We’re all familiar with the mobile phone as a digital technology because of the incredibly high level of global penetration that it has achieved. By definition, Disruptive Innovations should democritise offerings, taking products and services that historically have only been available to a privileged subpopulation and making them available to the masses. This gives the mobile great potential as a vector of disruptive digital innovation; potential that has come to fruition in the financial sector.
Microfinance is the provision of financial services to individuals and businesses that lack access to traditional banking and related services. When successful it is a disruptive innovation and improves financial inclusion, acting to assuage the global social ailment that access to financial services is extremely heterogeneous. Tackling this inequality is a high priority as it fundamental to the ability of individuals to be able to establish economic stability and prosperity, for example having access to credit to for business ventures or safe storage of money. In addition we also very commonly see intersections of a lack of financial inclusion with other preeminent issues of equality, such as gender and race. Could mobile phones then, with their great global proliferation, offer an opportunity to provide solutions?
Kenya in 2006 was a country with dire financial inclusion, with an estimated 90% of its population unbanked (Claessens. 2006). Yet the country had a very high mobile phone penetration and low regulatory barriers around the activities Mobile Network Operators (MNOs) were able to utilise their networks for. As a result, one of the largest success stories of financial inclusion stems not form a financial institution but from an MNO who recognised this need and opportunity in Kenya, Vodafone.
In March 2007 Vodafone launched M-PESA in Kenya as a Corporate Social Responsibility (CSR) project, aimed primarily on boosting reputation and not expected to deliver any commercial benefit. Today M-PESA is a strikingly successful and profitable business in its own right, which has unexpectedly disrupted the domestic finance industry. What made M-PESA so successful and will we see something similar sweeping financial markets across the globe?
The first of 2 key components to M-PESA’s success as a disruptive innovation was the democritisation of its service. It was made as accessible as possible by the implementation of technology that can work well on any mobile phone. The M-PESA applications were on the SIM card and were not reliant on the functionality of handsets, an important factor in a country with very low smart phone penetration. Furthermore anyone was able to receive money through the service, regardless of the MNO operating their SIM card.
The specific MNO that Vodafone partnered with to deliver the full service was Safaricom. With Safaricom being far and away the leading telecoms provider in Kenya this too was a driver of inclusivity. Safaricom also had nationwide network of airtime resellers that Vodafone used as M-PESA agents, taking cash from customers and topping up the equivalent amount in e-money on their M-PESA accounts (or vice versa). This network of agents grew to include other merchants, such as convenience stores and petrol stations, growing exponentially. By January 2009 the number of agents exceeded 7,000, whereas the country had a total of 750 bank branches (Barrett. 2011).
Finally, Vodafone collaborated with the Commercial Bank of Africa (CBA) to integrate the telecoms infrastructure of Safaricom, over which the information of requested financial transactions was transmitted, with a banking infrastructure legally and technically capable of carrying out the transactions themselves. These transactions occurred between bank accounts opened with the CBA for newly registered M-PESA users, and it was in opening these accounts, and the subsequent provision of financial services for the previously unbanked, that financial inclusion was improved.
The second key component of M-PESA’s disruptive success was an Open Innovation (Chesborough. 2003) and value co-creation (Vargo. 2008) approach to the provision of their service. The deployment of the M-PESA service initially involved a long pilot. This allowed the users of the service to communicate what was actually valuable to them in use, shaping its final form.
When financial inclusion was first acknowledged as an important societal problem, the focus was heavily on microcredit, the provision of credit to those typically unserved by financial institutions in order to aid their cash flow and also allow them to invest in ventures with growth potential. Microcredit, although potentially disruptive due to the vast number of the world’s population currently unserved (‘the value at the bottom of the pyramid’) posed a sort of Innovator’s Dilemma: Going ‘down market’ to serve this potentially vast pool of customers conferred challenges in generating profit. Crediting such small values to individuals typically resulted in a very low marginal profit (Average Return Per User levels) due to transaction and operating costs being so large comparative to loan size and also a high susceptibility to rates of inflation. Additionally, it was often assumed that recipients of microcredit needed more extensive monitoring and interaction with loan officers to ensure efficient use of funding and repayment of loans.
Vodafone too entered their CSR project with an a priori focus on microcredit, even partnering with Kenyan microloans company Faulu, and no expectation of profit. However, the pilot stage allowed them to view what end users were actually doing with the service; People were depositing more money than they needed to repay loans and even depositing money at one agency store only to withdraw it a few hours later at another agency store in a different location. In Kenya there is a large ‘send money home’ culture with a large flow of urban-to-rural remittances and people were using M-PESA deposits as a safer alternative to traveling with physical cash. Soon, thanks to the innovation of the end users, it became clear that the real customer need was not microcredit but in peer-to-peer (P2P) money transfer.
Finally, M-PESA stimulated innovation of their service by their network of agents by giving agents relative autonomy in what services they provided and incentivising them with commission for registering new M-PESA customers. Eventually this Open Innovation led to M-PESA being used for a myriad of services including C2B payments, ATM cash withdrawal and even the payment of salaries.
The M-PESA success story in Kenya is one of the mobile phone being used for a plethora of applications and helping financial inclusion. Increasingly however mobiles are being used as a platform for a vast range of applications and further articles in the series will consider how they could further disrupt financial industries in both developing and more developed countries.
Outside of finance, in other verticals such as healthcare, companies are utilising mobile phones to democritise the provision of care, such as SimPrints using the digital technology for the effective storage of, and access to, healthcare records in Bangladesh.