Research Policy 48 (2019) 1201–1215

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Research Policy
journal homepage: www.elsevier.com/locate/respol

Mobile phones for financial inclusion: What explains the diffusion of mobile T
money innovations?
Addisu A. Lashitew, Rob van Tulder , Yann Liasse
⁎

Rotterdam School of Management, Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, the Netherlands

ARTICLE INFO ABSTRACT

Keywords: Mobile money innovations are expanding rapidly in developing countries, where they appear to be on track to
Mobile money extend financial services to billions of unbanked populations. However, adoption rates differ significantly across
Innovation systems countries, and the success of innovations is also radically different within countries. To understand the factors
Appropriate technology that affect the development and diffusion of mobile money services, this study uses a mixed research method that
Technology diffusion
combines cross-country data of adoption rates and an in-depth case study of a successful mobile money in-
Financial inclusion
Inclusive innovation
novation. Quantitative analysis of adoption rates across countries indicates the varying role of institutional and
economic factors on the adoption and usage of mobile money innovations. We undertake an in-depth study of M-
Pesa in Kenya, one of the world’s most known mobile money innovations, to gain nuanced understanding of the
development and diffusion of the innovation. Analysis using the functional innovation system approach reveals
the key role of the lead firm in guiding the innovation process, and the importance of a supportive regulatory
environment that sought to advance financial inclusion. The results further reveal how the power and interest
dynamics of key actors in the innovation system can shape the emergence of inclusive innovations that aim to
address social issues.

1. Introduction
Innovations of mobile money, also called mobile banking, leverage
rapidly expanding mobile phone access in developing countries to
support banking and payment services (Demirguc-Kunt and Klapper,
2012; Jack and Suri, 2011). In Sub-Sharan Africa mobile phone pene-
tration has reached 76%, whereas the percentage of people with bank
accounts remains less than 30% (Demirguc-Kunt and Klapper, 2012).
This has created a room for mobile money services that provide ac-
cessible and affordable financial and payment services to previously
unbanked, low-income segments of society (Munyegera and
Matsumoto, 2016). As of 2016, the number of people with mobile ac-
counts has grown to half a billion globally, out of which 277 million
were found in Sub-Saharan Africa (GSMA, 2016).
The East African region is at the forefront of the mobile money re-
volution, Kenya being a frontrunner with more than 70% of the coun-
try’s adult population using mobile money services (GSMA, 2015). M-
Pesa, the country’s leading mobile money service, is one of the first and
most successful mobile money services in the world and is credited for
inspiring similar innovations globally (CGAP, 2014; Aker and Mbiti,
2010). Mobile money has become an integral part of Kenya’s economy,
and is extensively used for diverse purposes such as domestic and
international money transfers, paying school fees, paying utility bills,
and point-of-sale transactions. The value of money transferred through
M-Pesa had reached more than 30% of the country’s GDP as of 2011
(Vaughan et al., 2013), which grew to 85% of GDP in 2016 (Safaricom,
2016). M-Pesa provides significant welfare advantages, according to
some estimates helping lift at least 2% of the country’s population out
of extreme poverty (Suri and Jack, 2016).
The significant adoption of locally developed mobile money in-
novations in Africa is puzzling, since traditionally new technologies are
developed in advanced countries, before gradually spilling over to less
developed countries (Aron, 2017; Van der Boor et al., 2014). Mobile
money also highlights the potential of information and communication
technologies (ICT) to enable developing countries to ‘leapfrog’ to more
efficient and modern economic systems (James, 2009; Aron, 2017).
Mobile money provides significant efficiency improvements compared
to traditional means of money transfer since it reduces travelling time,
and enhances safety and convenience (Munyegera and Matsumoto,
2016; Jack and Suri, 2014). It can also foster the modernization of the
large informal economy that characterizes most developing countries,
thus contributing to sustainable and inclusive development (Foster and
Heeks, 2013a). The service, therefore, appears to be an example of
appropriate technologies that address the specific needs of developing

⁎
Corresponding author.
E-mail addresses: lashitew@rsm.nl (A.A. Lashitew), rtulder@rsm.nl (R. van Tulder), yann.liasse@aev.etat.lu (Y. Liasse).

https://doi.org/10.1016/j.respol.2018.12.010
Received 31 January 2018; Received in revised form 17 December 2018; Accepted 20 December 2018
Available online 28 January 2019
0048-7333/ © 2019 Elsevier B.V. All rights reserved.
A.A. Lashitew et al.
economies (Basu and Weil, 1998). Mobile money innovations like M-
Pesa can also be viewed as inclusive innovations given their capacity to
foster financial inclusion by reaching previously unbanked populations
(Kaplinsky, 2011; Pansera and Owen, 2018).1
In spite of their apparent suitability for developing country contexts,
mobile money innovations have seen uneven success in these coun-
tries.2 In Africa, 13 countries have adoption rates of at least 10%,
whereas more than a dozen other countries have virtually no mobile
money services (Demirguc-Kunt and Klapper, 2012). Moreover, com-
peting mobile money services within countries exhibit radically dif-
ferent levels of adoption. The absence of research effort to explain these
significant differences has limited current understanding on the devel-
opment and diffusion of mobile money innovations. The emerging lit-
erature on financial inclusion and mobile banking is largely concerned
with explaining user adoption at micro-level (Murendo et al., 2017;
Batista and Vicente, 2013; Jack and Suri, 2011; Aker et al., 2016; Blauw
and Franses, 2016) and/or evaluating the socio-economic impacts of
adoption (Munyegera and Matsumoto, 2016; Aker et al., 2016; Jack and
Suri, 2014; Suri and Jack, 2016).
We adopt a mixed method approach with the aim of exploiting the
combined strength of quantitative and qualitative research methods
(Bryman and Bell, 2011) to analyze the development and diffusion of
mobile money innovations across and within countries. Our exploratory
quantitative analysis seeks to explain the large cross-country variation
in adoption rates by considering a number of economy-wide market and
institutional factors. Given the complexity of mobile money innova-
tions, quantitative analysis alone might not sufficiently explain their
diffusion patterns. We, therefore, conduct an in-depth case study of the
industry’s development in Kenya by applying the functional technolo-
gical innovation system (TIS) approach to understand the institutional
and economic processes that shaped the emergence of M-Pesa. The TIS
approach provides a powerful tool for systematically analyzing the in-
terplay of functional and structural factors that drive innovation pro-
cesses and outcomes (Foster and Heeks, 2013b; Wieczorek and Hekkert,
2012; Van Alphen et al., 2010). It is thus suitable for identifying bar-
riers or drivers that influence the rate or direction of innovation dif-
fusion and knowledge exchange (Woolthuis et al., 2005; Wieczorek and
Hekkert, 2012; Jacobsson and Bergek, 2011; Bergek et al., 2008). The
system level perspective of TIS is particularly suited for studying mobile
money innovations, which involve coordination among several actors
spanning different industries.
The study makes three major contributions to the literature on in-
novation systems and the diffusion of inclusive (appropriate) innova-
tions. Firstly, we provide nuanced empirical results on the underlying
factors that drive the success of mobile money innovations. Our quan-
titative and qualitative analyses complemented each other in shedding
light on the complex institutional processes that influence the devel-
opment of mobile money innovations. Our quantitative analysis sug-
gested that low levels of financial access or expanding mobile phone
penetration alone cannot sufficiently explain significantly greater
adoption rates in developing countries. The results indicate the varying
role of institutional and economic factors on the adoption and usage of
mobile money innovations. Our case study of M-Pesa in Kenya uncovers
how various institutional and regulatory factors interplayed with pri-
vate sector innovation processes. The presence of a well-resourced
private sector was crucial for coordinating functions across an extensive
1
Other slightly different concepts related to innovations that contribute to
social change are ‘grass roots innovation’, ‘below-the-radar innovation’, ‘frugal
innovation’, ‘social innovation’ and ‘sustainable innovation’ (Foster and Heeks,
2013b; Kaplinsky, 2011; Pansera and Owen, 2018; Simanis and Hart, 2009;
Seyfang and Smith, 2007).
2
Adoption generally refers to the decision of individuals to use a new product
or innovation, whereas diffusion refers to the macro-level adoption process
(Erumban and De Jong, 2006). Since our analysis is at the macro (country)
level, we use the two terms interchangeably.
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Research Policy 48 (2019) 1201–1215
network of actors through collaborative arrangements. Moreover,
proactive engagement and advocacy work with regulators reduced
uncertainties, which encouraged heavy investments during the early
stages of product development.
Secondly, our analysis sheds light on the innovation dynamics of
appropriate or inclusive technologies that blend commercial and social
goals. The results reveal the nature of power and interest dynamics
among actors in the innovation system that shape the innovation
agenda and subsequently its ability to address social issues. Finally, we
contribute to the literature by showing how the TIS approach can be
adapted for analyzing the distributional aspects of appropriate tech-
nologies. To capture the process of goal contestation that defines the
innovation agenda, we integrate the TIS framework with an adaptation
of the power-interest framework from the management literature
(Freeman, 2010; Mitchell et al., 1997).
The rest of this paper is organized as follows. Section two describes
how mobile money services operate, and reviews the related literature
on the contributions of mobile money for financial inclusion. Section
three reports our regressions results that explain cross-country differ-
ences in adoption rates. Section four presents the results from our in-
depth case study of M-Pesa. Section five concludes the article by in-
tegrating the insights from the quantitative and qualitative analysis
while also defining avenues for further research.
2. Background on mobile money
Mobile money innovations are expanding rapidly, riding on the
back of ever-increasing access to mobile phones. In 2006, there were
just 10 mobile money services globally (Aker and Mbiti, 2010), while in
2014 the innovation came to be adopted in 89 countries, including 81%
of Sub-Saharan African countries (GSMA, 2014). By 2016, the number
of people with mobile money accounts around the world had grown to
half a billion, out of which 277 million were in Sub-Saharan Africa
(GSMA, 2016). These services support diverse functions including peer-
to-peer money transfers, bill payments, utility and school fee payment,
and buying airtime credit (Demirguc-Kunt and Klapper, 2012). Al-
though mobile money systems exhibit some differences across service
providers, their functioning shares many similarities (Murendo et al.,
2017). Typically, a user registers at an agent of the service provider,
and deposits cash that will be used for later transactions. When a cus-
tomer deposits cash at the agent, an equivalent amount of electronic
money is transferred to her mobile wallet. The customer can then use
her electronic money to make transactions such as sending money and
paying bills (Demirgüç-Kunt and Klapper, 2013). When a user transfers
money to another mobile phone, the receiver gets an instant notifica-
tion with a unique code through Short Message Service (SMS). The
recipient can visit the closest agent to collect the cash, or alternatively
leave the money as a deposit in her mobile wallet for future transac-
tions.
Since mobile money involves the provision of financial services on
ICT platforms, it requires close coordination between telecom compa-
nies and financial institutions, with either party serving as the main
service operator. In countries like Kenya, Tanzania, and Uganda, tel-
ecom firms became the main operators, often in partnership with banks
to support banking-related services such as interest-bearing deposits
and micro-credit (Mazer and Rowan, 2016). In countries such as Ni-
geria and South Korea, banks operate mobile money services by buying
or licensing the technological infrastructure from telecom firms
(Gutierrez and Choi, 2014; Dermish et al., 2012). In either model,
mobile money services rely on an extensive agent network to provide
customer service. Accessibility and other convenience advantages of
mobile money services are proportional with the ubiquity of agents,
who provide customer services such as handling cash deposits and
withdrawals. These agents often include small retail stores that are
spread across the market, and offer additional agency services in return
for commission income (Foster and Heeks, 2013a; Jack and Suri, 2011).
A.A. Lashitew et al. Research Policy 48 (2019) 1201–1215

