Will the real banks, please stand up?

The amazing growth and success of Safaricom’s M-Pesa mobile money transfer service has made Kenya a focal point of growing international interest in mobile commerce and sparked excitement over the transformative potential of mobile banking for unbanked populations around the world.

M-Pesa is certainly an impressive and innovative service applied to a very clear value proposition within Kenya, peer-to-peer money transfers.

But is Safaricom, or any other Mobile Network Operator (MNO) for that matter , the best positioned organisation to lead the m-banking revolution in Kenya?

Though Safaricom has some distinct advantages in the mobile money space, as financial regulations change to allow banking through agents, Kenya’s banks should realise that if they move quickly to embrace the new channels they have the potential to offer a more complete mobile banking solution than MNOs, at a lower cost.

Safaricom begins with some advantages. It controls 80 per cent of the 15 million mobile phone market in Kenya, along with much of the SMS and data infrastructure that mobile banking solutions rely on.

More significantly, the scale and continued growth of M-Pesa’s agent network, already approximately 10,000 strong, makes the service a powerful branchless banking tool and is perceived as a major barrier to entry to any competitors within the mobile money space.

More expensive
In comparison, the total number of ATMs in Kenya barely surpasses one thousand.

Yet this same agency system which serves as an intimidating barrier for new entrants may also allow non-MNO players the best opportunity to compete with M-Pesa.

The major challenge for M-Pesa’s agent network is cash management, especially in remote areas and Safaricom has largely transferred this burden on to their agents.

M-Pesa is predominantly used for domestic remittances and rural users tend to withdraw cash from agents significantly more than they make deposits.

Rural agents then become responsible for providing cash to a significant portion of their communities as people move away from less convenient or more costly money transfer systems.

At the same time, obtaining cash is likely to be more expensive for rural agents than for their urban counterparts, due to their remote location relative to bank branches or ATMs.

As research by Olga Morawczynski and CGAP is bringing to light, these agents are already strained by the need to supply the significant amount of cash sent via M-Pesa into their communities.

Servicing their clients requires frequent, time-consuming trips to the nearest bank branch, in the absence of which there will be regular service outages as M-Pesa users are forced to wait agents can replenish their cash balances from M-Pesa deposits or other business activities.

The problem of agent cash management would potentially afflict any organisation that attempted to create an m-banking or branchless banking service, but Safaricom is particularly ill-suited to solve these challenges.