SUMMARY
Kenya’s M-Pesa platform can be the blueprint for India’s rural fintech adoption challenges
Only 5% of India’s population used a mobile phone or internet to access bank accounts, in comparison to Kenya’s 32%
Improved internet and telecom coverage, along with on-ground agents drove the success of M-Pesa
When you compare India to most African countries, one would assume that India is leading on most technology fronts. In fact, India’s Unified Payments Interface (UPI) is heralded as one of the biggest fintech success stories in the world. But India’s biggest problem is its sheer size and the depth of its civic structures which makes fintech adoption in rural areas much harder than in most other countries. In this case, perhaps India needs to take inspiration from initiatives that have worked in other such developing economies.
For a long time, countries in Africa have also struggled with similar problems of reach and access due to the wide disparity in rural and urban development. The notion that African nations will continue to struggle — with socio-economic issues ranging from poverty to disease outbreak due to poor healthcare — is being increasingly challenged by innovation in economies such as Kenya.
Not many may know about M-Pesa in the global context, but this Kenyan fintech innovation has changed the game in its home country and laid the roadmap for other countries in the continent. Such has been the impact of M-Pesa in Kenya, that it has increased access to essential government services from 20% of the population to 90%. As of 2018 M-Pesa claims over 20.5 Mn active users along with 156K registered merchants.
The East African nation has a GDP (PPP) of $164 Bn, which is 58x lower than India’s ($9.59 Tn), but the average mobile internet speed in Kenya (16.26 Mbps) is 47.55% higher than India’s 11.02 Mbps average speed. In addition to this, 23% of the rural population of Kenya had used the internet to pay bills, in comparison to just 2% in India, as per a study published by the World Bank.
The higher utility of fintech products among rural Kenyans in comparison to India indicates deeper penetration in Kenya, which should be a matter of concern for India and the fintech ecosystem here.
One can argue that the relatively larger population of India in comparison to Kenya — 27x higher than Kenya — means it’s easier to get the desired fintech adoption in Kenya. But that cannot explain how Kenya despite its poor socio-economic conditions, which are far worse than India, has managed to achieve what is sorely lacking in India. The answer to overcoming the socio-economic barriers is the collaborative public-private approach between telecom company Vodafone and the Government of Kenya. This was the key to making M-Pesa a success.
Why Kenyans Adopted M-Pesa Amass?
The employment market in Kenya is very similar to India, driven by the migration of the rural workforce to cities for job opportunities. In both countries, the migration of rural workforce to urban areas can be attributed to the big wage gap in urban and rural employment.
M-Pesa was initially launched as a digital micro lending product in the industrial town of Thika. The platform made it easier for those who received a loan in the cities to send the amount back to their families in rural areas. This is largely down to Kenya having a similar problem as India — the unavailability of formal financial institutions in rural and semi-urban regions and the high cost of financial services in the country.
When M-Pesa saw how the platform was providing utility to the early adopters, Vodafone quickly pivoted into the mobile payments space and launch a version of M-Pesa dedicated to the same.
In order to make M-Pesa a success story in Kenya, a 360-degree financial ecosystem was created through a partnership between Safaricom and Vodafone Kenya. This was created through a number of changes on the ground and in the infrastructure.
Telecom And Internet Coverage
Since M-Pesa requires a stable internet connection to run seamlessly, establishing telecom and internet infrastructure was the key. Safaricom being a publicly listed telecom service provider with 71.9% of market share was the key in establishing a sustainable fintech ecosystem in the country which helped in scaling up the product in the future.
On-Ground Agents
Kenya being a largely lower middle-income economy had its challenges in terms of tech readiness of rural people to use digital payments. To tackle, a network of registered M-Pesa agents were onboarded aggressively, designated to act as the “bank branch” in every nook and corner of Kenya.
They acted as a point of settlement whenever someone wanted to deposit cash in their M-Pesa account or withdraw it as cash. Since 2014, the number of registered agents on the M-Pesa platform has a CAGR of 17.79%. The presence of an agent at the point of settlement helped novice fintech adopters overcome their fears and acted as a catalyst in building the brand value of M-Pesa.
Merchant Value Chain
Payment platforms are only successful when you can use them seamlessly for daily transactions. In order to maximise the value of digital money on the M-Pesa platform, the utility of the digital currency was needed to be increased. This was achieved by making M-Pesa products accepted across a wide range of merchants in Kenya. As of 2018, the total registered merchants on M-Pesa platform was 101K, which is a surge of 2.32x from the 43.6K merchants in 2016.
The collaborative approach taken up by the government of Kenya and Vodafone had a deep positive impact on the overall economy of the country — a study by MIT concluded that mobile payments in Kenya increased per capita consumption of around 194K people (approximately 2% of total households) who were living under an income below $1.25 a day, lifting them out of extreme poverty.
After studying the factors that have made M-Pesa a success in Kenya with a per capita income of $3,250, compared to India’s $7,060, it’s clear that a collaborative effort is what will deliver the results in the Indian context too. A consumer-centric, collaborative approach involving the government, private companies and startups can actually have a substantial impact on the overall economic growth, as the Kenya example proves.
This brings us to an important question — despite having more than 604 Mn internet subscribers out of which 35.26% (213 Mn) are rural subscribers, why is fintech adoption in India only limited to the urban and tech-savvy audience?
Can India Replicate M-Pesa Success?
India cannot ape Kenya’s success by simply copying what it did, given that M-Pesa in Kenya had a first mover advantage, whereas India already has many fintech players these days.
The total fintech market size in India is estimated to reach $2.4 Bn by 2020, driven by the rise of startups — from 2014 to Q1 2019, a total of $7.78 Bn was invested in fintech startups in the country across 513 deals.
However, despite, players like Paytm, the Indian mobile wallet which processes over 400 Mn transactions every month and many other startups working towards improving financial inclusion in the country, the adoption of fintech products in the rural and semi-urban regions of India is still lagging. And this is dragging down fintech growth prospects.
The leading factors for the slow fintech growth have been financial literacy and lack of sustainable tech infrastructure. Unless these hurdles are cleared, India is limited in its capacity to expand the reach of fintech products beyond the urban and tech-savvy audience of India. Surprisingly there is not much effort from the government or fintech startups in solving these challenges i.e. financial literacy and sustainable tech infrastructure.
India Stack is another step that the government has taken up in order to facilitate a sustainable technology infrastructure for digitalisation of the economy. But due to the tech-averse nature of the Indian rural audience along with low financial literacy, the outcome has not been very impactful. As of 2017, a mere 5% of the Indian population aged 15 years or above had used the mobile phone or internet to access bank accounts or financial services. On the other hand, in the case of Kenya, this number was 32%.
In order to achieve an egalitarian fintech adoption as Kenya, India also needs to follow a consumer-centric approach similar to Kenya. The government has taken up certain steps towards increasing fintech adoption among the non-urban audience by lowering digital transaction costs, providing RuPay debit cards, cashback on digital transactions through UPI and many others. But the fundamental problem of financial literacy is still not being addressed adequately, which eventually lowers the perceived value creation of fintech products in the minds of the consumers.
Although the first mover advantage for M-Pesa along with the 360-degree infrastructure created by Safaricom was the supporting pillars for widespread fintech adoption in Kenya, the visibility of value creation by M-Pesa in the minds of Kenyan public was the driving force behind its rapid adoption.
India with its over 1.3 Bn population needs a more comprehensive approach by both the government as well as fintech startups to help Indians realise why it would make their lives easier and build their trust around fintech solutions.
