What is M-Pesa?

M-Pesa is a mobile banking service that allows users to store and transfer money through their mobile phones. M-Pesa was originally introduced in Kenya as an alternative way for the unbanked population of the country to have access to financial services. Safaricom, the largest mobile phone operator in Kenya as of 2016, launched M-Pesa in 2007. M-Pesa is a blend of two entities where M means mobile and Pesa means payment in the Swahili language.

One of the drives for Fintech innovations, lik eM-Pesa, is financial inclusion, which is mostly geared toward an underbanked or unbanked group of people. Financial inclusion is an initiative that seeks to include residents who have no access to banks or who can’t afford the required minimum deposits in the digital banking era. In order for this initiative to be successful, different sectors have to collaborate in sharing data with each other in order to build a meaningful digital platform.

Key Takeaways

  • M-Pesa is one of the innovative tools that have been birthed from the collaboration of telecommunications and banking sectors in East Africa,
  • M-Pesa began in Kenya. To date it is being utilized in 10 countries, including India and Romania.  
  • Emergent technology in the financial sector, or Fintech, has made it possible for financial services and products, like M-Pesa, to be more accessible at small costs.
  • M-Pesa makes it possible for unbanked people to pay for and receive goods and services using a mobile phone instead of utilizing a brick-and-mortar bank.

This cross-communication tactic is developing rapidly in sub-Saharan Africa, where the telecommunication and banking sectors are working together to create mobile banking services for the underbanked.

How M-Pesa Works

M-Pesa is a virtual banking system that provides transaction services through a SIM card. Once the SIM has been inserted into the card slot of the mobile device, users can make payments and transfer money to vendors and family members using SMS messages.

Users with no bank accounts can access the numerous M-Pesa outlets favorably distributed across the country. The money that needs to be stored is given to the kiosk attendant, who transfers the amount in digital form to the user’s M-Pesa’s account.

Using M-Pesa allows small business owners in remote and rural areas to conduct financial transactions safely and easily via their mobile phones.

Cash collected from M-Pesa depositors are deposited in bank accounts held by Safaricom. The bank accounts serve as regular checking accounts and are insured up to a maximum of 100,000 shillings (or $1000) by the Deposit Protection Fund.

M-Pesa provides receipts as proof of a transaction. For a transaction to take place, both parties have to exchange each other’s phone numbers because the phone numbers act as account numbers. After settlement, both parties would receive an SMS notification with the full name of the counterparty and the amount of funds deposited to or withdrawn from the user’s account. The mobile receipt, which is received within seconds, helps to promote transparency for all individuals involved in a transaction.

An Example of M-Pesa

For example, a farmer who has no bank account and wants to deposit his commodity sale proceeds of 1,000 shillings would head to an M-Pesa outlet and deposit the money with the kiosk agent or attendant. The agent would, in turn, use her phone to access the client’s account with the client’s registered phone number and credit the account for 1,000 shillings.

The farmer gets an SMS notification on his cellphone within seconds of the deposit confirming how much was deposited and what his current account balance holds. The farmer can also easily withdraw cash from his account by using the M-Pesa attendant's or agent's number provided at the outlet and a personal PIN.

Special Considerations

Through mobile payment services like M-Pesa, the standard of living in Kenya has improved greatly. Market traders, debt collectors, farmers, cab drivers, etc., don’t have to carry around or transact in a large amount of cash. This means that the occurrence of theft, robbery, and fraud is reduced. Also, individuals and business owners don’t have to wait in queues for long hours to make their electricity and water bill payments because these can be made using M-Pesa.

To combat fraud, Safaricom mandates that users of a Safaricom SIM card who want to register for M-Pesa have to do so with a valid government ID such as the Kenyan National ID card or a passport. This way, each transaction is marked with the identification of the party transferring, paying, depositing or withdrawing money from an account.

Mobile money is increasingly being adapted to in developing nations that have a high percentage of an unbanked population. Revolutionary services like Paga, MTN Mobile Money, Airtel Money, and Orange Money are disrupting the traditional payment means frequently used by residents of emerging nations, by changing the economy from a cash-centric one to digital.