The majority of people who use the world’s most successful mobile money service don’t even have a bank account.
M-Pesa, the financial service of choice for 30 million people in 11 countries, was surprisingly not a project of the financial services industry. M-Pesa is actually a co-creation of the UK Department for International Development (DFID) and Vodafone, the mobile communications company.
M-Pesa launched 10 years ago, and redefined financial services by creating an entirely new market category: mobile payments. (Maybe you’ve seen the news? They’re taking off). M-Pesa was so ahead of the curve that in 2014, when Apple Pay first launched, M-Pesa was already seeing annual transaction volumes of over $10 billion USD.
Today, M-Pesa provides financial services to millions of people who have access to a mobile phone, but not bank services. In Kenya, over 25% of the gross national product flows through the system. In Afghanistan, some government services process their payroll through M-Pesa (and are eliminating corruption as a result).
The New Venture didn’t just change payment paradigms. Creating a whole new market also had a massive impact on the Vodafone business as a whole. In 2017, M-Pesa generated $534M USD in revenues for Safaricom alone (the Kenyan telecom network that Vodafone has a controlling stake in). This accounts for 26% of overall revenues, and has allowed them to surge past competitors.
Like many other successful New Ventures, M-Pesa’s origins bear little resemblance to the final product. In 2005, all signs pointed to microfinance as the “next big thing”. The United Nations had even declared 2005 to be the Year of Microcredit. User interviews suggested the same. Vodafone decided to create a microloan service that would allow Kenyans to receive and repay funds using the Safaricom mobile network.
But when a team conducted a 6 week trial with 316 users, these users surprised them by using the application for a completely different reason: sending money to friends and family. In that time, users sent 493 P2P payments — something the platform hadn’t even been designed for.
It wasn’t microfinance services that people were most interested in. Instead, it was the ability to store and send money that people found most valuable. The team had invalidated their initial hypothesis, but stumbled upon another, more pressing user problem.
In hindsight, we had inadvertently identified one of Kenya’s biggest financial challenges.
– Michael Joseph, Vodafone Director of Mobile Money
Most teams would have shut down the program, and moved on to the next thing. But because the Vodafone team had a mandate to explore the problem (the inaccessibility of financial services) rather than a directive to build a solution (a micropayments platform), a pivot was possible.
Without the mandate to find the underlying truth in the user problem, M-Pesa (and modern mobile payments) might look quite different than they do today.
Consumers living in rural areas of Kenya had little access to banking infrastructure, but still needed a way to send money to friends and family.
Surprisingly, in their world, mobile phone airtime was seen as one of the easiest ways to store and transfer values between relatives and friends.
“In hindsight, we had inadvertently identified one of Kenya’s biggest financial challenges.”
– Michael Joseph, Vodafone
Most teams would have shut down the program, and moved on to the next thing. But because the team had a mandate to explore the problem (the inaccessibility of financial services) rather than a directive to build a solution (a microloans platform), a pivot was possible.
Without a mandate to find the underlying problem, M-Pesa (and modern mobile payments) might look quite different than they do today.
While today M-Pesa offers a full suite of financial services, from payments to loans to insurance, the platform’s beginnings were much simpler. M-Pesa launched with a Minimum Viable Product (a version of the product with just enough features to satisfy early customers, and to provide feedback for future product development).
This allowed them to test the market as they built, and course correct based on their learnings. When the team realized that p2p payments were the most pressing user problem, they scrapped their microfinance plan and doubled down on that functionality. By keeping the initial product simple, M-Pesa was able to launch quickly and solve for the most urgent need.
The next version of the product allowed users to do only one thing: transfer money from one user to another.
They launched the product with a marketing call to action that focused on this single, simple need:
“Send Money Home”.
Being first to market with a solution and/or focusing on the most pressing user problem allows New Ventures like M-Pesa to learn and to grow quickly. M-Pesa’s network effect locked users into the service, achieving further virality.
The original business plan called for 350,000 customers within the first year. At the end of the first year M-Pesa had 1.2 million customers.
Vodafone had a few core assets to leverage for this project: their cellular network, their technical expertise and assets, and their 1000’s of agents on the ground. They could have made an attempt to go it alone.
But M-Pesa was a risky venture and, despite their clear competitive advantages, Vodafone was still in uncharted territory.
“Why and how does a telecom company like Vodafone start a banking project like this? It’s not part of Vodafone’s core business.
It was not developed in a core market (Kenya is a relatively small market in Vodafone’s terms) and it has little to do with the voice or data products that drive Vodafone’s revenue streams.” – Nick Hughes
To get executive buy-in for a non-core project like M-Pesa, the early team had to get creative.
As it happened, at the time the UK Department for International Development (DFID) was looking to provide grants to companies who were developing services to help the unbanked. Nick Hughes, then Vodafone’s Head of Global Payments, approached the DFID team.
M-Pesa launched with £2M in “seed” investment — a £1m grant from DFID, and £1m in investment from Vodafone.
“Private sector organizations such as Vodafone are legally bound to use their shareholders capital to achieve the best returns. But many organizations use internal competition to allocate funds to their projects, and this competition is based on potential returns on investment.
What if a firm could use somebody else’s capital to overcome the internal competition? “ — Nick Hughes
By leveraging external capital for co-creation, Vodafone de-risked their investment reduced internal competition for the same funding, and gained a partner who was later instrumental in facilitating regulatory changes and partnerships that have allowed M-Pesa to continue to grow.
Since its launch, M-Pesa has grown astronomically. Today, 30 million people in 11 countries use M-Pesa to deposit and withdraw money; to transfer money to others; to pay bills or purchase goods and services; to open interest-bearing accounts; to access loans; and to purchase insurance.
What can we learn from this astronomical growth? What shapes a successful new venture?
Fall in love with the problem, not the solution.
Get curious about your user behaviour — it’s the only way to unearth game-changing insights.
Start simple, launch quickly.
Build only the functionality you need to validate your user problem and your market.
Find Co-Creation partners.
Non-core ventures can benefit greatly from external capital, expertise, and networks.