Table 1
Variable description and data source.
Variables Description Source

Dependent variables
Mobile Accounts Percentage of adults who have personally used mobile phone to pay bills, send or receive money in Financial Inclusion Indices
the past 12 months using a GSMA recognized mobile money service (Findex) database
Sending Money Percentage of adults who used a mobile phone to send money in the past 12 months
Receiving Money Percentage of adults who used a mobile phone to receive money in the past 12 months

Demand factors
Account at formal financial Percentage of adults who have an account at a formal financial institution Global Financial Structure
institution Database (GFSD)
ATM access Number of ATMs per 100,000 people
Banking sector concentration The percentage share of the three largest commercial banks in total banking assets

Supply factors
Mobile phone penetration
- Gross & unique subscription
rates
Mobile connectivity quality
Mobile connectivity coverage
Telecom regulation
Gross mobile subscription rates refer to the percentage of adults in a country with subscriptions to World Development Indicators
mobile phones based on data from WDI. We used additional data from GSMA (2014) to calculate (WDI), GSMA
unique mobile subscription rates by correcting for double SIM-card ownership, which differs between
rural and urban areas. This correction is based on survey evidence that urban and rural users own
2.03 & 1.18 active SIM-cards respectively.
Measures the average speed of uploading and downloading data through mobile network in 2014 & GSMA
2015.
Measures the weighted average of share of populations covered by 2 G, 3 G and 4 G mobile data GSMA
networks (normalized to range between 0 and 100).
Measures the regulatory quality of the telecom sector in terms of four major criteria: transparency, Waverman and Koutroumpis
independence, resource availability, and enforcement capability of the regulator. The index is based (2011)
on dozens of indicators taken from the International Telecommunication Union’s regulatory
database.

Macro-level factors
Rule of Law A measure of the extent to which agents have confidence in and abide by the rules of society World Development Indicators
GDP per capita GDP per capita in purchasing power parity (WDI) database
GDP growth The rate of total GDP growth
Urbanization rate Percentage of population living in urban areas

Notes: Mobile Accounts is based on the second wave of the survey (2014) and Sending Money and Receiving Money are based on the first wave (2011). The variables
telecom regulation is based on data for 2011. The two variables measuring mobile connectivity are based on average values for the years 2014 & 2015. For the remaining
variables, averages are taken over the years 2010–2014 to smooth out potential year-to-year variations.

Mobile money has the advantage of extending financial access to
unbanked populations (Munyegera and Matsumoto, 2016). More than
60% of Sub-Saharan Africans live in rural areas where banks do not find
it commercially profitable to open branches. In addition to availing
financial services to larger segments of society, mobile money can also
enable small-scale and informal entrepreneurs to use safer and more
efficient means of storing and transferring money. This can foster the
formalization and modernization of the large informal economy that
characterizes many developing countries (Foster and Heeks, 2013a).
Evidence from Mozambique shows that the introduction of mobile
banking enhances financial literacy and trust, while also replacing
traditional means of saving and transferring remittances (Batista and
Vicente, 2013). Moreover, mobile banking can encourage saving be-
haviour by familiarizing people with formal financial institutions (Mbiti
and Weil, 2013).
In countries like Sudan, 92% mobile bank users do not have formal
accounts, indicating the potential for mobile money to reach unbanked
users (Demirguc-Kunt and Klapper, 2012). Interest in the service,
however, is not confined to people without bank accounts because of its
convenience over alternative bank-based payment systems (Jack and
Suri, 2011; Murendo et al., 2017). In Kenya, for example, 43% of adults
who are active users of mobile banking also have formal bank accounts,
indicating that it is perceived to be a safe and inexpensive means of
payment (Demirguc-Kunt and Klapper, 2012). Experimental evidence
indicates that organizational use of mobile banking for money transfer
improves efficiency, while also offering the advantages of privacy and
convenience for recipients. The introduction of mobile banking has also
been associated with improvements of real per capita income and
consumption by households (Blauw and Franses, 2016; Aker et al.,
2016; Jack and Suri, 2014), due to greater remittance receipts and re-
ductions in transaction costs, such as transport and time costs
(Munyegera and Matsumoto, 2016; Aker et al., 2016; Jack and Suri,
2014). Mobile money can further be used for purposes of risk sharing
across individuals or over time, helping users to smoothen their con-
sumption in response to unexpected individual or collective income
shocks (Jack and Suri, 2014; Blumenstock et al., 2016). When mobile
money services include deposit mobilization and mass microcredit, they
also lead to improved saving behaviour, and labour reallocation due to
changes in occupational choices (Suri and Jack, 2016). The combined
effect of mobile money is particularly notable in Kenya, where the in-
novation has achieved near universal adoption. Recent research sug-
gests that M-Pesa has helped lift at least 2% of Kenyans out of extreme
poverty by reducing transaction costs, by enabling consumption
smoothing over time, and by enabling better occupational choices (Jack
and Suri, 2014; Suri and Jack, 2016).
3. Cross-country analysis of mobile money adoption rates
While the success of mobile money in developing countries with
inadequate financial services suggest that latent demand plays an im-
portant role, we also observe significant variations among developing
countries. This section reports results of our exploratory analysis to
explain cross-country differences in adoption rates. The analysis is
based on cross-country data of mobile money adoption rates from the
World Bank’s Financial Inclusion Indices (Findex) database. This data-
base contains cross-country indicators of financial inclusion that are
imputed from in two rounds of representative surveys (Demirguc-Kunt
and Klapper, 2012; Demirgüç-Kunt et al., 2015). The first round of
survey data was collected in 2011 by interviewing a total of more than
150,000 individuals in 148 economies. The second round of survey was
undertaken in 2014 by interviewing almost 150,000 individuals in 143
economies, which covered more than 97 percent of the world’s popu-
lation (Demirgüç-Kunt et al., 2015). The survey targeted randomly se-
lected, nationally representative samples for the entire adult population

