The End of the Beginning: Kenya’s M-PESA Revolution Enters a New Phase

Starting as a simple tool to transfer money and buy airtime via text messages, Safaricom’s M-PESA ushered in a financial revolution that took all of East Africa by storm. The service has transformed into Kenya’s financial backbone with 59% of the country’s GDP flowing through it, unlocking financial services for millions along the way. Consequently, the refrain "Lipa na M-PESA" – Pay with M-PESA – has become ubiquitous, seen everywhere from coastal markets in Diani to homesteads in Turkana.

Now in its adolescence, Kenya’s mobile money miracle is at an inflection point. Safaricom commands the lion’s share of the market, empowering the company to charge high transaction fees and leverage its position to partner with potential competitors. This has reduced investment into Kenya’s fintech industry, produced a systemic vulnerability for the Kenyan economy and encouraged Kenyans sending money back home to turn to cryptocurrencies. As M-PESA approaches its 20th birthday and enters a new era, it’s worth reflecting on the network’s evolution from an experiment to an example.

The Origins of Mobile Money

Mobile money networks in East Africa were born out of necessity. The mission was to provide financial services to millions of people with no access to traditional banking services. It’s a ‘leapfrog technology’, an invention that takes hold because other alternatives are poorly developed.

This game-changer’s origins date all the way back to 2002 when researchers found that phone companies in Sub-Saharan Africa had unintentionally created a currency amongst their users. Customers were purchasing and reselling “airtime” – phone data or minutes – sending it to relatives and even using it as a store of value. It was safer than carrying cash around and more convenient than the banking system as airtime vendors were almost everywhere – there are now more than 100 times as many as many M-PESA agents as there are bank branches in Kenya.

Following this enlightenment, Vodafone was successful in obtaining a grant of £1m from the United Kingdom’s Department for International Development, provided they matched this investment. This came after winning the organisation’s Financial Deepening Challenge Fund competition. A pilot programme soon followed in 2005, enabling micro-finance borrowers to receive and repay loans using Safaricom’s network –  Vodafone and Vodacom, at present, collectively own 40% of the company. However, customers extended their use of the service to substitute for the financial institutions they did not have access to, utilising M-PESA as a safe, low-friction and low-cost means of transferring money.

Consequently, the platform was reconfigured as a mobile phone-based money transfer service. After obtaining clearance from the Central Bank of Kenya (CBK), the programme launched as M-PESA in March 2007 and as they say, the rest is history.

Mobile Money Magic

It is truly difficult to overstate the impact of M-PESA in Kenya. The service is at the heart of financial inclusion in Kenya. A year prior to its launch, a survey by Financial Sector Deepening (FSD) Kenya found that less than 20% of Kenyans had a bank account. Today, the network boasts more than 66 million users and over KSh 8 trillion in transaction volume, as the number of M-PESA accounts has surpassed the country’s population.

Furthermore, the links between increased financial inclusion and long-term economic growth cannot be overlooked. Mobile money networks cumulatively contributed up to 8.6% of Kenya’s GDP in 2023, amounting to $24 billion. This is similar to the total output of the country’s manufacturing and real estate sectors, respectively. The service has also evolved into an important source of tax revenue for the Kenyan government, generating over $320m through excise duties.

Safaricom’s extensive network of over 160,000 M-PESA agents scattered throughout the country have extended the benefits of this financial system. The results have been a significant increase in living standards with a Massachusetts Institute of Technology (MIT) study finding 2% of Kenyan households have been lifted out of extreme poverty.

Growth in M-PESA has been accompanied by an expansion in the number of financial products offered. These services have enabled Safaricom to increase their average revenue per user (ARPU) and leverage their biggest asset, their extensive customer base, further. In 2013, the savings and loans service, M-Shwari – meaning ‘calm’ in Swahili –, was launched.  This enables users to save as little as one Kenyan shilling, earning just over six percent per annum; and access loans ranging from KSh 1,000 up to KSh 1 million, with an interest rate of nine percent.

