The Next Step: How Mobile Money Could (Rightly) Supersede the Government

October 16, 2012 Newspapers hail it as a life-changing tool. The UN named it a potential accelerator on the path towards the Millennium Development Goals. Customers everywhere use it. By now, most everyone should have gotten the message: mobile money – the use of a mobile device to transfer, deposit or withdraw funds - is big. Just how big exactly though, we might not even imagine.

Mobile money has made an enormous impact as a financial inclusion gadget, particularly in Sub-Saharan Africa. Due to their informal status, many urban dwellers do not qualify to open a bank account. E-money enables them to obviate the bank altogether without having to hide cash under their mattresses or travel long distances to transfer money. It has been so good at including marginalized populations into the financial system in fact that philanthropic funds and multi-lateral organizations hastened to open up their generous funds to them. Through the Mobile Money for the Unbanked program, Bill and Melinda Gates now proudly award grants towards the expansion of mobile banking.

But the "unbanked" are not mere consumers of mobile money, Bill Maurer, Professor of Anthropology at UCIrvine, argued at the Territories of Poverty conference on September 15th 2012 at UCBerkeley.

"The poor need to be seen as monetary innovators, not just the targets of development," he said during a panel discussion titled “Geographies of Penality and Risk.”

Poor people, he argued in a recent paper published in the Journal of Development Studies, have adapted mobile money as a system for value transfer and storage, but they have also modified it to serve as a system for saving and, as of recently, payment. Airtime, the amount of minutes or text messages that can be purchased for a prepaid cell phone, not only enables communication but also acts as a currency to purchases a commodity.

Essentially this means that users of mobile money have literally succeeded in creating an alternative currency—they no longer need cash. Predicting the replacement of the official governmental monetary system, cash, with unregulated mobile money might seem astonishing in the academic setting. In the field, it is quite simply nuts. I decided to chat to my friend Freddie about it.

I met Freddie when I first went to the Mecca of mobile banking, Kenya, in 2010. This is where mobile money really took off. M-PESA (“M” for mobile, and “Pesa” for “money” in KiSwahili), a mobile banking service provided by Safaricom, went from zero to two million in two years following its launch in 2007, double the customer target for that time period. M-PESA's successful idea spread all over the world: Wizzit in South Africa, M-Sente in Uganda and Eko in India, among others, offer similar services.

Freddie is a tall, quiet 25-year old from the Western part of Kenya. He moved to Nairobi eight years ago and has been working as a guide and reporter for Voice of Kibera. “All my family and friends use M-PESA,” he answered when I wrote to him the other day, "because it is the fastest way to send money across the country." And the safest way too.

"There has been a trend lately in Nairobi of thugs hijacking you, taking you to the ATM and forcing you to withdraw money," he said. "But if my phone is robbed, my account is not affected."

Freddie himself has been on M-PESA since he moved to the city. A lot of people he knows pay their bills though M-PESA, anything from water, electricity and hospital bills to school fees and traffic tickets. Freddie mostly uses it to pay for his Tuskers when he runs out of cash at the end of the night.

Freddie also told me that banks have been complaining. Even Kenyans who had access to banks are using M-PESA. According to the World Bank, 93% of Kenyans use mobile phones and 73% are mobile money customers. In 2011, a quarter of Kenya's GDP moved through M-PESA, a share most likely to have grown even more by now.

What happens when so much money moves into the uncontrolled mobile market and what is the role of the state in this new money system? The active modification of mobile banking to mobile saving to mobile payment has brought with it regulatory concerns.

M-PESA does not provide security in case of financial default, reimbursement in case of fraud or interest for saving money. And yes, the national bank system would be weakened. According to the Wall Street Journal, the World Bank has actually issued a warning about "the way payment systems are developing."

Strategies such as mandatory limits on the mobile balance to avoid money laundering and risky defaults as well as partnerships with commercial banks are beginning to counter these concerns, though they do not, of course, replace the regulatory power of a government. But maybe the free market should be left to do its magic in this particular case. When governments fail to provide necessary services, new and affordable free-market technologies are a great alternative--at least for the time being.

"M-PESA is rocking," Freddie wrote to me in his last email. I could not agree more.

Christina Gossmann is a Master in City Planning student at UCBerkeley interested in the interaction of technology and media in the urban space. Check out her blog