Evidence suggests that many poor, unbanked households in developing countries rely on informal social networks as a form of insurance in the event of emergencies, illness, poor harvest or other economic shocks. Yet sending money to friends and family in need often comes with costs. In many rural areas of Kenya, for example, families and social networks are dispersed over large distances. Until recently, most households hand-delivered remittances or sent them informally through friends or bus drivers. This process was not only expensive, but fraught with delays and involved substantial losses due to theft. In this context, technology offered by mobile money—which dramatically lowers transaction costs and improves the efficiency of sending money—may increase the size and frequency of domestic remittances and, in turn, better enable households to “share risk” and weather rough patches. This research contributes evidence on this topic.
Mobile money is a recent innovation in developing economies. One of the first and most successful examples to date is Safaricom’s M-PESA, launched in 2007 in Kenya. Just four years after its launch in 2007, nearly 70 percent of Kenyan households had at least one account. The product’s rapid adoption was in part due to the growth of a network of small business outlets that provide cash-in and cash-out services (“agents”). The agents exchange cash for “e-money,” the electronic balances that can be sent from one account to another via SMS. In a country with 850 bank branches in total, roughly 28,000 M-PESA agents over the first few years dramatically expanded access to a very basic financial service—the ability to send and receive remittances or transfers. Not only are the actual monetary costs of the transfers lower, but the safety and certainty of the process have meant Kenyans can send and receive money at a substantially reduced cost.