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A.A. Lashitew et al.
in each country. Since the two surveys do not include identical mea-
sures of mobile money adoption rates, we will not be able to track
progress over time but will combine responses from both rounds as
indicated below.
We focus on three alternative measures for the adoption of mobile
banking services (Table 1). The first measure of adoption (‘Mobile Ac-
counts’) indicates the percentage adults in a country who have per-
sonally used mobile money accounts for payment and other services.
While a useful measure of adoption, this generic indicator covers the
use of mobile phones for diverse activities such as sending and re-
ceiving money, making transactions or paying bills. The other two in-
dicators measure the percentage of people who used mobile phones to
send and receive money (‘Sending Money’ and ‘Receiving Money’ in
Table 1). Since money transfer is the most common use of mobile
money (Demirgüç-Kunt et al., 2015), these indicators are highly re-
levant measures of adoption. Considering the diverse uses of mobile
money and potential differences in usage patterns across countries,
using these specific measures is important to get consistent explana-
tions for adoption rate differences. ‘Mobile Accounts’ is based on the
second wave of Findex survey (2014) while ‘Sending Money’ and ‘Re-
ceiving Money’ are based on the first wave (2011). Table 1 describes the
measurement of the variables and Table 2 provides descriptive statis-
tics.3
Fig. 1 reveals that the diffusion of mobile money differs significantly
across geographic regions. The African continent has the largest
adoption rate, with 13 African countries registering adoption rates of
10% or higher (Demirguc-Kunt and Klapper, 2012). There are also
considerable differences in adoption rates within Africa, since more
than a dozen countries have virtually zero adoption rates. Kenya has the
highest share of adults with a mobile banking account (58%) followed
by Somalia, Tanzania, and Uganda (around 35%).4 Fig. 1 also shows
that regional differences are relatively small outside of Africa although
there are some differences in usage. Europe, for example, has the least
percentage of people with mobile money accounts, but has a much
larger percentage of people using their phones for sending and re-
ceiving money. Fig. 1 is based on data for all countries, including those
in which mobile money is not available. Fig. A1 in the Appendix A
presents regional averages of mobile money adoption rates by ex-
cluding countries in which the service has not been introduced. This
graph shows higher average rates of adoption, but the pattern of geo-
graphic variations remains generally the same.
3.1. Regression framework
We draw on the broad literature on technology diffusion to identify
potential determinants of mobile money adoption rates. We consider
three categories related to the demand, supply, and contextual factors
that could influence adoption rates (Rogers, 2003; Erumban and De
Jong, 2006). Demand (pull) factors affect the level of attractiveness of
mobile banking, thus determining the success of mobile banking in-
novations. Supply (push) factors are associated with the development of
the technological capabilities that enable mobile money innovations.
Finally, we consider a number of macro-level economic and institu-
tional factors that can affect the diffusion process.
a) Demand factors. Latent demand for convenient, cheaper and safer
3
The three measures of adoption are strongly correlated with each other. The
correlation coefficients of Mobile Accounts with Sending Money and Receiving
Money are 0.61 and 0.55 respectively. The latter two have a very strong cor-
relation coefficient of 0.97.
4
These figures refer to the year 2014. By the end of 2016, M-Pesa alone had a
total of 27 million subscribers in Kenya, indicating 100% adoption among the
adult population. The number of active M-Pesa users (those who used the
service in the past one month) was 19 million, indicating an adoption rate of
69%, without counting users of other mobile money services.
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Research Policy 48 (2019) 1201–1215
financial services is considered to have given impetus to mobile
money innovations in developing countries (Van der Boor et al.,
2014; Muwanguzi and Musambira, 2009). Low level of financial
access in developing countries could also convince service providers
of the commercial feasibility of introducing mobile money and sti-
mulate regulators to encourage its development. For our analysis,
we consider three standard indicators of financial access (Demirgüç-
Kunt et al., 2015), namely: i) the percentage of adults who have an
account at a formal financial institution; ii) ATM penetration and;
iii) the level of bank concentration in the country. Greater financial
access in the form of bank account ownership and ATM penetration
is expected to reduce demand for mobile money, whereas bank
concentration, which is likely to be associated with reduced com-
petitive pressure in the sector, is expected to increase demand for
mobile money.
b) Supply factors. A telecom sector that is well-functioning and de-
veloped, in terms of regulatory oversight, network accessibility, and
quality, can be a key supply-related driver of mobile money in-
novations (Van der Boor et al., 2014; Demirgüç-Kunt and Klapper,
2013). Famous examples of mobile money services such as M-Pesa
are operated by telecom companies that leverage their technological
capabilities to provide innovative financial services (Mas and
Morawczynski, 2009). Technological sophistication of the telecom
sector, therefore, can place a constraint on the successful diffusion of
mobile money innovations. Since telecom industries tend to exhibit
natural monopolies, the presence of an effective regulatory frame-
work that reduces anti-competitive practices and protects public
interest can encourage the development of mobile money. Previous
research has likewise documented that competition-enhancing reg-
ulations expedite the diffusion of broadband internet (Gruber and
Koutroumpis, 2013).
We consider a range of indicators related to the performance of the
telecom sector and its regulatory framework. Firstly, we account for
mobile phone penetration differences across countries, which is
likely to enhance the feasibility of mobile money by expanding the
pool of potential users. Since gross mobile subscription rates that do
not correct for multiple SIM-card ownership will overstate mobile
phone penetration (GSMA, 2018), we impute a measure of unique
mobile subscription rates from existing data of gross subscription
rates (see Table 1). Secondly, we control for the quality and cov-
erage of mobile internet networks, which are likely to affect the
operational feasibility of mobile money and alternative services
such as internet-based money transfer services. The effect of these
variables on the diffusion of mobile money innovations will be
difficult to decide a priori. On the one hand, mobile internet con-
nectivity will reflect the quality of the telecom infrastructure, which
should facilitate the development of such innovations, while on the
other hand greater mobile internet connectivity could increase
competition from alternative services such as internet banking. Fi-
nally, we account for differences in telecom sector regulatory
quality in terms of the transparency, independence, resource avail-
ability and enforcement capacity of the telecom regulator
(Waverman and Koutroumpis, 2011). We expect that well-regulated
telecom industries will be better positioned to expand the devel-
opment and diffusion of mobile banking services.
c) Macro-level factors. The adoption of mobile money is also likely to
be affected by a number of macro-level socio-economic factors. High
GDP per capita and GDP growth rate are expected to be associated
with greater adoption rates by increasing demand for the service.
Another feature of the institutional context that can affect adoption
rates is protection against crime risks. In Kenya, for example, one of
the factors that increased the appeal of M-Pesa was the reduced risk
of losing money en route, which is a frequent incident in traditional,
inter-personal means of money transfer (Murendo et al., 2017). We
thus expect that exposure to crime risk will be associated with faster
adoption of mobile money. Therefore, we control for a measure of
A.A. Lashitew et al. Research Policy 48 (2019) 1201–1215

Fig. 1. Adoption rates of mobile banking services by continent.

Notes: The data source is Findex database, which is based on nationally representative and standardized surveys across countries. The measurement of variables is
described in Table 1.

rule of law, which gauges the extent to which agents have confidence also shows that less than half of the world’s population (45.7%) has an
in and abide by the rules of society (World Bank, 2016). Finally, we account at a formal financial institution, whereas unique mobile sub-
also control for the level of urbanization, which is likely to expedite scription rates average at about 62%.6 This gap is even more apparent
the diffusion of new technologies. when we consider developing countries. The Sub-Saharan African re-
gion, for example, has the lowest level of formal bank accounts (21%)
whereas mobile phone penetration is significantly higher at 66% in
gross terms and 48% based on unique subscription rates.7 This poten-
Table 2
Descriptive statistics for dependent and independent variables.
tially explains why Africa has the highest mobile money adoption rate
(10.2%), which is more than three times the world average.
Variable Obs. Mean Std. Dev. Min Max

Dependent variables 3.3. Results

Mobile accounts (%) 145 3.30 7.90 0.00 58.39
Sending money (%) 146 3.12 7.58 0.00 60.48 This subsection reports the regression results that explain the three
Receiving money (%) 146 4.47 9.58 0.00 66.65
measures of mobile money adoption. Since adoption rates are expressed
Demand factors in percentage terms, they are by construction censored from zero and
Account at formal fin. institution 147 45.72 31.73 0.40 99.74
100. The standard Ordinary Least Square (OLS) estimator in this case
(%)
ATM penetration 148 43.28 45.03 0.33 279.71 will lead to inconsistent estimates since it fails to account for differ-
Banking sector concentration 143 71.94 20.70 9.49 100.00 ences in the conditional probability of adoption for limit observations –
Supply factors i.e. countries with zero or 100% adoption rate (Amemiya, 1984). The
Gross mobile subscription rate 155 100.20 38.18 15.49 222.28 analysis, therefore, is based on the nonlinear two-limit Tobit estimator
Unique mobile subscription rate 155 61.78 20.92 11.69 115.94 that accounts for the censoring of adoption rates on both sides of the
Mobile connectivity 147 11.92 14.69 0.04 67.19 distribution.
(performance)
The Tobit model assumes the presence of an unbounded latent
Mobile connectivity (coverage) 147 62.18 27.29 8.88 99.60
Telecom regulation 128 0.41 0.17 0.00 0.74 adoption variable that is a linear function of the independent variables
and normally distributed residuals (Amemiya, 1984). There are two
Macro-level factors
GDP per capita (PPP) 152 17,874 19,677 648 132,468 relevant marginal effects for the explanatory variables: one measuring
GDP growth 153 3.90 2.82 −4.92 11.10 the marginal effects of the independent variables on the latent, un-
Rule of Law 157 −0.09 1.01 −2.42 1.98 observed adoption rate and another on the observed, censored adoption
Urbanization (%) 155 58.22 22.85 8.81 100 rate. Table 3 reports marginal effects on the censored, observed adop-
tion rate, which have a more direct economic interpretation. Due to the
Notes:- The average values for the dependent variables are calculated across all
countries, including those in which mobile money services are not available.
(footnote continued)
3.2. Descriptive statistics money account, with 4.4% of adults sending money using mobile phones and
6.3% of adults receiving money through their phones.
The descriptive statistics for our dependent and independent vari- 6
Gross mobile phone subscription rate averages at 100%; however, this sig-
ables are reported in Table 2. The Table shows that 3.3% of adults nificantly overstates mobile phone penetration since individuals often own
globally have active mobile money accounts. A comparable percentage more than one SIM-card. A representative survey of mobile phone users by
of people (3.1%) use mobile phones to send money, whereas relatively GSMA in China revealed that urban users typically own 2.03 active SIM-cards,
more people receive money through mobile phones (4.5%).5 The Table whereas rural users own 1.18 active SIM-cards (GSMA, 2014). We use these
figures to compute unique mobile phone subscription rates for each country by
dividing total urban subscriptions by 2.03 and total rural subscriptions by 1.18
before calculating unique subscriptions per 100 individuals (see Table 1).
5 7
The percentage of people who receive money through mobile phones is These are average figures for the years 2011 to 2014. According to World
larger than those with mobile money accounts because recipients of mobile Bank data, gross mobile subscription rate in Sub-Sharan Africa as of 2015 was
money transfer typically do not need an account. Average adoption rates are 76%, whereas the percentage adults with bank and mobile accounts was 29%.
much larger if we focus only on the subset of countries in which the service is GSMA (2018), on the other hand, puts unique subscription rates in Sub Saharan
available. Among these countries on average 6.5% of adults own a mobile Africa in 2017 at 44% against a global average of 66%.

