In Kenya, new banking technology is paying dividends

NAIROBI – Some years ago, DFID—the UK Department for International Development — partnered with Vodafone to develop a secure software platform for performing a number of basic payment functions on mobile phones. These included transferring “E-Money” to anyone with a mobile phone and paying for call time on mobile phones (few people in developing countries can afford monthly plans).

This and similar payment applications have dramatically changed life for the better in Africa, where very few people had access to banking services until very recently. Workers in Kenyan cities now send money home to their families in the villages by using their mobile phone, instead of carrying cash by bus.

By the end of 2008, half of Kenya’s population had mobile phones. By the end of 2009, over one-fifth of the population had mobile phone e-money accounts (over 9 million from zero three years ago). Surprisingly, banks have responded competitively by increasing branch offices and becoming mobile phone payment agents.

As a result, the use of cash in Kenya has fallen rapidly. In less than three years, the share of the central bank’s monetary liabilities held as cash by the public fell sharply from 64 percent to 56 percent. As the number of e-money account holders continues to grow and the uses of e-money expand to cover a wider range of payments, the currency ratio will fall further.  Mobile phone payments are now cheap enough for even the very poor to use.

But the development and spread of mobile phone payments would not have been possible without the proliferation of mobile phones and their transmitting towers across the African countryside. And that would not have happened in our lifetimes at the hands of the state-run monopoly phone companies that have provided phone service in most countries for decades.

The breakthrough came when most African countries gave in to the pressure from the World Bank and IMF to privatize their mobile services and other state monopolies and open them to competition.

Technology has contributed to the ease of making payments—in fact dramatically transformed the whole process—in two fundamental ways. The first concerns how you get money into your own hands and the second concerns how you can deliver it to the person being paid (especially if they are far way).

Standardization is essential, of course. Without that, payments would still involve elaborate systems of bartering goods and services, which is terribly inefficient. Aside from the printing of currency or minting of coins (paper, ink, and engraving quality and other security features to thwart counterfeiting), the primary innovation in making payments was the creation of banks where money could be deposited for safekeeping. The arrangements for transferring specific amounts of your deposits with your bank to someone else eliminate the need to have cash.  The technical and legal options for transferring balances in your bank account to someone else include writing a check, keying in instructions using a debit card or credit card, and, in some places, keying simple transfer instructions into a cell phone.

These modern means of payment all involve transferring bank balances by issuing instructions (via check or debit card, for example) to your bank in one way or another. The benefits in cost saving and speed are enormous. Large or small amounts of money can be transferred to the cashier across the counter or to a relative, friend or business halfway around the world in seconds at low cost. These alternative payment instruments (means of issuing payment instructions to your bank) each have laws that define the rights and obligations involved in order to protect the process and different technologies to communicate and secure the payment messages.