Massimo Young Reports from Kenya: The Surprising Secret to Banking Success

My good friend Massimo Young recently moved to Kenya, where he is seeing what happens when you mix a little American ingenuity into a thriving but chaotic developing economy.  In what I hope is the first of many blog posts, Massimo reports on just what it takes to succeed in the banking industry in Kenya.  (Massimo does not have a financial interest in any of the companies discussed in his post, although he wishes he did!)

M-PESA: The Story of the Most Successful Bank in Kenya
By Massimo Young 

It’s not easy to do business in Kenya. Business people complain all the time that despite a wealth of opportunities, there are often major roadblocks to accomplishing much on the ground, especially at scale. In fact, Kenya ranks 121st out of 185 countries in the World Bank’s “Ease of Doing Business” survey.

On the other hand, there are some amazing examples in recent years of businesses that have managed to accomplish a lot very quickly. In particular, the wild success of mobile banking in Kenya has changed the way people use money here. Launched just 5 years ago, Kenya’s leading mobile money transfer service, M-PESA, now processes a total of about $5 billion in transactions per year, equivalent to an astounding 15% of the country’s GDP. Before it launched, only 14% of Kenyans participated in the formal banking sector. Today, about half the adult population uses M-PESA.

(Photo: Development Planning Unit University College London)

So what’s the secret to being the most successful bank in Kenya, where it’s supposedly so hard to do business? The answer is: not being a bank! M-PESA is not operated by one of the many domestic and international banks here, but rather by Kenya’s largest telecom, Safaricom.

At first, I thought the M-PESA story was a classic case of disruptive technology taking over an old-fashioned sector, like Netflix and Blockbuster. But talking to some people in the banking industry, I heard a different version of M-PESA’s success story – a story of monopoly, bad regulation, and government capture, producing a highly profitable but low-quality financial product and little competitive pressure to make it better.

Apparently, as mobile phone usage in Kenya began to skyrocket in the early 2000s, some banks started to offer mobile banking on mobile phones. But it didn’t work. Most of Kenya’s population lives in rural areas, and most bank branches are in cities, so there was no way for most people to conveniently deposit money. At the time, the only legal way for banks to reach these potential customers was to set up more branches, which was too costly. So mobile banking didn’t really take off.

Enter Safaricom. When M-PESA launched in 2007, Safaricom, which is partially owned by the telecom giant Vodafone, was far from a disruptive upstart. Rather, it had three enormous advantages over the banks, which it still has today. First, it had huge market share in Kenya. Second, it was not regulated as a bank. Third, it was 35% government-owned.

When M-PESA hit the market, Safaricom’s huge market share meant instant access to millions of customers. Monopoly power also allowed Safaricom to price out competitors with similar technology, like the banks, by charging them prohibitively high prices to do mobile banking on Safaricom phones. Most importantly, perhaps, was that because Safaricom was not a bank, it didn’t have to worry about bank regulations.  So to solve the problem of distribution, they outsourced deposit and withdrawal services to commissioned third-party agents who, in turn, could recruit sub-agents of their own. This proved to be a cheap way to set up tens of thousands of agents all over the country, making M-PESA a practical option for Kenya’s rural populations.

Of course the banking industry argued that Safaricom should be regulated as a bank– after all, it was performing basic banking services and investing users’ deposits. Instead, in 2010, when M-PESA already had about 15 million users, an amendment to Kenya’s Banking Act allowed banks to hire third-party agents. But unlike Safaricom agents, bank agents have to comply with a series of bank agent rules and be individually approved by the Central Bank of Kenya, which means it’s still pretty costly for banks to reach rural customers.  The banks are pushing to revise these rules and “level the playing field,” but for now, with over 45,000 M-PESA agents countrywide, M-PESA’s dominance seems untouchable.

In short, Safaricom figured out how to act like a bank without actually having to be a bank. By acting like a bank, they were able to serve customers who clearly demanded basic banking services. By not actually being a bank, they avoided the regulations that made it so hard for real banks to reach new customers. Monopoly power and government capture enabled them to maintain this advantage and keep competition low.