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Table 3 Among the supply-related factors, mobile penetration, which we

Tobit regression results explaining cross-country differences in the adoption of measure using unique mobile subscription rates, appears with insig-
mobile money innovations. nificant coefficients in all regressions, showing that access to mobile
Dependent variables phones is not necessarily a driver of mobile money innovations. The
two measures of mobile connectivity are mostly insignificant, poten-
Mobile money Sending Receiving tially because they capture the offsetting positive effect of better tel-
accounts money money
ecom infrastructure and a negative effect of internet connectivity that
Demand factors enhances competing internet-based services. There is a minor exception
Bank accounts 0.02 −0.00 −0.01 of a weakly significant negative effect from mobile connectivity per-
(0.04) (0.05) (0.06) formance to use of mobile phones for receiving money, suggesting that
ATM penetration −0.02* −0.03 −0.03
the competition effect dominates in this specific relationship.
(0.01) (0.02) (0.03)
Banking sector concentration −0.05* 0.00 −0.00
The variable capturing telecom sector regulation has a large positive
(0.03) (0.03) (0.03) effect on the adoption rates, indicating greater mobile money diffusion
Supply factors
in countries where the telecom regulator has greater transparency, in-
Unique mobile subscription rate 0.05 0.00 −0.01 dependence, resource access, and enforcement capacity. The. The
(0.03) (0.03) (0.04) marginal effect of this relationship (6.96) is quite large, indicating that
Mobile connectivity 0.05 −0.14 −0.18* an increase of one standard deviation in the quality of telecom sector
performance
regulation translates into an increase of 1.18 percentage points in the
(0.05) (0.09) (0.11)
Mobile connectivity coverage 0.05 0.02 0.04 adoption of mobile money (1.18 = 6.96 *0.17). This in turn represents
(0.03) (0.04) (0.04) a 36% increase compared to the average of the mobile money account
Telecom sector regulation 6.96*** 2.88 4.50 variable (3.3%), showing that differences in the quality of telecom
(2.68) (3.12) (3.61) regulation can lead to significant variations in adoption rates. Telecom
Macro-level factors sector regulation, however, does not appear to affect the extent to
GDP per capita in PPP (in logs) −1.37 3.13** 3.95** which mobile money is used for sending and receiving money.
(1.04) (1.29) (1.60)
Among the macro-level control variables, GDP per capita is posi-
GDP growth 0.60*** 0.25 0.16
(0.19) (0.24) (0.29) tively associated with sending and receiving money through mobile
Rule of Law −1.51 −4.03*** −5.34*** phones. GDP growth, on the other hand, leads to greater adoption rates
(1.05) (1.53) (1.85) but has no effect on usage. Interestingly, rule of law has a significant
Urbanization −0.03 −0.03 −0.03
positive effect on sending and receiving money although it does not
(0.04) (0.04) (0.05)
affect adoption rates. This indicates that crime risk in countries with
Region dummies weak rule of law induces people to use mobiles for money transfer,
Africa 8.87*** 3.32* 5.86**
(2.54) (1.94) (2.43)
suggesting that it is perceived to be safer and more secure than tradi-
Asia 4.15** −1.41 −0.39 tional inter-personal money transfer methods (Jack and Suri, 2011; Mas
(1.67) (1.74) (1.92) and Morawczynski, 2009). Urbanization does not have an effect on the
Americas 5.83*** −3.59** −3.33* adoption or use of mobile money accounts. Finally, the significant
(2.03) (1.68) (1.84)
dummy variable for Africa across the regressions indicates the greater
Middle East 7.07*** −5.00 −4.02
(2.57) (3.15) (3.08) diffusion of mobile money innovations in the continent that is not
captured by other variables.
Observations 102 108 108
This section has sought to explain the large cross-country differ-
Note: Results are based on the two-limit Tobit estimator that accounts for the ences in the adoption of mobile money. Overall, the regression results
censoring of adoption rates from 0 and 100. Reported coefficients are marginal indicate that diverse socio-economic and institutional factors influence
effects on the censored, observed adoption rate. Since these marginal effects the adoption and usage of mobile money services. While adoption rates
vary across countries depending on other explanatory variables, the reported are largely driven by GDP growth the quality of telecom regulation, the
values are averages across countries. Robust standard errors are given in par- use of mobile phones for money transfer services is positively associated
enthesis. The asterisks indicate that the variable is significant at the levels of with GDP per capita and the strength of rule of law. These different
1%, 5% and 10% respectively i.e. ***p < 0.01; **p < 0.05; *p < 0.1. explanations point to the importance of making distinctions between
overall adoption of mobile money and its application for specific
non-linear relationship between observed adoption rates and the in- functions. Moreover, the results suggest that regulatory and market
dependent variables, these marginal effects differ across observations conditions are perhaps more important determinants of the diffusion of
depending on the value the independent variables take. The figures mobile money innovations than factors related to the telecom or fi-
reported in Table 3 are average values of marginal effects across all nancial sectors.
observations. While our quantitative analysis is useful for assessing the relative
Table 3 reveals that demand-related factors have statistically weak importance of different diffusion determinants, it is less capable of
effect on the adoption rate of mobile money. Ownership of bank ac- providing in-depth understanding of how mobile money innovations
counts does not have a significant effect on any of our measures of emerge. More particularly, it leaves unanswered the question of how
mobile money diffusion. While ATM penetration is associated with re- and why mobile money innovations extend financial inclusion.
ductions in the adoption of mobile money accounts, this relationship is Moreover, the use of cross-sectional data fails to capture heterogeneities
only weakly significant (p < 0.1). Likewise, banking sector con- among innovations in their stages of development, and the associated
centration have negative and weakly significant effect on mobile money non-linearities that determine their growth trajectories (Van de Ven,
accounts, which implies that concentrated banking sectors could block 2017). The next section will complement the results reported in this
the introduction of new mobile money services (Demirgüç-Kunt and section by analyzing the innovation system of M-Pesa to provide
Klapper, 2013). Overall, the results show that demand related factors nuanced understanding of the development and diffusion of mobile
have only negligible effect on adoption rates, showing that high latent money innovations, especially focusing on their emergence as in-
demand in developing countries in itself cannot explain greater adop- clusive/appropriate innovations.
tion rates in those countries.

