What is E-Money's Future?

Monetary Theory and Electronic Money: Reflections on the Kenyan Experience
June 9, 2011

Tavneet Suri and Robert M. Townsend of MIT, who are CFSP members, and William Jack of Georgetown University have examined data from Kenya on mobile banking giant M-PESA and seven monetary models in one of the first published academic papers to explore what new realities may be facing financial systems where mobile banking is on the rise. Their work gives a glimpse of the considerations that policymakers and central banks may soon face.   

Their findings, which were published in “Economic Quarterly,” suggest several noteworthy implications. These are set against the context of data Jack and Suri collected on M-PESA and were examined according to established monetary theories, including several models previously authored by Townsend. The main implications follow:

·       The authors’ analysis of how e-money functions within the mobile banking system suggests that the systems may also be well-positioned to supply insurance, savings and credit services, too.

·       The authors show that shortages of cash and e-money have emerged at various points within the M-PESA system. The monetary models suggest this is a natural outcome of the Kenyan environment, where clients and M-PESA sales agents are widely dispersed and where the region regularly suffers uneven flows or economic shocks. The authors argue that there may be policy remedies for these shortages, either through improved design within the mobile banking system or through modifications to monetary policy.

·       Specifically, under some circumstances, there may be potential gains from allowing net e-money creation. Currently, most mobile banking companies are required to limit the quantity of e-money that they issue to the amount of money they receive.  An increase in net e-money creation could help alleviate shortages and facilitate trade and exchange.

·       Likewise, as mobile banking systems emerge and develop, there are implications for monetary policy. The authors suggest that policy intended to change the monetary base should be geared toward narrowing differences in rate of return on private financial instruments and public fiat money for optimal benefit. Even as e-money helps to complete some markets, new shortages are likely to emerge on other margins within the financial system, and monetary policymakers should be prepared to accommodate this. 

“This research really begins to beg the question about what e-money’s future is,” notes Townsend. “Is it solely a means of payment or could it be an innovation that fills a role by providing economy-wide insurance and/or credit markets where there are almost none? If so, what is the optimal mix of traditional currency, e-money, and the design of financial systems so that economies are benefiting as much as possible from these innovations? This is what we’re examining.”

The authors also say that understanding how e-money functions most effectively within an economy with otherwise limited infrastructure may lie in gaining a richer understanding of the agent networks used by mobile banking companies.

M-PESA, for example, has close to 25,000 agents who facilitate the purchase and sale of e-money and who operate essentially like single-person bank branches. They are organized in several ways, usually within a larger network of agents or on their own with a reporting relationship to a head office.

The authors say that understanding the interrelationships among clients, agents, the parent company, and the banking system is essential to realizing fully the promise of mobile banking within economies.

“Monetary Theory and Mobile Banking: Lessons from the Kenyan Experience," originally appeared in “Economic Quarterly,” Volume 96, Issue 1, 2010. This work was made possible, in part, by a grant to the University of Chicago from the Bill & Melinda Gates Foundation for the Consortium on Financial Systems and Poverty.