Back in 2011, Erik Hersman, Ken Banks & Rudy De Waele curated a presentation dubbed “Mobile Trends 2020 Africa“, a collaborative outlook. Essentially they sought the views of different people across the continent who are players in one way or another in mobile on what they thought the future of mobile in Africa held and what it would be like in 2020. I was honoured to give my 5 thoughts on what I thought would trend in mobile within this period. One of my predictions was that: “Mobile money will shift economies on a large scale and across borders.”
So it came as a rather interesting discovery to learn that according to a recent Africa Development Bank (AfDB) research study, increased uptake of M-PESA, which is the literal mother of Mobile Money, is said to be contributing with some level of significance to the levels inflation in Kenya. Inflation was a major problem in the Kenyan economy in 2011, having hit a high of 19.7% towards the end of the year.
It seems we have already got to that point already where mobile money is becoming a matter of concern as far as national economies are concerned. According to an article titled “M-PESA linked to rise in Inflation“ in the Business Daily, a Kenyan business paper:
Increased uptake of M-Pesa, Kenya’s dominant money transfer service, has fuelled inflation as the service grew large enough to influence implementation of monetary policy, an African Development Bank (AfDB) research claims.
Then very recently a discussion broke on local Kenyan discussion, Wazua, on speculations that Safaricom, Kenya’s top MNO and M-PESA operator, would buy a bank. Whether such speculations are true or not, one thing is for sure, mobile money has come a long way in a relatively short term and it’s for sure that mobile money is affecting economies at the household level and at national level so that now we can study the finance and the economics of mobile money. This area of M-Finance, as it were, will become an area of increasing interest in future, perhaps it will be even necessary for universities to include this topic as an area of study in itself or within finance-related courses.
The household level
William Jack of Georgetown University and Tavneet Suri of MIT Sloan in 2009-10 carried out a survey in which they sought to investigate the “Economics of M-PESA“, apparently the survey had the blessing of the Central Bank of Kenya, Safaricom and Vodafone.
Perhaps the most interesting effects of mobile money on households relates to ease of movement of funds & saving capacity.
According to the previously mentioned survey, it appeared that M-PESA encouraged people to feel safe to keep funds in their M-PESA account for fairly extended periods of time. On the other hand, mobile money also affords an easy, and cost friendly means of moving money.
It is true that Safaricom is moving massive amounts per day via M-PESA is estimated to move about 2 billion shillings daily, and according to a Safaricom report, between April and September 2011, they moved Sh. 314 billion. It’s interesting that this amount is actually a minor fraction of the total money moved within the country. According to the same report (based on fairly dated information):
…the volume of transactions effected between banks under the RTGS (Real Time Gross Settlement] method is nearly 700 times the daily value transacted through M‐PESA. On the other hand, the average mobile transaction is about a hundred times smaller than the average check transaction (Automated Clearing House, or ACH), and even just half the size of the average Automatic Teller Machine (ATM) transaction. Thus M‐PESA is not designed to replace all payment mechanisms, but has found and filled a niche in the market in which it provides significantly enhanced financial services.
It would be interesting to learn what the current share of total transaction volumes is being handled via mobile money versus other means (if you have any tips please comment below).
The Community Level
Beyond households, mobile money is affecting local community economics. The introduction of mobile money and it’s effects at individual and household level eventually spill over and start having effects in communal life.
The Bill & Melinda Gates Foundation funded a project dubbed “The Financial Services Assessment” project in 2010 that was designed to examine the impact of financial services on the lives ofpoor people across the developing world. Part of their outcomes relating to the effects of M-PESA were published in a paper titled “Community-Level Economic Effects of M-PESA in Kenya: Initial Findings“, authored by Megan G. Plyler, Sherri Haas and Geetvea Nagara of the IRIS Center, University of Maryland.