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4. The technological innovation system of M-Pesa
4.1. Research context and method
Kenya is a global leader in the mobile money industry, which has
earned its capital, Nairobi, the nickname of the ‘Silicon Savannah’
(GSMA, 2015). The country boasts the highest adoption rate in our
dataset, with 58% of adults having mobile money accounts, and 61%
and 67% sending and receiving money through their phones respec-
tively. Mobile phone subscription in Kenya is close to 70%, whereas
only 42% of adults have accounts at formal financial institutions. The
country had only 2700 ATMs as of 2015 (Suri and Jack, 2016), resulting
in a very low penetration of only 10 ATMs for every 1000 individuals.
The asset share of the three largest banks is 53%, indicating a moderate
level of bank concentration compared to the rest of Africa (80%) and
the world average (72%). The quality of Kenya’s telecom sector reg-
ulation is 0.4, which is the same as the world average and higher than
the African average of 0.32 (Table 2).
Our analysis will focus on Safaricom’s M-Pesa,8 which is the pio-
neering and dominant mobile money service in the country, with a
market share of 65% in terms of users as of 2016.9 In the financial year
that ended in March 2017, M-Pesa had 27 million users, and generated
a revenue of 535 million USD, which grew at annual rate of 32%. The
value of financial transactions conducted through M-Pesa was around
52.9 billion USD (5.29 trillion Kenyan Shillings), which was equivalent
to 85% of the country's GDP (Safaricom, 2016). In comparison, the
value of M-Pesa transactions in 2011 was 7 billion USD or 30% of
Kenya’s then GDP (Vaughan et al., 2013), which indicates how M-Pesa
has grown rapidly to effectively become a second currency in the
country. The success of M-Pesa also inspired the formation of the Mo-
bile Money Division within Vodafone that introduced the service in
nine other countries, reaching tens of millions of users (Vodafone,
2016).10
In addition to extending financial access by providing affordable,
accessible and convenient financial services, M-Pesa has become a
source of additional income for tens of thousands of small-scale busi-
nesses that serve as its agents. Safaricom has built on the M-Pesa
platform to introduce a range of social innovations in sectors as diverse
as health, agriculture, energy and education. These services include
microcredit, payment of utility bills and school fees, bulk salary dis-
bursement, and last-mile delivery of international remittances through
partnerships with money transfers companies. In the financial year that
ended on March 2016, M-Pesa supported remittance payment of more
than 130 million USD (1.31 billion Kesh) from 100 countries. M-Pesa
has received numerous accolades for its social impact from the global
association of telecom operators (GSMA) and other international in-
stitutions, enabling Safaricom and Vodafone to be ranked first in
Fortune’s ‘Change The World List’ in 2015.
In analysing the innovation system of M-Pesa, we draw on interview
data collected in two rounds of fieldwork, and on secondary data from
multiple sources. The first round of primary data collection took place
in a period of five weeks in March and April 2016, and the second
round took place for a week in October 2016. During the first round,
one of the authors travelled to Kenya to conduct interviews at
Safaricom and its partner organizations. The focus in this round was on
understanding the innovation, development and diffusion of M-Pesa,
8
‘M-Pesa’ transliterates as mobile money – the letter ‘m’ stands for mobile and
‘Pesa’ is the Swahili word for money.
9
This figure is based on the 2015/2016 annual report of the telecom reg-
ulator (Communication Authority of Kenya). The next largest mobile money
providers as of 2016 were Airtel Money with a market share of 18%, and
Mobikash and Equitel each with a market share of 7%.
10
Apart from Kenya, M-Pesa is presently in use in Tanzania, South Africa,
Lesotho, the Democratic Republic of Congo, Egypt, Mozambique, Romania,
Albania, and India.
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Research Policy 48 (2019) 1201–1215
especially on identifying the factors that enabled its widespread adop-
tion. The fieldwork resulted in 31 interviews with purposefully selected
interviewees (Yin, 2014), half of which were with Safaricom staff and
the other half were with agents and super-agents (11 interviews),
partner banks (2 interviews), and agent network management organi-
zations (2 interviews). The second round of fieldwork focussed on un-
derstanding the broader organizational mechanisms that drive social
innovation in Safaricom. This effort resulted in 10 semi-structured in-
terviews with various organizational units that were directly or in-
directly involved in implementing Safaricom’s various social innova-
tions.
We also draw on a number of secondary sources to complement our
interview data, especially for re-constructing a historical account of the
development of the service. Our sources include in-depth retrospective
first person accounts that were written by individuals who played key
roles during the initiation of the project (e.g. Vaughan et al., 2013;
Hughes and Lonie, 2007).11 Finally, we used archival data including
annual reports of Safaricom and its partner banks, reports by the Cen-
tral Bank of Kenya and research reports on M-Pesa. The analysis is
conducted following the tenets of thematic analysis (Braun and Clarke,
2006), and we draw on the functional technological innovation system
framework for aggregating the themes. To check the validity of the
results, preliminary results from the analysis were presented at a re-
search workshop attended by senior management staff of Safaricom
who had been involved in the development of M-Pesa from its incep-
tion. The feedback from this meeting and other consultations with Sa-
faricom staff have been used to refine and validate the analysis.
4.2. Functions in the M-Pesa innovation system
The technological innovation system (TIS) perspective emphasizes
the complexity of innovation processes, as they involve interaction and
coordination among diverse actors from multiple institutional spheres
(Freeman, 1995; Niosi, 2008). TIS, therefore, takes a holistic view to
understand the interplay amongst diverse actors and functions that
affect the generation, diffusion and utilization of new technologies
(Niosi, 2008; Bergek et al., 2008). Within this research tradition, the
functional innovation system perspective adopts a dynamic character-
ization of the process of technological change (Jacobsson and Bergek,
2006; Hekkert et al., 2007; Negro and Hekkert, 2008; Bergek et al.,
2008). Whereas regional and national innovation system approaches
focus on the structural aspects of innovation systems (Bergek et al.,
2008), the functional approach pays attention to the processes or
‘functions’ of the technological innovation system that dictate the de-
velopment of innovation (Hekkert et al., 2007). This approach helps
analyze the interaction between the different innovation functions and
key actors that influence the rate, direction and eventual success of
innovations (Hekkert et al., 2007; Van Alphen et al., 2010). Previous
researchers have used this approach to understand, among other things,
the dynamics of technological change and the formation of new in-
dustries in developing countries (Gebreeyesus and Sonobe, 2012;
Tigabu et al., 2015).
We use the functional TIS approach to analyze the innovation
system of M-Pesa with the aim of identifying key actors and processes
that influenced its development and adoption. To that end, we build on
the existing literature but also make modifications to match the specific
features of our case. More specifically, we modify the framework of
Hekkert et al. (2007) by combining the interrelated processes of
11
The authors Hughes and Lonie were responsible for initiating and steering
the pilot and launch of M-Pesa, and in this paper they provide a detailed ac-
count of the piloting and early launch stages of M-Pesa. We also draw on the
book chapter by Vaughan et al. (2013), which is co-written by the former CEO
of Safaricom (Michael Joseph) who was instrumental for the introduction and
growth of the service.
A.A. Lashitew et al.
Fig. 2. Trends in the adoption of M-Pesa.
Source: Based on figures from Safaricom’s annual reports.
‘knowledge development’ and ‘knowledge diffusion’ within a single
process of ‘knowledge development and diffusion’. This approach is
more suited for our analysis since mobile banking involves incremental
innovations in the form of socio-technical adaptations (Foster and
Heeks, 2013a) rather than the development of a full-fledged knowledge
system. Similarly, we combine the functions of market formation and
resource mobilization because both functions in our case were under-
taken simultaneously and by the same actor. Consequently, we use the
following five key functions of technological innovation systems: 1)
Entrepreneurial experimentation; 2) Knowledge development and dif-
fusion; 3) Guidance of the search; 4) Market formation and resource
mobilization and 5) creation of legitimacy. The remaining parts of this
subsection analyze the innovation system of M-Pesa using this frame-
work, and the core results are summarized in Fig. 3.
4.2.1. Entrepreneurial experimentation
Entrepreneurial experimentation is an innovation function that
characterizes how entrepreneurs use their knowledge, networks and
resources to create new business opportunities through experimenta-
tion with new technologies (Hekkert et al., 2007; Bergek et al., 2008).
M-Pesa was born out of an international pilot project that explored the
role of ICT for enabling financial innovations. In mid-2003, a social
innovation unit of Vodafone, the British telecom firm, won a grant of £1
million from the British Department for International Development
(DFID) to develop an innovation that would extend financial services to
the poor. The grant was matched by an equal amount of contribution
from Vodafone, which led to a pilot project in partnership with Safar-
icom - Vodafone’s Kenyan associate-, a micro-finance institute (MFI),
and a commercial bank (Hughes and Lonie, 2007). After need assess-
ment workshops, it was decided that the innovation would support fi-
nancial service delivery of MFIs using a mobile-based payment plat-
form.
The product had to be accessible on simple mobile phones, and
support SMS texts in the local language (Swahili), which necessitated
developing a custom-made technological platform. A prototype was
developed and was tried on around 500 microfinance borrowers in two
different locations in Kenya - Nairobi and Thika. The prototype was
designed to help MFI clients to send loan repayments and get credit
receipts on their mobile phones. To withdraw cash from their mobile
wallet (to convert electronic money receipts to cash), or to top-up their
mobile wallet (to convert cash to electronic money on their mobile
wallets), users had to visit one of Safaricom’s airtime dealers. The
dealers were trained to operate the payment application and provide
customer care, and the pilot clients were given a free mobile phone with
the software pre-installed in it.
The pilot, which ran from October 2005 to October 2006, identified
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Research Policy 48 (2019) 1201–1215
a number of functional modifications and operational changes for im-
proving the usefulness of the service (Hughes and Lonie, 2007). More
generally, the pilot revealed that M-Pesa had broader appeal than
supporting MFI transactions, since users appeared to appreciate the
convenience of the service for transactions unrelated to loan repay-
ments. Surprisingly, the service was found not suitable for microfinance
transactions since it undercut the need for inter-personal interactions
among borrowers, which was an essential aspect of group lending
practices. The final product was thus redesigned to provide a generic
mobile payment service. Safaricom anticipated new revenue stream and
better customer retention, while Vodafone saw a prospect for sup-
porting international money remittances across countries in which it
was operating.
M-Pesa was launched in March 2007, ten days after getting an ap-
proval from the Central Bank. It started by offering three key functions:
withdrawing cash from the agent network, transferring money and
buying Safaricom airtime credit (Hughes and Lonie, 2007). The service
was an instant success, acquiring more than 2 million customers within
a year. Within three years, it had almost 10 million customers. As of
2017, the number of M-Pesa users has reached 27 million, served by a
network of more than 130,000 agents spread across the country
(Fig. 2). Just one month after the launch of M-Pesa, another telecom
firm, Celtel, launched its own mobile banking service called Sokotele,
which later became Zap and eventually Airtel Money. By 2010, the
number of competing mobile banking applications has flourished to
include new services called Mobikash, Orange money and Yu-cash, and
by 2016 there were six mobile banking services including the new
additions of Tangaza and Finserve Limited (Equitel). These services,
however, have struggled to outcompete M-Pesa given its dominant
position and its first mover advantages.
The creation of an entirely new mobile money industry in Kenya
thus started with a small-scale entrepreneurial experimentation.
Considering the high risk of failure and the limited prospect of mar-
keting the product, the presence of public sources of funding from DFID
was crucial to get the pilot started. The fund also expanded the ex-
perimentation window by allowing the pilot to start with a broad ob-
jective until it identified a socially and commercially desirable in-
novation for money transfer services. Moreover, the strong commitment
of Safaricom and Vodafone was critical for circumventing the numerous
challenges that the innovation encountered in its course towards
widespread adoption.
4.2.2. Knowledge development and diffusion
Knowledge development and diffusion are innovation functions re-
lated to the creation, evolution and exchanging of knowledge in the
innovation system. Product development in M-Pesa involved
A.A. Lashitew et al.
continuous adaptations and extensions of product features in response
to market need assessments, which was made possible because of the in-
house development of the product (Hughes and Lonie, 2007). M-Pesa
did not constitute developing significantly new technologies, but rather
was defined by the socio-technical process of articulating specific cus-
tomer needs, and devising technical solutions to meet them (Foster and
Heeks, 2013a).
At least three aspects of product development stand out as critical
factors for the fast adoption of M-Pesa. Firstly, keen emphasis on the
functional benefits of the product ensured its relevance to address an
existing market need. Innovations are often hampered by organization-
centric approaches that give primacy to resource availability and other
organizational constraints over market needs, especially in the case of
multinationals innovating for developing countries (Foster and Heeks,
2013a). Safaricom and Vodafone avoided this trap by remaining com-
mitted to the product’s ‘appropriateness’ to the Kenyan market, which
necessitated developing a custom-built software rather than acquiring
off-the-shelf solutions (Hughes and Lonie, 2007). This enabled in-
corporating customer feedback and insights during piloting as well as in
the final product. For example, the product feature that allowed users to
buy airtime credit through M-Pesa was added during piloting based on
customer feedback, which offers an example of user-driven innovation
(Van der Boor et al., 2014). Moreover, customer insights motivated the
drastic change in the product’s value proposition from the pilot’s goal of
supporting microfinance transactions towards money transfer func-
tions. The successful integration of insights from customer usage and
experience was thus crucial for ensuring the product’s functional re-
levance, which provided a practical, safe and affordable money transfer
service in a country where bank penetration was very limited. Safar-
icom also made sure to clearly articulate and communicate the func-
tional benefits of M-Pesa through an effective marketing strategy. M-
Pesa was launched as a money transfer system with a marketing mes-
sage of ‘send money home,’ which resonated with millions of urban
Kenyans who regularly sent money to their family members in rural
areas. A mixed marketing campaign that included television and radio
advertisements, personal demonstrations via road shows, and word-of-
mouth marketing enabled reaching a broad spectrum of potential users.
Safaricom also actively linked M-Pesa with its recognizable brand name
to enhance trust in the service (Mas and Radcliffe, 2010).
The second important feature of product development in M-Pesa is
its continual adaptations and extensions, which grew to include diverse
functionalities. M-Pesa bundled diverse services such as paying bills at
tens of thousands of stores, international remittances, micro-insurance,
micro-credit, and money transfer to and from regular bank accounts.
Many of these services have become highly successful, including a
number of micro-credit services that are offered in partnership with
banks. One of them, M-Shwari provides several banking products such
as interest-bearing deposits and micro-credits. Micro-credits have be-
come so popular that M-Shwari alone had amassed a customer base of
more than 12.5 million, issuing more than 50,000 small loans per day
with an average value of around 13 USD (Cook and McKay, 2015). The
development of these functionalities was highly informed by customer
feedback in the form of market research, but also through direct ob-
servations of the novel ways customers use the product.
Finally, knowledge development in M-Pesa was ‘polycentric’ in a
sense that ideas for product modifications and extensions came from
multiple sources. For example, M-Shwari was co-developed with
Commercial Bank of Africa, which initiated the service with the aim of
leveraging M-Pesa to venture into retail banking where its reach was
limited. Banks also took the initiative to integrate M-Pesa with their
electronic systems to allow users to transfer money from their bank
accounts to their M-Pesa wallet, and vice versa. Banks have benefited
from this since they charge commissions for this service while pre-
viously cash withdrawals and deposits by clients were done free of
charge. Moreover, clients now do not have to visit bank branches, re-
ducing the work pressure on front-office staff and yielding significant
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Research Policy 48 (2019) 1201–1215
labor cost savings.12 More recently, Safaricom has opened up the Ap-
plication Programming Interfaces (APIs) of M-Pesa for third parties to
allow them develop their own applications that are integrated with M-
Pesa. This integrative and open innovation approach has facilitated
knowledge accumulation and diffusion, leading to a near-universal in-
tegration of M-Pesa with the country’s banking and payment systems.
4.2.3. Guidance of the search
Guidance of the search constitutes directing and coordinating the
learning mechanisms of entrepreneurial experimentation, knowledge
development and diffusion functions (Hekkert et al., 2007; Bergek
et al., 2008). This could include activities such as developing product
and system standards, setting up the innovation agenda, and creating
institutional arrangements that enable commercializing the innovation.
The task of guiding the innovation search in M-Pesa was led by a pri-
vate firm, Safaricom, and indirectly by Vodafone, the British multi-
national that partially owns and manages it. M-Pesa, therefore, re-
presents a case where private enterprises played an important role in a
domain where public interest, namely financial inclusion and literacy,
