Mobile Banking

This page is written by Hee Su Roh

M-PESA is a transformative mobile banking service introduced by Safaricom, a leading Kenyan mobile service provider, in 2007. It lets people make small amount transactions using SMS technology without having to create bank accounts or having to physically carry cash. As a result, those who had been previously excluded from formal financial activities (i.e. saving money, sending money) can actively participate in financial industry. Despite its relative short history, it has attracted 83% of the adult Kenyan population.[1] Moreover, it has been praised as one of the most successful business model in developing countries, having significantly contributed to poverty relief, job creation, and sustainable development in Kenya. Indeed, it has become an inspirational source for many other philanthropic organizations (i.e. Gates and Melinda Foundation) that also seek an efficient way to combat poverty by making use of technologies, mobile phones. This paper explains how mobile banking in the developing world fosters financial inclusion and eventually promotes economic growth in the developing world.

Brief History of M-PESA

The formulation of an idea of M-PESA dates back to 2003. During the World Summit for Sustainable Development in 2003, Nick Hughes, an employee of Vodafone (a British telecommunication company and a mother company of Safaricom), came up with an idea of finding a niche market in the developing nations by somehow combining SMS technology with other business models. In a conference with Kenyan business people in Nairobi, he found that providing instant and cheap financial services to the majority of the population is necessary. With an executive sponsorship from Vodafone and a partnership with Safaricom, he launched M-PESA service. M stands for mobile and PESA for a Swahili word for money. It quickly gained popularity both in urban and rural areas. Despite the fact that not even half a decade has passed since its initial introduction, now M-PESA has more than six million subscribers and ten thousand agents.

Schematic of M-PESA.

How M-PESA Works

In order to start using M-PESA, all you need are a Safaricom mobile phone and a national ID card. As M-PESA is much more informal than traditional banking services, you do not need to go through tedious registration process as you would in a bank. Once you are registered for the service, you can visit local M-PESA agents. Once you deposit cash, you'll get cyber money called "e-float" in exchange. Then using SMS technology, you can exchange that "e-float" with another M-PESA subscriber. Or you can retrieve cash from the agent in exchange of "e-float" you have in your M-PESA account.

How It Contributes to the Kenyan Economy: Financial Inclusion

The primary benefit of introducing M-PESA to the Kenyan economy is that it incorporates the vast majority of the population into financial industry. In other words, it fosters 'financial inclusion.'

Due to poor banking and transportation infrastructure, the majority of the Kenyan population had had difficulty sending or receiving money before the introduction of M-PESA. Kenya has only 840 bank branches, which is far less to meet the demands of everyone, especially those in rural area.[2] As a result, the primary means of sending money had been physically carrying cash, which was both slow and vulnerable to robbery. Kenyan Post Service, which was another alternative, had a notorious reputation for being extremely slow.[3] The figure below shows how the Kenyan population quickly switched from traditional means of sending money (i.e. bus, post) to M-PESA since 2007.

In addition, having been excluded from formal financial system, the majority of Kenyan households was unable to save their income.[4] This inability to save deprived them of an opportunity to invest in the future and further increase the productivity in their economic activities.[5] For example, by having a means to save money, farmers can later buy a tractor, increase their productivity, and thus generate even more income in the future. All of these cannot be done without an access to financial services.

How Kenyans sent money in 2006 and 2009.

As a new player in the financial sector of Kenya, Kenyan households are now able to get several direct and indirect economic benefits. Here are some notable economic advantages.

Change in mobile phone price in the developing world.

Why Mobile Phones?

The most obvious advantage of using mobile phones over using other technological devices is its ubiquity. The remarkable penetration of cell phones in the developing world arises from a number of factors. First of all, wireless telecommunication network is oftentimes much cheaper and easier to build than fixed line network.[14] In addition, the price of mobile phones has been gradually decreasing to such a point that people in the developing world can possibly afford.[15] In the least developed parts of the world, people can share one phone by just switching out SIM cards, thereby making cell phones even more affordable.[16]

In contrast to its increasing affordability, mobile technology is indeed a vehicle through which the most cutting-edge technology from the developed world can reach the most underprivileged part of the world. Mobile banking is just one example how mobile technology can extend beyond the traditional realm of telecommunication to better the lives of people in the developing world. A list of other incredible services realized by mobile technology includes mobile insurance, disease diagnosis, and weather forecast. As a result, the developing world has been embracing the mobile technology more aggressively than any other part of the world.

In Kenya, despite a total absence of fixed-line telecommunication network, mobile phones have penetrated to a remarkable extent, as can be seen in the figure to the left.

Penetration of fixed line, mobile line and M-PESA in Kenya.

As a result, given the ubiquity, affordability, and versatility of cell phones, it was a natural decision for Nick Hughes and Vodafone to choose cell phone to realize their goal, making finance accessible to everyone.

Beyond M-PESA: Financial Inclusion in the Global Context

The phenomenal success of M-PESA has brought global attention to the potential of mobile technology, especially in the developing world. M-PESA's winning of the 2011 Mobile Money for the Unbanked Award showed how the world views this phenomenal success.