On the one hand, M-PESA is clearly a great achievement for the Kenyan consumer: millions of people who had no access to any kind of formal banking now perform basic banking services directly from their mobile phones. On the other hand, Safaricom’s near monopoly on mobile money means sky-high prices, little incentive to innovate, and a limited range of services to customers.  To transfer and withdraw the equivalent of a few dollars, users have to pay about 60 cents USD (higher amounts are cheaper but keep in mind that Kenya’s per capita income is about $850 per year). On top of that, M-PESA doesn’t offer much else besides transfers, like savings accounts with decent interest rates, loans, or insurance that a traditional financial services firm could provide.

M-PESA is an amazing example of a fast-growing and extremely successful business in Kenya, and it has inspired a whole slew of related businesses as well as a growing tech sector in the country. But the idiosyncrasies that led to its success make it seem like a tough feat to replicate, and perhaps not quite the engine of innovation it’s sometimes made out to be.


Imagine that . . . lack of burdensome government regulation leads to rapid innovation and huge success. Will wonders never cease.


Imagine that . . . lack of burdensome government regulation leads to "Safaricom’s near monopoly on mobile money means sky-high prices, little incentive to innovate, and a limited range of services to customers"

Ask the banks mentioned above if they think there is a lack of government regulation compared to the partially government owned non-bank.

Seminymous Coward

So PayPal isn't the only shady quasibank in the world?

Actually, I believe that US banking regulation has a similar problem even with the major banks, as they can select their regulator by tweaking their corporate structure and electing a different classification (e.g. bank holding company). Savings and loan associations also spring to mind.

On a similar regulation-à-la-carte note, there's also the FedEx vs. UPS & Teamsters squabble over FedEx's non-airline employees being regulated by the Railway (?!) Labor Act.

Extinct Species

I live in the Philippines and have often wondered why the phone service companies here don't offer a money transfer service. Money transfers are pervasive. Transferring load (credits) between phone numbers is done by text. And just about every store that sells sundries, they're everywhere, also sells load. The infrastructure is already in place and has been for years.

Even if regulations prevent the phone companies from offering the service it would be nearly impossible to prevent any of the businesses selling load from doing it. I've run the idea by a few Filipinos I know but it's value alludes them. Maybe I'm missing something.


In your Blog you said "– a story of monopoly, bad regulation, and government capture, producing a highly profitable but low-quality financial product and little competitive pressure to make it better."

Been living in Kenya all my life and Safaricom was actually not the first telco in the country... it was the second but had was able to beat its rival at the time Kencell(went to Celtel then Zain and now Airtel) ... It is now in a market with several other players all with mobile money transfer solutions.

Bad Regulation? I think its time the banks understood that traditional Banking is dead.. and they need to re think or be left behind.

you may also want to read this

Another Correction, M-PESA carries 33% of the countries GDP and not 15% as per the half financial results released by the company

M-PESA brought to the us what a convenience that we cannot leave without..Banks on the other hand perhaps due to control from mother companies away from Africa, or lack of understanding or perhaps the lack of an innovation culture in banks have just watched and done little to meet the needs that M-PESA addresses.



It seems odd that the author can describe M-Pesa as being a monopoly when the photograph that illustrates the article shows a shop that offers both M-Pesa and a competing service from another operator: airtel Money. The monopoly as described appears to be M-Pesa restricting third-party access to its network, surely a reasonable position for a business to adopt.
It also seems odd to claim that M-Pesa should be regulated as a bank and then complain later in the article that it doesn't provide its customers with any banking services apart from money transfer.
M-Pesa may be unpopular with the author's friends in the banking industry but it appears to be very popular with the Kenyan public.

Mondo Bandeenie

In the land of the blind, the one-eyed man is king

Ikingi Mbae

Great read here. I would like to add that has gone a notch higher to establish a banking and saving service called M-shwari. Deposits earn an average interest of 7.5% p.a. Customers can access loans of upto USD 2500 payable within a month. This has revolutionized the industry for good. As Masimo noted the penetration of formal banking is still low thus credit and debit cards are less successfully here. M-pesa has now launched Lipa Na M-pesa to pay for goods and services. Uber launched here a few days ago and going by it's business model charges clients from credit cards. However, they might succeed once they integrate M-pesa into their payment systems.