was prominent. Safaricom (and by extension Vodafone) played a prime
role at all stages of the innovation process, which was particularly
crucial in the early days when strong leadership was needed for making
risky investments and building the innovation ecosystem.
Safaricom set up the innovation agenda around mobile banking by
emphasizing its significance for financial inclusion. The focus on the
social significance of mobile money was in part due to the involvement
of DFID in funding the pilot, but remained central to M-Pesa because of
Safaricom’s commitment to the cause. Since its formative years,
Safaricom has nurtured a corporate image as a cause-driven Kenyan
company in a deliberate endeavor to create better emotional connection
with Kenyans (Tuwei and Tully, 2017). As the first major telecom op-
erator in Kenya, the company became a household brand name when
mobile technology became a symbol of modernization. Safaricom
exploited this symbolic advantage to develop an image of a flagbearer
operator that pursued the collective welfare of all Kenyans, which is
epitomized by its motto of ‘Transforming Kenyan’s Lives.’ Although M-
Pesa was primarily seen as customer loyalty program, it was also en-
visioned as means of advancing Safaricom’s brand image by strength-
ening its social contribution. The strong alignment of the product with
the company’s image and strategy, therefore, contributed to the success
of M-Pesa by providing sufficient resources for the difficult and time-
consuming tasks of building the agent network, and coordinating ac-
tivities across different actors.
One aspect of the central coordination role of Safaricom in M-Pesa is
the strict control it maintains on important decisions in the value chain.
For example, the payment system is strictly centralized – all commis-
sions are collected by Safaricom at the end of each transaction, to be
paid back to agents and super-agents at the end of the month. Likewise,
Safaricom arranged the legal framework that governed its relationship
with the M-Pesa agents and super-agents. While Safaricom’s central role
was critical for efficiency and entrepreneurial risk taking during the
early stages of market development, it also strengthened its dominant
position, an issue which we will discuss in greater detail in the next
subsection.
4.2.4. Market formation and resource mobilisation
Market formation includes a set of activities that enable the com-
mercialization of a new technology, including pricing mechanisms and
tax allowances, while resource mobilization includes the collection of
human, financial, and other complementary assets to enable the
12
Figures from the annual bank supervision report of the Central Bank of
Kenya indicate a steady increase in the number of depositors per bank employee
in Kenya. The figure rises from 412 in the year 2000 to 972 in 2015, which the
central bank attributes to mobile banking and other technologies.
A.A. Lashitew et al.
development of a new technology (Hekkert et al., 2007; Bergek et al.,
2008). The revenue model of M-Pesa is based on a small margin mass-
market strategy that benefits from large-scale adoption (Vaughan et al.,
2013). As a dominant telecom firm with a market share of at least 65%
since its formation, Safaricom had potential M-Pesa customers in every
part of the country. However, it was necessary to build an extensive
agent network to reach potential customers in remote towns and vil-
lages. Such a network could also be a major source of differentiation
from banks, whose limited reach inhibited their ability to extend fi-
nancial and payment services nationwide. Market formation thus re-
quired making sizeable financial and organizational investments by
Safaricom to build the extensive agent network that became a signature
attribute of M-Pesa.
As can be seen in Fig. 2, the number of M-Pesa agents grew ex-
ponentially from a mere 750 during its launch in 2007 to 130,000 in
2017. Safaricom’s value proposition for these agents was additional
commission income for little extra cost, as well as attracting more
customers to their core business (Vaughan et al., 2013). Safaricom
started by recruiting its airtime credit dealers as M-Pesa agents, and
then expanded its agent network rapidly by recruiting chain stores such
as petrol stations, supermarkets, postal banks, retail banks, and utility
companies (Vaughan et al., 2013). Using airtime dealers and networked
businesses as agents was advantageous in the early stages when finding
agents was not easy due to low levels of commission income. Recruiting
new agents became increasingly easy as the product achieved scale and
network advantages resulted in attractive commission income. To en-
sure the quality and reliability of customer service, Safaricom applied
strict agent selection criteria, and provided trainings through a dedi-
cated intermediary organization (IFC, 2009; Mas and Morawczynski,
2009). A standardized training was provided for new agents, including
Know-Your-Customer (KYC) and anti-money laundering regulations,
followed by regular on-the-field trainings (IFC, 2009). Agents were
subjected to regular check-up visits and evaluations based on selected
key performance indicators (Mas and Morawczynski, 2009). Commis-
sion incomes were paid in proportion to the revenue that agents gen-
erated, which gave them incentives to attract users and provide quality
customer care.13
In order to manage this extensive agent network, Safaricom created
commission-based partnerships with an extensive network of financial
institutions, including bank branches, postal banks, and microfinance
institutes. These institutions, also called ‘super-agents’, serve as
wholesalers for distributing cash and electronic money between
Safaricom and its agents. Their main task is dispensing cash to agents
for daily use (often at the beginning of the day) and taking deposits
from agents (often at the end of the day) with the help of the electronic
transaction system of M-Pesa. Agent administration was highly cen-
tralized initially to accommodate the fast pace of growth, but was
eventually replaced by a loose association between agents and super
agents (Mas and Radcliffe, 2010; Foster and Heeks, 2013a).
In terms of resource mobilization, M-Pesa is an outcome of unique
combination of resources from various actors. Vodafone used its tech-
nological expertise to develop the software platform, which was li-
censed to Safricom for a fee. Safaricom was responsible for customer
acquisition and care, marketing, and building the agent network. The
associated financial cost of these activities in the first year was between
£8 and £10 million, and was equally shared between Safricom and
Vodafone (Vaughan et al., 2013). Moreover, Safaricom bore the full
13
Technical errors were common in the first years of M-Pesa. About 4.3% of
users have reported that their money was transferred to the wrong recipient and
only 1/3 of these users have managed to recover these funds (IFC, 2009). The
product’s reputation and integrity was safeguarded through sustained, multi-
pronged efforts that included on-the-spot troubleshooting by agents, dedicated
customer care through telephone calls, and eventually modifications in product
features and administrative procedures.
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Research Policy 48 (2019) 1201–1215
cost of replacing around 6 million old SIM-cards with new ones that had
M-Pesa pre-installed in them, at the cost of about 2 USD per unit. While
these financial investments would have been too heavy for a single firm,
cost sharing between the two firms reduced the investment risk of M-
Pesa (Vaughan et al., 2013). As a strictly mobile payment service, M-
Pesa is prohibited from offering traditional banking products such as
interest loans and saving products. However, Safarciom was able to
initiate strategic partnerships with commercial banks to offer financial
service, which enabled tens of millions of users to access micro-credit
and other services through M-Pesa (Cook and McKay, 2015). M-Pesa,
therefore, benefited from the contribution of unique resources and
capabilities by a network of diverse organizations.
4.2.5. Legitmation
Legitimation refers to activities that aim to create a supportive en-
vironment and counteract resistance to change, which new technologies
often encounter (Aldrich and Fiol, 1994; Jacobsson and Bergek, 2006).
M-Pesa initiated an entirely new industry with a novel business model,
which necessitated significant legitimation efforts to acquire buy-in
from various actors. We identify three aspects of legitimacy building,
which included: A) co-designing the regulatory framework; B) de-
fending the innovation against backlash and; C) co-creation.
A Co-designing the regulatory framework. M-Pesa was introduced at a
time when the regulatory provisions for mobile banking were not
yet available, which created the opportunity for designing a new
regulatory framework (Hughes and Lonie, 2007). Safaricom ap-
proached the Central Bank during the pilot to request critiques and
suggestions, and the engagement continued as the product was
being developed (Vaughan et al., 2013). The Central Bank was in-
terested in the success of M-Pesa due to its potential capacity to
advance financial inclusion, which was one of its important policy
prerogatives. Lacking precedents to draw upon for devising a reg-
ulatory framework, the Central Bank worked closely with Safaricom
to address regulatory aspects of the service such as product func-
tionality, legal compliance, technical requirements, prudential
controls, and consumer protection (Vaughan et al., 2013).
Once the Central Bank, in discussion with the telecom regulator,
became satisfied with the legal structures and controls of the pro-
duct, it wrote Safaricom a ‘letter of no objection’ in which it speci-
fied reporting obligations and a full set of prudential and market
conduct rules. The full value of customers’ deposits in the M-Pesa
system was to be saved in trust accounts at selected commercial
banks to ensure that the money was safe from claims by Safaricom’s
creditors in the event of insolvency (AFI, 2010). To address anti-
money-laundering concerns, limits were placed on the maximum
value of transactions that can be implemented though M-Pesa14, and
Safaricom was required to regularly report on the performance of M-
Pesa to the Central Bank as well as the telecom regulator. This al-
lowed M-Pesa to proceed under the oversight of the Central Bank
pending a complete regulatory framework under the National Pay-
ment System Act, which was still in legislating process at the time.
The product was launched in March 2007 in a ceremony that was
attended by the ministers of finance and communications.
B Defending against backlash. In its first two years of existence, M-
Pesa faced strong resistance from banks that felt threatened by the
service and lobbied against it through the Kenya Bankers
Association (AFI, 2010). M-Pesa was treated as a payment service
that allowed it to operate outside the restrictive regulatory frame-
work for banking services, which was in line with international
14
As of 2016, the maximum account balance allowed in M-Pesa is Ksh
100,000 (around 1000 USD), and the maximum daily transaction value is Ksh
140,000 (i.e. 1,400 USD) with maximum value per transaction of Ksh 70,000
(700 USD).
A.A. Lashitew et al.
practice for comparable innovations (IFC, 2009). The incumbent
banks argued that M-Pesa should be subjected to the same reg-
ulatory provisions as themselves since it provided similar financial
services. In response to these complaints, the Finance Minister re-
quested the National Treasury and the Central Bank to conduct an
audit of M-Pesa. The result of the ensuing probe, which was released
in January 2009, concluded that mobile money services such as M-
Pesa did not amount to offering banking services as they did not take
deposits from the public, and were already subjected to sufficient
oversight under the existing framework (Muwanguzi and
Musambira, 2009).
This incident is illustrative of the legitimacy challenges that in-
novations face from established players who have vested interests in
current technologies. Overall, these legitimation efforts highlight
the political nature of entrepreneurship and innovation in new in-
dustries (Aldrich and Fiol, 1994). Co-designing the regulatory fra-
mework through pro-active engagement with government institu-
tions helped Safaricom to counteract this threat. Moreover,
Safaricom positioned M-Pesa as a means for extending financial
services for unbanked populations, which made it easier to defend
the innovation on the grounds of its social significance.
C Co-creation. Once M-Pesa achieved the status of fait accompli, most
banks started to integrate it with their own core applications. By
allowing their clients to manage their bank accounts through M-
Pesa, banks were able to achieve significant savings in their opera-
tional costs. A number of banks also initiated strategic partnerships
with Safaricom to launch innovative financial products such as
saving accounts, interest payments, micro-credit and insurance.
These products include M-Kesho (since 2010, with Equity Bank), M-
Shwari (since 2012, with Commercial Bank of Africa) and KCB M-
Pesa (since 2015, with Kenyan Commercial Bank or KCB). Through
co-creation, therefore, Safaricom was able to turn prior enemies into
allies and benefit from their expertise in financial services.
4.3. Power and interest dynamics in the M-Pesa innovation system
The previous subsections sought to explain the development and
diffusion of M-Pesa without explicitly focusing on its distinctiveness as
an inclusive or appropriate innovation. Appropriate technologies address
the specific needs of developing countries in terms of production pro-
cesses (e.g. input availability) or market preference, thus filling in the
demand gap in these economies that arises from the non-transferability
of innovations from advanced countries (Basu and Weil, 1998). Another
related, albeit more exact, concept is inclusive innovation, which evokes
the normative notion of empowering disadvantaged social segments,
especially those previously excluded from participating in market ex-
changes (Kaplinsky, 2011; Pansera and Owen, 2018). M-Pesa can be
characterized as an inclusive or appropriate technology given its strong
emphasis on financial inclusion (‘reaching the unbanked’), and appro-
priateness to local contexts. As explained under the functions of en-
trepreneurial experimentation and knowledge development, the service
was consciously designed to be simple and affordable in order to en-
hance its accessibility for semi-literate rural inhabitants.15
The emphasis on the appropriateness and inclusiveness of innova-
tions creates additional considerations than their financial feasibility,
raising questions of how actors reconcile these competing motives. For
example, what motivates commercial businesses to take up social issues
15
The use of affordable SMS technology has enabled M-Pesa to be more ac-
cessible and affordable than alternative services such as agency banking and
micro-finance. Surveys show that more than half of M-Pesa users do not have
formal bank accounts (Demirguc-Kunt and Klapper, 2012), making M-Pesa the
only channel through which millions of small and informal business owners,
micro-entrepreneurs, and semi-literate rural inhabitants access financial ser-
vices.
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Research Policy 48 (2019) 1201–1215
through inclusive/appropriate innovations, and what determines the
balance between commercial and social end-goals? Addressing these
questions requires paying explicit attention to the structure of power
and the nature of interests among actors in the innovation system to
understand the bargaining process through which the innovation
agenda, and consequently the appropriation of innovation rents, is
determined. The relatively agnostic view of the TIS approach towards
the political aspects of innovation processes presumes that innovations
do not involve trade-off between competing goals and choices
(Kaplinsky, 2011). Since this is unlikely in inclusive/appropriate in-
novations, we modify the TIS approach by integrating it with a fra-
mework for analyzing the structure of power and interest among actors
in the innovation system (see Table 4).
We use the power-interest framework to map the evolution of power
and interest among key innovation actors that shaped in the innovation
agenda in M-Pesa. This framework is typically used in the management
literature to identify salient stakeholders that deserve managerial at-
tention – i.e. actors who have high interest in the organization’s ac-
tivities and the power to influence it (Freeman, 2010; Mitchell et al.,
1997). Power is broadly understood as the ability to impose one’s will
on the basis of coercive (e.g. legal or physical), material (e.g. financial),
or normative (e.g. status) means (Mitchell et al., 1997). While we adopt
a similar meaning for power and interest, our focus is on assessing the
material (financial, technological) and political (regulatory) power of
actors, and their interests in specific innovation outcomes. Our analysis
is in line with previous research, which has also employed analytical
frameworks that capture the interplay between structural factors,
namely institutions and actors, and their functional roles to understand
innovation processes (Wieczorek and Hekkert, 2012; Wieczorek et al.,
2013; Bergek et al., 2008).
Table 4 summarizes the evolution of power and interest among
actors in the M-Pesa innovation system. Since the table is based on the
detailed case description in the previous subsection, we only summarize
key insights that emerge from the analysis. Firstly, the analysis reveals
that actors with different interests had taken the driving seat during the
different stages of development of M-Pesa. DFID and Vodafone played a
leading role during the initiation the piloting stages, but the product
was increasingly owned by Safaricom after its launch, which took the
responsibility of marketing, delivering, and extending the product.
Since these actors had divergent interests, the innovation agenda
emerged through a negotiated process that reconciled their competing
goals. Although DFID’s role and its voice in representing social causes
dwindled in the advanced stages of M-Pesa, the social cause remained
pertinent to a large part due to the strong involvement of the Central
Bank. As discussed under the legitimation function, Safaricom was
motivated to couch the innovation agenda around the issue of financial
inclusion in order to acquire the regulatory approval of the Central
Bank. This indicates that intended or accidental mechanisms that affect
the balance of power between actors representing social and commer-
cial goals can determine the extent to which an innovation becomes
appropriate or inclusive.
Secondly, the analysis indicates the presence of significant power
asymmetries in the M-Pesa innovation system. Table 4 reveals that only
Safaricom, Vodafone, and the government (particularly the regulatory
body) maintained high interest and power throughout the different stages
of the innovation process. Considering that both Vodafone and the gov-
ernment have had an ownership stake in Safaricom, there appears to be a
significant power concentration among these trio of organizations vis-à-vis
the remaining actors in the innovation system, which include millions of
customers, tens of thousands of agents and other intermediary businesses.
Also considering the first-mover advantage of M-Pesa and the dominant
position of Safaricom, the emergence of M-Pesa as a (natural) monopoly
becomes hardly surprising. Viewed from this angle, the development of M-
Pesa as an inclusive innovation seems an outcome of fortuitous circum-
stances rather than an inevitable end. An example of favorable external
contingencies that contributed to this outcome is Safaricom’s purpose-
A.A. Lashitew et al. Research Policy 48 (2019) 1201–1215

