M-PESA: the Black Swan of Mobile Money?

a black swan

“A Black Swan … is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

– Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, in the New York Times

M-PESA: the Black Swan of Mobile Money?

Lately I have wondered whether the rise and stunning success of M-PESA is a Black Swan. M-PESA, a mobile money transfer service developed by/for Safaricom of Kenya, was launched in 2007 and has seen staggering growth. Much has been written about M-PESA and equivalent services worldwide (a search for M-PESA at CGAP yields a treasure-trove of articles). None of the launched services appear to rival M-PESA in growth, even in countries with similar target demographics (Tanzania, next-door to Kenya, isn’t doing so well with M-PESA).

Let Sleeping Dogs Lie

While there doubtless are many factors explaning the M-PESA phenomenon in Kenya, the implicit expectation always seems to be that it is just a matter of time before a similar service somewhere replicates M-PESA’s success in Kenya.

I’m not so sure anymore. Here’s why.

With M-PESA’s success in mind, and its implications for a country’s financial institutions, regulators (hardly known to be trend-setters) are unlikely to approve a service with as much leeway as Safaricom had with M-PESA.

Being the first to market what was essentially an outlier, Safaricom in effect escaped the regulators’ scrutiny in the early stages of M-PESA. Infact, once M-PESA’s success came to the attention of Kenya’s banking community and to the Central Bank, they tried regulating M-PESA in a way that would have, at the very least, hampered its growth. Here’s an illuminating quote from Kenya’s Daily Nation:

Bankers are up in arms over the revolutionary innovation. They have complained that cellphone companies are operating bank accounts outside of any regulations.

“Money transfer on the cellphone is a great idea,” John Wanyela, an executive director of the Kenya Bankers Association, told the Sunday Nation.

“But you do not allow innovation to outsmart regulation….[It] has broadened access to the unbanked, especially those in rural areas. We can’t do what they (mobile phone service providers) do. All we are asking for is a level playing ground.”

Banks have put the Central Bank of Kenya on the spot, demanding to know what laws allow telecommunication companies to offer money services, saying Zain and Safaricom are invading their domain without much regulation, while they continue to operate under the stringent rules of the Banking Act.

The appropriateness of the regulation isn’t my focus in this post, rather it is the effect of the regulation (appropriate or not) on the growth of M-PESA and similar services.

It is unlikely, so it appears at this moment, that regulators in other countries would give any company such leeway. It is also unlikely that financial institutions, with a lot to loose from an M-PESA clone, would sit tight and hope for the best. What is more likely is that constraints, whether the result of banking-industry lobbying or well-conceived government policy, will be placed on any such services.

MTN’s Mobile Money in Ghana

The latest launch of a mobile money service in Africa, in this case Ghana, bears out my theory (Appfrica has more details). The MTN service, which has seen slow uptake, seems hamstrung by rules and regulations forced on it by banks and regulators in Ghana.

From the Appfrica article, MTN’s Mobile Money seems to burden merchants and customers in ways that Safaricom’s M-PESA does not. With MTN’s system:

• customers need ID to perform *any* transaction
• merchants are required to have a specific handset for customer registration (something Kenya’s Zain (then known as Celtel) tried and failed with Sokotele, its earlier attempt at mobile money (Zap is Zain’s current money transfer service).
• customers have to sign for every transaction
• merchants need a bank account from participating banks
• the growth of the money-transfer network depends on banks expanding and accepting more merchants

Part of the reason for M-PESA’s runaway success has been its relative simplicity and lack of constraints, from the merchant/customer perspective. Fraud levels are somehow, and curiously, kept to a “manageable” level (if the lack of public outcry from Kenyans is anything to go by).

White Swans Galore

Sadly, it appears that M-PESA was an anomaly that won’t be replicated elsewhere anytime soon.

M-PESA succeeded, it appears, largely because there was no precedent, and hence little legislation standing in the way.

Perhaps regulators ought to factor this into their deliberations.