A conversation I recently had with a taxi driver in Kenya—a country where more than half the adult population uses Safaricom’s M-PESA—illustrates why talk of the death of banks is unfounded. He explained that M-PESA is one of a portfolio of financial tools that he uses to manage his money, and that his bank is an indispensible part of that portfolio. In fact, I’ve come to believe that mobile money services can increase, rather than dampen, demand for traditional banking services.

John explains one reason why he still needs a bank: he prefers not to leave large balances in his M-PESA account because a criminal could coerce him into transferring money into his account. It may be that this risk is higher for taxi drivers, who come into contact with all kinds of characters, than for ordinary users. But he makes a more prosaic point, relevant to just about any saver: you can’t earn interest with M-PESA. John takes advantage of the linkages that Safaricom has created with a number of banks in Kenya, allowing him to sweep money from his M-PESA wallet into his bank account when his balance becomes large enough.

For John, M-PESA is a complement, not a replacement, for the bank. In fact, you can plausibly argue that M-PESA is increasing, not decreasing, the demand for bank accounts in Kenya. That’s how I interpret the extraordinary popularity of M-KESHO, an interest-bearing savings account linked to M-PESA which 176,000 people have started using in the last 3 months. By tearing down some of the barriers to bank usage (long queues, inconveniently located branches, minimum-balance requirements, etc.), M-PESA makes banking attractive to a whole new segment of consumers. And that’s something for customers, operators, and banks alike to celebrate.

A financial inclusion holy alliance in Kenya: Equity Bank accounts riding on M-PESA rails

Finally, M-PESA is connecting with banks in Kenya. And with a big bang too, as two big players in the financial inclusion scene in Kenya are joining forces: Safaricom (the mobile operator behind M-PESA) and Equity Bank are launching M-KESHO, a co-branded suite of financial products that will ride on the M-PESA transactional ‘rails.’ Three years ago, there were 2.5 million bank accounts in Kenya, out of a population of 39 million. Today, there are close to 8 million bank accounts (of which 4.5 million are with Equity Bank) plus a further 9.5 million M-PESA accounts. One third of M-PESA accounts are held by people that are otherwise unbanked, and this is the segment that the new product is targeting. Equity’s aggressive objective is to acquire 3 million M-KESHO customers by the end of this year.

In late April, the Central Bank of Kenya issued new agent banking regulations which for the first time allowed banks to engage a wide range of retail outlets for transaction handling ( cash in & out) and product promotion (receiving account applications, though applications must be approved by a bank staff). This paved the way for banks to begin utilizing the M-PESA platform and associated network of M-PESA outlets as a channel.

On March 18, in the presence of the President, Prime Minister and Ministers of Finance and Telecoms of Kenya, Safaricom and Equity Bank unveiled a full savings account issued by Equity Bank but marketed as an “M-PESA Equity account.” M-KESHO accounts are held in a server owned, hosted and operated by Equity Bank. Safaricom and Equity Bank jointly own the brand and logo. The first part of the logo takes after the M-PESA logo, while the second part has the brown color of Equity. ‘Kesho’ means ‘future’ in Kiswahili. So they are positioning this as an aspirational service than M-PESA, which is more functional. Equity Bank and Safaricom have developed a joint marketing plan with joint funding to market M-KESHO.

Like M-PESA accounts, M-KESHO accounts have no account opening fees, minimum balances or monthly charges. But unlike M-PESA accounts, M-KESHO accounts pay interest, do not have a limit on account balances, and are linked to limited emergency credit and insurance facilities. And unlike its regular Equity account holders who can only transact at the bank’s 140 branches, Equity’s M-KESHO customers will be able to transact at any of the 17,000 retail outlets that accept M-PESA.

M-KESHO customers must have an M-PESA account (and hence be a Safaricom customer). In addition, they may have a normal Equity Bank account and this can be linked to their M-KESHO bank account, but that is not required. Customers will be able to open accounts at either Equity Bank branches or at a subset of some 5000 M-PESA agents at which Equity Bank will place a bank representative. Customers must bring the original plus a photocopy of their ID and two photographs (at agent locations their picture will be taken on the spot with a digital camera). Customers complete a relatively short and simple application form (see attachment), but accounts won’t be active until 48 hours later.

M-KESHO is fully integrated into the M-PESA user interface on customers’ mobile phone, and is also accessible through Equity Bank’s own mobile banking service (available on JAVA or USSD). Customers can deposit and withdraw money from their M-KESHO account by transferring value to/from their M-PESA account, which they can in turn cash into or cash out from at any M-PESA outlet. Deposits into M-KESHO are free to the customer, whereas withdrawals incur a KSH 30 (40¢) payable to Equity Bank plus the normal KSH 25 (33¢) cash out fee payable to Safaricom.

Safaricom’ strength in the relationship comes from two main elements under its control. First, it has a channel of retail outlets that is 120 times more extensive than Equity Bank’s branch network. Kenyans are clearly keen on the convenience that M-PESA delivers, whereas Equity Bank is in danger of jeopardizing customer goodwill as its branches get more and more congested. Second, through its ownership of customers’ SIM cards, Safaricom can present a very convenient user interface which is an extension of the phone’s menu and a secure communications channel. Equity must use either an inferior user interface (e.g. USSD) or one that is operationally more cumbersome to deliver (e.g. JAVA).

Through their M-KESHO collaboration, Equity can enhance M-PESA’s value by driving more transactions. M-KESHO adds value to the M-PESA proposition (interest payable on saved balances, loan and insurance facilities available) and can therefore be expected to increase take-up and usage of the underlying M-PESA service as a transactional channel. Being a bank-backed, interest-bearing account, M-KESHO should also drive higher account balances than are currently stored in M-PESA. Moreover, the interest on float held on M-KESHO accounts can be appropriated by Equity Bank, which M-PESA could not do under its trust structure. Thus, simply transferring existing savings balances from M-PESA accounts to the new M-KESHO accounts increases the value accruing to the partners.

Safaricom is also connecting M-PESA with the accounts of other banks, enabling customers to cash in/out of their bank accounts through M-PESA. But Safaricom and Equity are going well beyond that, with product co-branding, use of select M-PESA agents to promote the bank’s products, and user interface integration.

The M-KESHO announcement has aroused much curiosity and excitement. It is big news because it creates an opportunity to offer a broader range of financial services seamlessly on the biggest mobile money platform in existence in the world. It also represents the marriage of two very powerful Kenyan brands that have relevance for the poor. Together, they can drive awareness and mass marketing of financial services on an unprecedented scale. Whether M-KESHO takes off will probably depend on several key factors:

• Marketing. Given that this is a jointly branded product, it’s possible that Safaricom and Equity Bank may promote in preference their own branded products rather than M-KESHO. It will be interesting to see how aggressive the partners promote the joint product.

• Sales & admin. Will Equity Bank’s sales staff and systems be able to sustain such an aggressive customer acquisition path?

• Customer convenience and pricing. Will customers see sufficient value in the new M-KESHO account to compensate for (i) the administrative trouble of moving money between their M-PESA or Equity Bank account and the new M-KESHO account, and (ii) the extra cost of withdrawing funds from the M-KESHO account?

• Credit scoring. How reliably will Equity Bank be in judging the creditworthiness of M-KESHO customers to provide them with on-demand credit? The quality of the credit scoring model will play a big role in determining the attractiveness and profitability of the product.

It’s interesting times in Kenya….