Table 4
Power and interest mapping of key actors in the M-Pesa innovation system.
Actor Power dynamics Interest dynamics

Safaricom & Vodafone High power due to their contribution of High interest in economic profit
-financial resources Moderate to high interest in social impact (especially since Safaricom sees
-managerial expertise itself as a purpose driven company that champions the national cause of
-technological expertise empowering Kenyans – see Subsection 4.2.3).
-telecom infrastructure & network -The interest in social increases gradually as the compatibility between
-Their power remains unchanged in different stages of the financial inclusion and profit making becomes more apparent.
innovation cycle.
Financial and telecom High power High interest in social impact since financial inclusion falls within the
regulators -Financial regulators are in charge of devising the legal framework policy prerogative of the financial regulator (the Central Bank of Kenya)
that governs mobile money, which could be favourable or High interest in regulatory oversight (consumer protection, anti-money
detrimental to the innovation. laundering etc) by telecom and financial regulators.
- The telecom regulator’s approval was needed every time a new -Interest in regulatory concerns (e.g. inter-operability, competition) vis-
functionality was added to M-Pesa. à-vis social issues increases in latter stages when regulatory risks
become more apparent.
Civil Society High power due to financial and technical contributions High interest in social impact throughout the entire process.
Organizations -DFID’s power was particularly high in the early stages (e.g. during
(Particularly, DFID) piloting), when its seed money contribution was active.
-Supporting role in subsequent functions.
Banks Moderate power High interest on the success of M-Pesa
-Through their national association, banks could request for - M-Pesa had direct implications for customer engagement.
regulatory action against M-Pesa (see the ‘legitimation’ function in - M-Pesa threatened their revenues from retail banking services
Section 4.2.5). (especially money transfer).
-This power declines in later innovation functions after M-Pesa was -The interest gradually shifts from adversarial to collaborative once M-
legally recognized. Pesa becomes fait accompli. -Banks subsequently started to integrate it
-Subsequently, banks could only choose individually whether or not with their systems to improve efficiency.
to participate.
Agents Low power High interest
- Individual agents have limited bargaining power since they were -For many agents, especially very small businesses, M-Pesa is an
not organized. important source of income.
-Agents could only individually choose whether or not to participate. - For small store owners, M-Pesa attracts new customers.
-This power marginally increases in later stages after the regulator -Larger (chain) businesses such as postal offices have moderate interest
banned agent exclusion clauses in 2014, enabling agents to serve since they are less dependent on agency commission income.
multiple mobile money operators.
Competing mobile money Low power High interest
providers -The first-mover advantage and dominant position of Safaricom -Competitors are interested in capturing the market share of M-Pesa.
limits their ability to compete.
Customers Low power High interest
-Customer are not organized, and had limited choices. -For many customers, M-Pesa is the only accessible and affordable
-Network externalities favour choosing M-Pesa to be a part of a money transfer means and source of micro-credit.
larger network. -Interest could be relatively lower among urban customers who have
-Their power rises gradually with the growth of competitors bank accounts.
providing new choices.

