Friday, June 11, 2010

The behind-the-scenes logistics of M-PESA

The Economist has a brief article on how money flows so smoothly through M-PESA's network of agents. The challenge is to make sure that agents in remote villages are able to regularly swap the cash they receive from customers, for the mobile bank's virtual currency:
... The basic idea of M-PESA is that the 100,000 small retailers in Kenya who already sell mobile-phone airtime, in the form of scratch cards, can also register to be mobile-money agents, taking in and paying out cash. More than 17,600 retailers have signed up as M-PESA agents—far outnumbering Kenya’s 840 bank branches. When a customer is registered with the system, paying in cash involves exchanging physical money for the virtual sort, called “e-float”, which is credited to his mobile-money account. E-float can then be transferred to other users by mobile phone, and exchanged for cash by the recipient, who visits another agent.

It is simple enough for customers. But agents in cities, where most transactions are deposits (see chart), accumulate cash and risk running out of e-float, at which point they cannot take any more deposits. Agents in rural areas, where most transactions are withdrawals, accumulate e-float and risk running out of cash. Keeping the system running requires the agents to manage their liquidity, by regularly swapping cash for e-float, or vice versa.

Exchanging cash for e-float means visiting a bank affiliated with Safaricom, and the whole point of systems like M-PESA is to reach where banks cannot. Accordingly, M-PESA relies on a system of intermediaries (including Mr Eijkman’s firm, PEP Intermedius) between agents and banks. These middlemen have their own distribution networks, and take on much of the work of ferrying cash around the country. But individual agents still handle the “last mile”.

... Rather than many individuals moving money around by carrying it physically, as they had to in the days before M-PESA, the movement of money can then be handled in larger quantities by a smaller number of individuals, which is much more efficient. Safaricom, says Mr Mas, “understood this like no other mobile operator really has”. As well as orchestrating the emergence of the intermediaries, it monitors its agents closely, typically visiting them every two weeks to see how they are handling the growing volume of transactions (on average, each M-PESA agent now handles almost 100 transactions a day).


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