Other notable services include Lipa Kodi – meaning ‘pay your rent’ in Swahili, which allows property owners to collect rent at no cost, and Fuliza – meaning ‘continuously flowing’ in Swahili –, an overdraft service that allows customers to complete transactions with insufficient funds. The scheme disbursed over $6.4 billion in 23/24 financial year.

M-PESA’s position as a model to emulate is a testament to its success. The system inspired MTN’s MOMO network in Rwanda and Uganda, with its influence felt as far away as Afghanistan where Vodafone helped launch M-Paisa. Safaricom itself has ventured into Tanzania, Ethiopia and Ghana.

M-PESA Monopoly

A cornerstone of Safaricom’s success has been their brilliant translation of their massive telecommunications customer base into financial services. By leveraging their dominant position, the company has created a moat in the market. As of December 2024, the company commands 92% of the market with its competitors, Airtel Money and T-Kash, making up the remaining 8%.

Potential competitors have little incentive to go against them, allowing the company to enjoy a plethora of partnerships. From domestic banks such as Kenya Commercial Bank (KCB) to multi-national giants such as Western Union, Visa and MoneyGram. However, this has also stifled investment into Kenyan fintechs, with the country securing only 8% of capital invested into African fintechs, compared to South Africa’s 20% and Egypt’s 16%. M-PESA’s grip on the market creates a formidable barrier to competition, deterring investors from financing new entrants to the market.

As a result, Safaricom enjoys considerable pricing power. For instance, in a bid to gain market share, Airtel Money cut transaction charges within its network to zero as well as offering lower withdrawal and cross-network fees. These changes enabled the company to double their market share from 3% to 7.6%. Safaricom responded with an increase to withdrawal fees, underscoring the company’s market dominance.

Safaricom is also actively maintaining the status quo by dragging its feet on directives such as the CBK’s 2022 plan to open up agent networks to all platforms. Three years later,there has been no progress. Here, we must note that the Government of Kenya retains a 35% stake in Safaricom, so it has a vested interest in the company’s performance.

Growing Pains

Kenya now finds itself at a critical regulatory juncture, where policy decision will determine whether the mobile money ecosystem remains a monopolistic enclave or evolves into a competitive marketplace.Current regulations focus primarily on transaction limits and anti-money laundering provisions. However, they have largely failed to address the need for structural changes such as interoperability between all operators.

In 2016, Treasury officials considered the question: What would happen if the M-PESA service collapsed? In 2019, they got their answer. An outage lasting five hours was estimated to have cost the economy billions with ripple effects across the economy. Agents and businesses lost revenue as people were left unable to pay their bills, highlighting the network’s systemic importance.

Regulators may find instructive models among other developing countries. India’s Unified Payments Interface (UPI) system provides public infrastructure that acts as a foundation for innovation. It has fostered an ecosystem of over 12,000 fintech companies while keeping costs for consumers near zero. Ghana’s GhIPSS system uses the central switch model promoting competition and maintaining system stability.

These systems decrease transaction costs while promoting further financial inclusion by improving network coverage in underserved areas. They also present the added benefit of streamlining regional integration efforts such as the East African Payments Systems Masterplan.

Potential Disruptors

Cryptocurrencies loom as potential disruptors to the established order. The adoption of cryptocurrencies and stable coins such as Tether, also known as USDT which is pegged to the dollar, has quietly accelerated. Specifically in the remittances market, as it is 90% cheaper than using traditional financial services and even mobile money networks. With Kenyans in the US sending about $3 billion annual in remittances, Tether has become increasingly popular and is now the most popular coin in the country and the wider East African region.

Conclusion

Kenya’s M-Pesa miracle is at a crossroads. The choice lies between fortifying its position and laying the foundation for the country’s next financial revolution. The system that brought millions into the financial fold has the opportunity to go a step further and become a platform for the possibilities of tomorrow. True financial inclusion requires not just access but options and opportunity. Just as sharks must keep swimming to stay alive, financial systems must keep innovating to remain relevant and inclusive.