, and Example. (2023.).
Investopedia. Retrieved 2 December 2023, from
https://www.investopedia.com/terms/m/mpesa.asp
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