Each week, Bloomberg Businessweek asks a different economist to recommend one good paper—research, new or old, that should be on our reading list. In this first installment, Bill Maurer, an anthropological economist at the University of California at Irvine, chose Mobile Money, More Freedom? (PDF) by Kevin Donovan of the University of Cape Town.
Since its launch in Kenya in 2007, M-PESA has emerged as a standard for mobile money in developing markets. The service, developed by Safaricom, Kenya’s dominant mobile carrier, allows customers to pay hard cash to a physical agent in return for a code. The code can then be given to one of 20,000 Safaricom agents anywhere else in the country, and redeemed again for cash. And by 2011, four years after launch, a little more than one in three Kenyans had registered an account.
Development experts and media outlets, this magazine among them, celebrate M-PESA as a home-built idea, a commercial operation that provides desperately needed financial tools for the poor. At first, it allowed Kenya’s internal migrants to move earnings from Nairobi out to the country. Then businesses started accepting M-PESA as a way to pay bills. Some Kenyans use it as an informal savings account. Now Vodafone, which owns Safaricom, is building on M-PESA’s success in Kenya by piloting M-PESA in India, as well. Bill Maurer, who runs the Institute for Money, Technology and Financial Inclusion at University of California, Irvine, is impressed by the innovation that surrounds the service. “But gosh,” he says, “wouldn’t it be great if there was a competitor?”
Safaricom’s success with its service, says Maurer, has made it a little like Facebook, or Google—a for-profit company that has become a kind of utility. The more ubiquitous it becomes, the more useful it is. And the more temptation it might feel to abuse its power. Academics in the developed world focus on the potential that mobile money offers for economic growth, says Maurer, but fail to see basic concerns about the dangers of giving too much power to any single network. “That’s harder for us to see over here,” he says, “where we’re given over to the gods of Facebook and Google.”
Maurer recommends Mobile Money, More Freedom?, a 2012 paper in the International Journal of Communications by Kevin Donovan, an American on a Fulbright Scholarship at the University of Cape Town in South Africa. (And who has received a grant from Maurer’s institute.) Donovan, looking at the research around M-PESA, describes a trade-off. He points to the work of Amartya Sen, a Nobel-Prize winning economist who described economic development as a way to give people the freedom to make choices. If that’s true, writes Donovan, Kenyans now have the freedom to spend less on money transfers, and they have the freedom to avoid the danger of carrying too much cash. But they don’t have the freedom to choose a mobile money service that’s not M-PESA. And it’s possible that, in the near future, M-PESA may become money in Kenya.
Safaricom didn’t invent mobile money transfers. It noticed them. In 2006, anthropologists in Kenya, Uganda, and Congo saw that mobile phone customers were using minutes as currency, buying them in one place and texting them somewhere else to be redeemed, with the local mobile agent taking a cut. Safaricom formalized this process and made a crucial change. Where informal minute-texting will work on any network, Safaricom embedded the software for M-PESA right on its SIM cards. The mobile phone service and the mobile money service sit on the same chip, much in the same way Microsoft made Internet Explorer the default browser on Windows. In competitive developing markets, locking someone into a mobile money service is a way to keep them as a phone customer, too.
Now M-PESA encourages mobile payment recipients to sign up by offering discounts for transfers among customers. In addition to the M-PESA agents, as of early 2011 more than 400 companies and government agencies were using M-PESA to pay bills or salaries. From Donovan’s paper:
Because that critical mass is unlikely to be reached by other financial providers, many organizational users are attracted to the M-PESA standard in large part because of the size of the network it unites. … adoption has been, and is increasingly being, driven by the size of the M-PESA network relative to alternatives.
In other words, once you have become the largest network, there’s less incentive for you to be the best. Donovan points to research in which a senior manager of a Kenyan bank describes Safaricom as “a bully that dictates all terms.” The bank joined anyway. It had little choice.
Safaricom did not respond to a request for comment.
To be clear: any abuse of market position by Safaricom is so far just a possibility, not a reality. Maurer recommends the paper as a warning, not a policy prescription. “I think you don’t hold up progress … but you do proceed with your eyes wide open.” He’d hate to have regulators so scared of network power that they give up on private innovation. Poorer Kenyans can move money cheaply now because of M-PESA. They can save small amounts without stuffing cash in a jar, and they can pay bills without being robbed of their cash. Safaricom has provided a real solution to real problems.
But experience shows that when a network reaches a certain size, it forgets how to be good. Microsoft, Google, and Facebook have all had run-ins with the U.S. Federal Trade Commission and with regulators in Europe. Vodafone is launching M-PESA in India as a for-profit service and, most likely, to reduce what mobile phone companies refer to as “churn”—customers’ inconvenient tendency to move to other providers. “My concerns are hypothetical,” says Maurer, “but let me give you an analogy. The U.S. government has taken Visa and MasterCard to court repeatedly over things like anti-competitive behavior. So we’ve been there before.”