The Potential of Opening Up a Proprietary Platform: the Case for M-Pesa
I had the opportunity to travel to Nairobi where I spoke at a conference, and took advantage to experience firsthand the power of the ubiquitous M-Pesa local electronic payment system. M-Pesa is a mobile phone-based money transfer service that allows users to store, send and receive money on their mobile phones. Launched in 2007 by Safaricom, the largest mobile network operator in Kenya, it has become a dominant player in Kenya's economy, with over 40 million customers. It offers an important way for the population of Kenya to have access to financial services, especially for those who are unbanked or underbanked, and has become over the years a viable alternative to cash.
Every business, small or large, accepts M-Pesa in Kenya
M-Pesa has helped to increase financial inclusion in Kenya by providing access to basic financial services to people who don’t have a bank account, and were previously excluded from the formal financial system. M-Pesa has enabled Kenyans to send and receive money, pay bills, purchase goods and services, all through their mobile phones. This has helped to reduce financial exclusion and improve the living standards of millions of Kenyans. It has reduced the need for physical travel and cash-based transactions, helping to save time, simplifying and reducing transaction costs for users, particularly in rural areas. This in turn has promoted entrepreneurship and economic growth in the country.
M-Pesa has also contributed to improved transparency and accountability in financial transactions, by providing a digital record.
However, M-Pesa is also a proprietary system that operates on a closed platform controlled by Safaricom. This means that its users cannot easily interact with other electronic payment systems or access new products and services that could enhance their financial inclusion and empowerment. Moreover, M-Pesa faces increasing competition from other players in the market who offer lower fees, greater convenience, higher security and more innovation.
By shouldering the development and marketing costs, Safaricom was able to create a dominant position in the market and secure a loyal user base. However, this approach has also limited the growth of the service in other markets and has increased operational costs, which can be passed on to users in the form of higher transaction fees. M-Pesa is facing significant regulatory challenges in Kenya, particularly in relation to the Central Bank of Kenya's requirements for mobile money operators. The regulations have limited M-Pesa's ability to innovate and expand its services.
While M-Pesa's success in Kenya was in large part due to its relationship with Safaricom, its creator and the largest national mobile operator, and Equity Bank, its banking partner, it has struggled to form similar partnerships in other markets.
Financial inclusion in practice: buying sugarcane for 70 Kenyan Shillings (equivalent to 50 cents) in a Nairobi slum, paying with M-Pesa.
As M-Pesa faces increasing competition and regulatory challenges, it may need to consider new approaches to remain competitive and expand its user base. One potential approach is to transition to an open blockchain-based platform, managed by a foundation.
There are examples of transitions from proprietary to open platforms that could provide some insights and lessons for M-Pesa. One example of a successful transition is Android, which started as a proprietary mobile operating system developed by Google, but later opened up its platform, allowing device manufacturers to adopt and modify it. This enabled Android to become the most popular and widely used mobile operating system in the world, with over 3 billion active devices.
An open blockchain-based platform could enable M-Pesa to build an ecosystem that generates economic opportunities beyond those of the current system, allowing for greater interoperability with other mobile money services, increasing the usefulness of the service. The blockchain technology could provide enhanced security and transparency for transactions, which could help to address trust and security issues, both in Kenya, and in other countries in Africa and beyond.
The open platform would create new opportunities with a greater variety of services and products developed by third parties, which could drive economic growth and job creation.
Transforming Mpesa into an open platform based on blockchain technology also poses challenges. Blockchain technology is still a nascent and evolving field that requires high levels of technical expertise, infrastructure and resources to implement effectively. Moreover, blockchain platforms face scalability issues that limit their ability to handle large volumes of transactions or users. Blockchain technology operates in a decentralized manner that challenges the existing regulatory frameworks and authorities that govern electronic payment systems.
Introducing new concepts, terminologies and functionalities that may be unfamiliar or confusing for many M-Pesa users who are used to a simple and intuitive interface, blockchain platforms may require users to change their behavior or preferences, and need extensive educational efforts to be accepted.
Overall, M-Pesa's future in Kenya and other markets will depend on its ability to continue to innovate and adapt to the changing landscape of mobile money services. As M-Pesa evolves, it will be important to maintain its commitment to financial inclusion and to build a platform that is secure, transparent, and accessible to all.
