Forget Bitcoin: There’s A Better Model For Mobile Money

Bitcoin has all the buzz right now. But there’s another financial innovation that could have a far more meaningful impact on the lives of billion of people without bank accounts across the world.

In 2007, two years before the mysterious Satoshi Nakamoto wrote the original proposal for Bitcoin, Safaricom, a Kenyan telecommunications company effectively controlled by Vodafone, launched M-Pesa, a service that let anyone with an active cell-phone line send and receive money instantly.

Coin Of The Unbanked Realm

“Pesa” means money in Swahili, and M-Pesa, short for mobile money, has become synonymous with money in Kenya. M-Pesa transactions accounts for 40 percent of the gross domestic product. It has spread beyond Kenya’s borders to South Africa, Afghanistan, India, and most recently Romania. It doesn’t require smartphones; it works on the very basic so-called “feature” phones that are common in the developing world. If you can send a text message, you can bank with M-Pesa. 

M-Pesa has enabled millions of the unbanked to emerge from subsistence living into the makings of a middle-class life. Being able to get paid dependably and store up assets is something we take for granted in the West, where parents often open up savings accounts for their kids as an introduction to the modern financial system.

Bitcoin is the answer that Silicon Valley is putting forward for the 70% of the world that is unbanked. It’s easy to understand why entrepreneurs and investors are charmed by the technical elegance and openness of Bitcoin, which provides both a decentralized system for transactions and its own form of stored value.

Therein lie two key differences between M-Pesa and Bitcoin:

  1. M-Pesa works with existing national currencies, making it far simpler to withdraw and spend.
  2. M-Pesa is controlled by Vodafone, whereas Bitcoin is an open technology.

The AOL Of Mobile Money?

Could M-Pesa be the AOL of mobile money—set to become big for a brief period, only to be overtaken by more open technologies?

It’s hard to remember how powerful AOL once was compared to its current reduced state. At one point, half of all American households on the Internet used its dial-up service to get online.

AOL was criticized for being a “walled garden” which offered its own content and services, like news, shopping, and email. Early on, that all-in-one service was highly successful. Ultimately, it was defeated by broadband providers which simply provided high-speed Internet access to any websites people wanted to visit.

“AOL served a very useful purpose and became a hugely valuable business,” Blocktech CEO Devon Read, a Bitcoin entrepreneur, told me recently. He’s obviously a fan of the metaphor. But it strikes me as damning M-Pesa with faint praise.

There are four reasons why this way of thinking about M-Pesa could be wrong:

  1. Adoption drives innovation. Now that millions of people use M-Pesa, entrepreneurs are creating new M-Pesa related services in areas such as lending and remittances.
  2. M-Pesa fits within existing regulatory structures. Initially, banks tried to stop M-Pesa, but they’re now partnering with Vodafone in places like India.
  3. M-Pesa is designed for mobile, and it’s clear how to use it. Until recently, Apple banned Bitcoin apps from its App Store. There’s a confusing array of Bitcoin-related apps, some of which store bitcoins, others of which facilitate transactions, and they all present different interfaces to consumers.
  4. Retail adoption. There are 40,000 M-Pesa agents in Kenya, small retail outlets that are effectively bank branches for the unbanked. This means M-Pesa works well in the physical world, where cash still dominates.

Bitcoin transactions are theoretically instant—but only theoretically. In practice, to have any confidence that a transaction has gone through, you may have to wait hours. In the meantime, it’s possible to spend bitcoins twice. Call it Schrödinger’s currency.

M-Pesa avoids the double-spending problem by having a central authority—in this case, Vodafone or its subsidiaries.

It’s up to Vodafone if it wants to avoid M-Pesa becoming the AOL of mobile money. Vodafone has more than 400 million customers worldwide, but that’s a small percentage of the world’s global mobile users. As of March, only 17 million of them used M-Pesa. Vodafone will never reach the billions of unbanked who need it if it limits M-Pesa to its own markets.

So it will have to let M-Pesa free, either by open-sourcing it or licensing it on very fair, simple terms. It can still make plenty of money processing M-Pesa transactions on its own networks, as well as swapping M-Pesa for voice minutes or mobile data fees. It could even reach some kind of accommodation with Bitcoin: Kipochi, a Bitcoin wallet, allows users to transfer their balances into M-Pesa.

Battlefield India

India is the best country to watch Bitcoin battle M-Pesa. India is a far bigger economy than Kenya; it is one of the big emerging economies that all global companies target.

Today, Indians love gold. For many of the same reasons—distrust of the government’s stewardship of the rupee, among others—many people in India want Bitcoin to succeed. And yet at some point they’ll need to spend bitcoin on food. Sure, you can buy pizza with bitcoin in Mumbai, but many Indians will want to send money back to their parents in rural villages, and that will have to be in a form that local merchants will accept.

Vodafone is a big player in India but also has competitors both big and small. Nobody in India wants the unbanked market controlled by one company. So this is one market where Vodafone may need to give their precocious child some more independence. If Vodafone does this in India, then the M-Pesa revolution has a good chance of sweeping the world, leaving Bitcoin as a fascinating footnote in the history of digital money.

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