A blog post appeared on FT Alphaville yesterday purporting to draw lessons from the case of M-PESA in Kenya that are relevant to the Eurozone’s woes. Unfortunately, by confusing some key points, its author unwittingly plays into the hands of those who would slow the expansion of access to financial services in markets where the unbanked are most in need of it.
Apart from misleadingly blurring the concepts of pre-paid mobile airtime credit and e-money, the most important mistake in the post is the assertion that “while Safaricom could theoretically reduce or increase M-PESA money as it see fits, it currently chooses to provide exactly what its customers ask for—providing, of course, that the correct collateral is delivered (Kenyan shillings in this case).”
In fact, Safaricom makes no such choice. Rather, it is obligated by the Central Bank of Kenya to create e-money only when “collateral” is provided to it, and to destroy e-money when that collateral is withdrawn from the system. This is how regulated e-money services work all over the world. They have been designed this way in large part to ensure that customers always have recourse to their funds, which are held in trust, even if the service provider in question were to become insolvent. This also keeps e-money tightly tethered to the national currency on which it is based.
Readers of this blog will already understand these points. They will also understand why it’s a big deal when a high-profile outlet like the FT gets them wrong.
As news of M-PESA’s impact has spread around the globe, mobile operators and others have sought authorization from their central banks to launch similar services. But in some cases their regulators have balked because they fear that such services entail the creation of money and could thus lead to loss of control over the money supply. This fear is rooted in a misunderstanding of the way e-money works, and advocates for financial inclusion have been working painstakingly for years to dispel it. The FT post is pernicious because it makes that work harder, not easier.
Update: A follow-up post, responding to some of the criticism of the original, has just gone up.