On October 29th, CGAP’s Technology Program hosted a discussion with Vodafone’s Nick Hughes, who leads this global mobile network operator’s mobile banking efforts. Vodafone is one of the biggest mobile network operators with operations in 30 countries and over 250 million subscribers worldwide.

Vodafone has been expanding its operations in emerging markets. Safaricom, Vodafone’s network operator in Kenya, M-PESA was launched 18 months ago. Since this time, it has reached nearly four million people in a country with a population of 31 million people where just 5 million people have bank accounts.

Nick presented three key aspects of the M-PESA model….

M-PESA offers a very simple and secure customer proposition. Simple: The product that Vodafone piloted prior to formally launching M-PESA looked very different from the one they now offer to customers. This former product was much more complex, including features such as group lending models, group products, and treasurer accounts. During the pilot, they learned that much of this complexity had to be stripped away to meet a very specific, narrow demand from the customer: person to person money transfers.

In addition, the user experience has been simplified. There are no signing-up fees and no minimum balances to confuse the customer with hidden fees or conditions. M-PESA’s user interface is intuitive. It works on very basic handsets, and does not require a smart phone. Since 90% of the mobile phones in the Kenyan market are not smart phones, it was imperative that M-PESA work on the simple devices that customers already had.

Simply put, Vodafone has taken the business proposition which they know best, namely pay-as-you-go, high-volume mobile transactions, and has introduced this into the financial services space through the simple payment service of M-PESA.

Secure: Vodafone has also established a secure system that gives customers a sense of confidence. Transactions are completed within 15-30 seconds and customers receive an SMS confirmation that the money has been sent. Vodafone has a back-office system that tracks every transaction and makes it possible to correct any errors and respond to customer concerns. The entire platform is data-rich and transactions leave a long paper trail making the platform an unconducive place for money launderers to operate. Overall, M-PESA has high visibility and Vodafone realizes that trust must be at the heart of their business model.

M-PESA reaches customers through its network of agents. Safaricom has leveraged its existing retail distribution channels to serve as cash-in and cash-out points for M-PESA customers. In addition to this network, it has also signed up other retail stores that wish to include M-PESA services in their product offerings. Vodafone has properly aligned the incentives for these agents to participate, mainly through its commission payments for transactions, but also through benefits such as the increased foot traffic into their stores. With over 3,500 agents throughout the country, M-PESA’s presence has expanded into rural areas, increasing customer adoption.

During the Q&A discussion, a participant asked a question regarding the challenge for agents to manage their cash flow since deposits and withdrawals often do not match. Nick said that one initiative that addresses this problem establishes partnerships with those institutions that are receiving many of the payments in the village. Since customers tend to convert their M-PESA credit into cash to pay school fees, for example, the cash conversion can be avoided by enabling the schools to accept electronic school fee payments directly into a fund. Nick recognized, however, that there will always be operational challenges like these to confront.

M-PESA had the support of the Kenyan central bank from the start. According to Nick, the Kenyan central bank was open to discussions with Vodafone concerning its M-PESA project from the very beginning. Unlike some central banks in other countries, Kenya was willing to see how this new innovation would evolve. The central bank also liked the fact that Vodafone would not invest customer funds that were placed in M-PESA electronic wallets. Instead, Vodafone established a holding company that owns the accounts such that the float remains the property of the customers at all times. Because Vodafone did not become a deposit-taking institution, the central bank was more comfortable with its activities.

These three points summarize the broad lessons that Nick Hughes shared during his talk. There are many more details of M-PESA’s operations that were discussed, which you can view on the webcast archive. In conclusion, Nick stressed the point that M-PESA has been transformational because the technology itself is not what is driving the success. Instead, customer adoption and usage drive M-PESA and its use of technology.