According to their findings, M-PESA had four overarching economic effects at the community level:
- Local economic expansion: In essence, the team found that, M-PESA facilitated increased money circulation which had an effect of increasing local consumption, which of course means more business for local store owners and the like. In addition new business and employment opportunities arise out of for example the establishment of M-PESA agents, existing store owners could also diversify their offering by including this service that is now in much demand
- Security: Other than physical security (i.e. muggers realizing that few people carry liquid cash) the study found that M-PESA contributed to money security, that is by enabling people to safely store funds in their mobile money account
- Capital accumulation: Being able to save money instead of spend it enables wage earners to accumulate financial resources on their phone safely even without having to have a bank account or resort to a less secure mechanism such as keeping cash under the mattress
- Business environment: “M-PESA reduces the overall transaction cost of moving capital along a network and increases the flow ofcapital. While the amount of money M-PESA moves is relatively small among formal financial systems in Kenya, the number of transactions and volume of flow is increasing and covers larger segments of Kenya’s population in terms of income, age and depth and breadth of access (Jack and Suri, 2009)”
The National Level: Monetary Policy
This is where things get really interesting. The effect at the household and even community level are almost predictable from the earliest signs of successes of mobile money. The national economic effects however have been more gradual and have become more and more pronounced with the increased adoption and use of mobile money services.
In fact, the issue of the macro-economic impact of mobile money has spawned academic interest and conferences to discuss these issues. In 2010, for example, The Columbia Institute for Tele-Information (CITI) at the Columbia Business School hosted an event dubbed “The Macroeconomics of Mobile Money” to discuss the impact of mobile money on the macro-economic situation.
1. Impact of Mobile Money on GDP
Menekse Gencer of mPay Connect Consulting gave a presentation at the CITI event (there’s a paper based on the same presentation as well) looking at the impact of mobile money on GDPs of emerging markets. According to him, mobile money has triggered improvements in GDP. Menekse notes a statistic that a 10% rise in mobile subscribers in emerging markets would lead to a 0.6% to 1.2% increase in GDP. Why would mobile money make contributions to a country’s GDP? According to Menekse, the answer lies in 5 forces that are inherent to mobile money:
- The ubiquity of data transmission that mobile provides means that financial services can be extended to reach people who were previously unreachable.
- Mobile money as a new industry that is precipitating new investments for new ventures, new jobs and new revenue streams for existing companies
- Mobile money as an infrastructure supporting new businesses in other industries
- Mobile money formalizes the informal financial sector , enabling savings, loans and investments in lieu of “cash under the mattress”
- Mobile money enables efficiencies associated with digitization and reduces frictions associated with cash (such as theft or ‘shoe leather costs‘)
2. Impact of Mobile Money on Monetary Policy
a). Monetary Policy – Effect on Money Supply
Mobile money would affect money supply in two ways at least as per the M1 definition of Money which combines the currency in circulation and demand deposits:
- Currency circulation: Mobile money creates a situation where people have more money in their pockets in the form of mobile money. What happens if these stores become vastly more than actual cash in supply?
- Demand deposits: Traditionally demand deposits have been considered to include easily accessible funds stored in demand deposit accounts in a commercial bank. Well, how does storing money on your mobile phone fit into this? Further more, what if you could move the money off shore
b). Monetary Policy – Effect on Velocity of Money
The velocity of money is the average frequency with which a unit of money is spent in a specific period of time. This is the issue the AfDB research we quoted earlier found – simply put, money held in M-PESA accounts has much higher transactional velocity.
“Evidence shows that the transactions velocity of M-Pesa may be three to four times higher than the transactions velocity of other components of money.
“The increase in the velocity of money induced by these activities may have in turn propagated self-fulfilling inflation expectations and complicated monetary policy implementation,” said AfDB in a brief on inflation dynamics in selected East African Countries.
The fact of the matter is that mobile money is not only disruptive in terms of technology, but also as far as economics goes. And this trend will continue into the future perhaps becoming even more interesting as the uptake of mobile money increases, mobile payments and mobile transactions become mainstream and even cross border as well as integrated to other forms of money stores.