Mobile money: Progress thus far, miles to go
2017 marks ten years since the launch of M-PESA in Kenya, undoubtedly the most successful mobile money product to date. Over the last decade, there have been many developments in the sector, and mobile money has emerged as a predominantly African innovation. A recent conference on Mobile Money and Financial Development, organised by the LSE’s Department of Management and the IGC, brought together academics, practitioners, and policymakers to discuss the sector’s progress to date. Research findings and country experiences indicate that, while mobile money has seen some notable successes, the sector’s impact has fallen short of expectations in some ways.
Today, over 96% of households in Kenya have at least one M-PESA account, and over 110,000 agents serving customers nationwide. Access to mobile money has improved customers’ financial resilience, enabling access to micro-credit, insurance, and savings for rainy days. As it allows privacy, micro-credit has increasingly displaced store credit and borrowing from friends and neighbours. Savings facilities have had a significant impact, providing customers with a safe way to save and allowing women in particular to discreetly tuck away money. It appears that rather than substituting for other savings methods, M-PESA crowds in savings from elsewhere, such as SACCOs (Savings and Credit Cooperative Organisation), indicating that it also plays an important role in facilitating informal savings groups.
In the wake of negative shocks, M-PESA users tend to receive a greater number and value of remittances, allowing, for example, more spending on medical costs while also keeping children in school. This is crucial to preventing households from slipping into poverty after a crisis. In Kenya, access to mobile money is thought to have pulled an estimated 194,000 households (particularly female-headed households) out of extreme poverty, and empowered 185,000 women to change move out of subsistence farming and into business occupations.
However, M-PESA’s success in Kenya has proven to not be replicable in other countries. This is primarily because M-PESA’s first-mover advantage meant it very quickly secured a high market share, and network effects meant new customers found it more attractive and convenient to join the mobile network that already had the most customers. In contrast, mobile networks elsewhere have faced greater market competition and frequently struggled to achieve adoption at scale. M-PESA also had the space to grow and innovate without being heavily regulated in its early years, whereas other mobile networks have needed to comply with a plethora of regulation since their inception. How stringent regulations are strongly impacts mobile networks’ ability to innovate, and higher compliance costs undermine the profitability of operations. Striking the right balance between regulating and allowing sufficient space for innovation remains a challenge.
Difficulty in achieving profitability with mobile money products is also partly due to high user dormancy rates. The number of active mobile money customers tend to be less than half of the registered subscribers, and active users may still be very infrequent users. This usage gap indicates that availability of technology is not enough – perhaps the right products are not on offer, or not available at the right price, or product illiteracy could be holding customers back from using products. Effectively addressing user dormancy will require better understanding of the underlying reasons for it.
Possibly the most concerning weakness of the sector’s development has been that mobile money access has not fully translated into financial inclusion for the poor. Transfers and savings are valuable, but insufficient. Complementary products, such as credit and insurance, are also needed, but must be provided by prudentially regulated entities, generally banks.
The poor haven’t been given access to the same facilities as the banked middle class, despite needing them as much (or even more). Having access only to micro-credit instead of credit has been particularly constraining. Studies on the impact of micro-financing (not facilitated by mobile money) have largely found no transformative effects on the average borrower in terms of income, consumption, health, or schooling expenditure, and there’s little reason to think that simply delivering micro-credit using a mobile product would change this. Indeed, where mobile micro-credit is available, limits are too low for customers to access enough funds to make even moderate investments in growing their business or extending their home. Micro-loans are also generally structured as monthly loans, creating a big mismatch between loan structure and being able to borrow to invest. In practice, this limits customers to borrowing mainly for household needs and emergencies, with micro-credit performing no more than a payday lending function rather than empowering people to make useful investments.
Considerable re-thinking of mobile credit facilities is therefore vital if they are to have a tangible impact on promoting economic development and reducing poverty. Similarly, more focus should be put on savings products, which have proven to be valuable. Along with product development, efforts are needed to improve product literacy. The simulation trainings being developed by Fundacion Capital to allow customers to practice using different products without making transfers or incurring fees have much experimentation potential and could be very instructive in this regard.
Adoption of mobile money has been the quickest adoption of technology in human history and, while early adopters tended to be urban, wealthier, and better educated, today poorer, rural users make up a substantial share of subscribers. More and more money is moved across mobile platforms between more and more customers every year. International remittances have also grown significantly and WorldRemit reports that international remittances now account for annual transfer flows to Africa that are four times that of aid. More of these transfers are being made directly to the person who needs it, and they are increasingly being done using mobile money.
Mobile money and other mobile products have made notable gains and continue to hold significant promise for greater financial inclusion. It’s apparent, however, that continued innovation and product re-design is vital if usage rates are to grow and mobile money’s potential is to be fully realized.