INNOBLOG

The New York Times reported yesterday that mobile phones are opening up banking opportunities in developing countries. The article focuses on how mobile-based devices are allowing microfinance institutions to extend their reach and how mobile phones can be used as platforms for a disruptive payment service.

Microfinance is itself a disruptive innovation that weve mentioned in the Innoblog before. (You can find Josh Suskewiczs entry on microfinance here). What Id like to focus on is the potential for disruptive, mobile-based, payment services. The story of how Vodafone went from developing one innovation (a microfinance service) to another (the payment service M-PESA) is a great example of how disruptive innovations are developed and refined through trial-and-error.

In 2005, Vodafone and the UK Department for International Development jointly funded a project to develop a mobile-based microfinance solution, and partnered with Faulu Kenya, a local microfinance institution, to do so. Vodafone used the six-month pilot to study, essentially, consumer jobs to be done. The results surprised them.

"The idea was to reduce the cost of loan disbursal and recovery, said Nick Hughes, Vodafones head of international payment services, "but what we found is that customers were using it for person-to-person transfers.

This learning allowed Vodafone to refocus the service on customers jobs to be done. At launch, M-PESA allowed customers to deposit cash at a local agent (an affiliated mobile phone dealer, gas station, supermarket or other shop), to send and receive money from other mobile phone users by SMS, and withdraw cash at any agent. M-PESA turned potentially any shop into a bank and eliminated physical barriers to cash transfer. Breaking down barriers to consumption enabling access in new contexts, catalyzing the decentralization and democratization of critical services is a key hallmark of disruptive innovations that signals massive opportunity.

Vodafone has had incredible success in Kenya (through a jointly-owned subsidiary, Safaricom). Three months after launch, M-PESA had 175,000 customers and was signing up 2,500 a day. Over 7.5 million dollars was moved over the service during this period and Safaricom is counting on M-PESA to help it continue its record profitability. Vodafone is now looking to take the service international. The Consultative Group to Assist the Poor (CGAP) estimates that more than five billion of the worlds people live without a bank account, but more importantly for Vodafone, two billion of those unbanked have mobile phones. Based on those numbers, it looks like this disruption has considerable upside potential.