Treasure at the Bottom of the Pyramid

This is the second installment of our series, Bringing the Bank to the Unbanked While Making Bank. The first post in the series drew the conclusion that even in a growing “cashless” economy in which mobile money revels in popularity, cash is king. In this context, “cash is king” refers to the persevering demand for flexible and “spendable” cash flow, which precipitates investment, in turn permitting growth. Mobile money in Kenya, where our series is focused, arguably exceeds the flexibility and “spendability” of physical cash.

Mobile money also known as the mobile wallet also interchanged (arguably incorrectly) with the term mobile banking, refers to financial transactions enabled by a mobile phone, where value is stored virtually in an account tied to a SIM card.

Mobile money is stealing headlines. And with it, so is Kenya. 43% of Kenya’s GDP flows through Safaricom’s M-Pesa. More than two thirds of Kenyan adults are M-Pesa customers. And unlike a typical smartphone-required mobile application, mobile money transactions occur on the most modest and consequently ubiquitous cell phones available. Internet access is not a condition.

If we are to identify some primary components of financial inclusion, we might highlight access to basic financial services such as the ability to store money safely and remotely, to receive money transfers, and to make remote payments. Conceptualized as such, it can be argued that mobile money providers such as M-Pesa, extend access to the lowest tiers of financial inclusion. In Kenya, access to such services has soared to over 80% of the population.

Kenya is a mobile money dream come true for a multitude of reasons, a few being key:

Urbanization: Kenyan cities are teeming with more people each day. Nairobi’s population alone is set to increase two-fold from over three million people just five years ago to nearly six million people in the next decade. Rural-urban migration accounts for an estimated 25% of Kenya’s urban growth rate.These migrants were incurring exorbitant costs in their quest to send money home to the countryside, that is, until M-Pesa arrived.

Progressive regulation: The Central Bank of Kenya permitted Safaricom to operate M-Pesa experimentally, before regulation was fully birthed. M-Pesa was also classified as non-bank institution, able to avoid some of the prudential regulations already in place. Consequently, M-Pesa was not limited by regulations that could have hampered innovation.

Private sector investment in and engagement with the bottom of the pyramid (BoP): This is central to the “Bringing the Bank to the Unbanked While Making Bank” blog series. According to Sitoyo Lopokoiyit, Head of Strategy for Financial Services at Safaricom, “There's formal research, informal research, and lots of feedback from staff, communities, and the government. But it's what you do with that information that's important. How do you collate it and how do you develop a product to suit different needs from different parts of the country? […] There was a lot of investment to get [M-PESA] right. Mobile money isn't like any other product where you try it for six months and leave it. M-Pesa first started making money after three years. The first three years are just investment, investment, [and] investment.”

The rise of M-Pesa has enriched the market landscape. An array of enterprises including ShopSoko and Kopo Kopo Inc. have benefitted tremendously from this “new normal” in payment mechanisms and they, in turn, have contributed to the rise of Kenyan micro-enterprises. Additionally, just as was the case with corporate powerhouse Safaricom, for micro-entrepreneurs, investment has allowed for expansion. The expansion of micro-enterprises is good news for poverty reduction efforts, particularly those which place an emphasis on asset building. Ella Peinvoch spoke of the micro-entrepreneurs ShopSoko partners with:

"ShopSoko opens a door for our partnering artisans to sell at a globally competitive price and thereby earn a fairer wage. Our craftswomen are then able to achieve access to small business loans as they then have verifiable income as well as increased earnings to justify repayment. They are able to connect with Kiva Zip to apply these loans to the purchase of materials used to create wider collections and to the purchase of a mobile phone to receive payments. There are varying degrees of success. Some artisans have bought ceramic cook stoves to replace charcoal, retail spaces to also sell their goods in person, even homes. Our craftswomen find themselves further included in an economy they were once only informally apart of.”

Historically, micro-entrepreneurs have lacked access to formal banking. Consequently, they have remained limited in the ways in which they can grow their businesses. Kopo Kopo Inc. and ShopSoko are among a growing ecosystem of private companies indirectly enabling micro-entrepreneurs to build assets and make investments, thereby facilitating expansion. Their successes have a ripple effect. According to the founders of ShopSoko, artisans are constantly recruiting other artisans and even apprentices in order to meet a growing demand. In the case of Kopo Kopo Inc, Ben Lyon cited a relevant marvel, “[The] biggest challenge is meeting demand, which is a good challenge to have. Kopo Kopo is the only company worldwide that is positioned to act on this opportunity today. We’ve been building relationships with mobile money providers around the world and now need to identify which markets are the most promising so we can help them succeed.”

M-Pesa is a product that addresses a pain point for overlooked masses at the bottom of the pyramid. ShopSoko partners with untapped, low-income micro-entrepreneurs, many of whom were previously hitting a ceiling created by minimal cash flow. Kopo Kopo Inc. delivers value to micro-enterprises in the form of better market research, and a formal, digital footprint which clients can use to secure credit to invest and expand. It is evident that in the case of unfilled demand, the treasure really may lie at the bottom of the pyramid. And as the private sector continues to dig, more opportunities will continue to be uncovered. The question now is, how will they be leveraged in a way in which mutual benefit and sustainable development is an output of each and every ripple?