However, despite the phenomenal success in Kenya, there still remains much to be done in other parts of the world. In the developing world, still more than 2 billion people are deprived of any sort of access to financial services.[17] As a result, the vast majority of population in the developing world is being exposed to all kinds of risks (i.e. poor harvest, contagious disease). Whenever they encounter poor harvest, their lives are literally threatened because they do not have money to buy daily breads.

People who do not use formal financial services.

Bill and Melinda Gates' Foundation is one of the most notable non-government organization or company trying to apply M-PESA's business model in other parts of the world. The foundation identified the major cause of financial exclusion in the developing world to be the fact that banks do not have economic interest in opening branches for poor people. Poor people usually have much smaller savings account and thus it is not worth making another branch just for them. However, according to the foundation, "banking beyond branches" can be a solution. Banks can have economic motive to serve poor people if they do not have to build another branch. The foundation clearly recognizes how mobile technology can help achieve this goal. After the catastrophic 2010 Haiti earthquake, it invested 10 million U.S. dollars in a project that aims to construct a mobile banking system in Haiti similar to M-PESA.[18]

G-20 Summit also began to focus on the use of mobile banking to facilitate financial inclusion. The Leaders' Statement from the 2009 Pittsburg G-20 Summit recognized financial inclusion as a key means to alleviate poverty in the developing world.[19] The next 2010 Toronto G-20 summit clearly gave a node to the suitability of mobile phone technology as a means to foster "branchless banking" and thus "financial inclusion".[20] For sure, M-PESA was being used as an important evidence to support this claim.[21]


Financial exclusion is one of the important obstacles developing nations nowadays face in their way to prosperity. Without financial services, people in the developing world cannot invest in their future. However, banks often times find little economic interest in serving the marginalized population as their small amount savings account generates little profit. M-PESA launched in 2007 showed how "branchless banking" and mobile banking can solve this problem. M-PESA is now being extensively studied by others who wish to expand this innovating 'financial inclusion' business model to other parts of the world.

Mobile banking surely is one of the most creative yet viable applications of the existing technology to seek for sustainable economic growth in the developing nations.


  1. ^ The Economics of M-PESA
    This is a great paper that shows the economic workings behind M-PESA project (mobile baking service in Kenya). The authors actually did go to Kenya and surveyed Kenyan households. Their explanation about M-PESA's impact on average Kenyan households at microeconomic level did greatly help my research. The source includes several anecdotal evidences which comes from the authors' real experience.
  2. ^ Txteagle: Mobile Crowdsourcing MIT Media Lab
    The original Txteagle proposal written by founder Nathan Eagle for MIT's Media Lab. Contains extensive information on the methodology, origins, and applications of the service.
  3. ^ Mobile Payments go Viral: M-PESA in Kenya Bill & Melinda Gates Foundation
    While the second source focused on the economic impact of M-PESA at a microeconomic level, this source focuses more on its macroeconomic impact. This source shows how M-PESA outperforms other alternative means of sending, receiving, or saving money in Kenya, thereby explaining the phenomenal success of M-PESA. This source is a clear evidence that Bill & Melinda Gates Foundation is strongly inspired by the remarkable success of M-PESA in Kenya.
  4. ^ The Relationship between Mobile and Fixed Line Communications The Georgetown Center for Business and Public Policy Conference on Wireless Technologies
    Although I did not reference this source extensively, this source confirms that an infrastructure for wireless communication is much cheaper to build than that for fixed line telecommunications. However, this source was important for me to explain the ubiquity of mobile phones in the developing world.
  5. ^ African Telecommunication/ICT Indicators 2008: At a Crossroads Market Information and Statistics Division of Telecommunication Development Burueu at International Telecommunication Union
    This source includes data that shows how the price of mobile phones has been decreasing gradually for the last few years to such a point that Africans can now afford them. Therefore, this source was important for me to explain why the developing world has been embracing mobile phones more aggressively than any other technology. This source is actually a Power Point Slide, so it's easy to follow what they're trying to say about the mobile technology in the developing world.
  6. ^ For the Poor, Cellphones can Offer Lifeline Washington Post
    This source shows how people in the least developed parts of the world are making use of mobile technology. This article was particularly interesting as it showed that people in the same village choose to use the same phone with different SIM cards, thereby making mobile phones even more affordable.
  7. ^ Financial Services for the Poor: Strategic Overview. Bill & Melinda Gates Foundation
    This source explains why Bill & Melinda Gates Foundation is interested in introducing mobile banking service in developing countries. It also gives a brief description of the foundation's future plan, including introducing mobile banking service in Haiti.
  8. ^ Innovative Financial Inclusion : Principles and Reports on Innovative Financial Inclusion from the Access through Innovation Sub-Group of the G20 Financial Inclusion Experts Group
    This source is shows how M-PESA is becoming an inspirational source for other organizations that want to realize sustainable economic growth in the developing nations by creatively making use of technologies. Persistent reference to M-PESA evidences the phenomenal success of M-PESA. Also this source shows that there still remains much to be done with regards to financial exclusion in the developing world.