driven business model that emphasized the alignment between social and
business goal, which was discussed under the ‘guidance of the search’
function. This suggests that a power constellation that looks like Kenya’s
mobile and telecom sectors may very well fail to lead to inclusive mobile
money innovations in other contexts. Moreover, this result suggests that
the distribution of M-Pesa rents is likely to be favorable to the telecom
operator.
Finally, the analysis reveals how greater functional differentiation
emerged among the involved actors as the innovation process matured.
More specifically, we notice stronger regulatory oversight in latter
functions of the innovation process than during the early functions,
when the focus was on supporting the development of the innovation.
In its early stages, M-Pesa benefited from the willingness of regulators
to allow managed experimentation, and to co-devise a regulatory fra-
mework through ongoing dialogues with the telecom operator.
Gradually, however, trade-offs started to emerge between the goals of
encouraging the innovation system and ensuring a competitive en-
vironment (see Section 4.2.5). Dominant, first-mover telecom firms
could easily set up entry barriers, for example by limiting channel ac-
cess (e.g. USSD and other services) for banks that seek to launch
competing mobile money services. Alternatively, they could limit ‘in-
teroperability’ across services, either by prohibiting their agents from
serving other mobile money services, or by precluding money transfer
to and from competing new services. Safaricom, for example, used ex-
clusion clauses to prohibit its M-Pesa agents from serving as gents of
competing mobile money operators. The company justified its actions
on the grounds that it had invested financial resources in selecting and
training its agents, and thus had the right to prevent other service
providers from freeriding on these investments.
In 2014, the telecom regulator passed a ruling that barred Safaricom
from using agent exclusion clauses, which essentially forced Safaricom
to share its agents with Airtel Money and other competing services
(Mazer and Rowan, 2016). In the same year, the telecom regulator
ruled against Safaricom’s complaint on the practice of a new entrant
(Equitel), which involved placing ultra-slim SIM-cards on top of Sa-
faricom’s SIM-card to reach M-Pesa customers. The ruling enabled
Equitel to bypass a significant entry barrier, and thus become a major
mobile money service provider in the country16 . These incidents in-
dicate the gradual application of prudential regulatory oversight that
tampered the dominant position of M-Pesa. The gradual process was an
important enabler of mobile money innovation, since severely stringent
anti-monopolistic policies in the early stages could have dissuaded
16
As of 2017, Equitel had more than two million subscribers, and conducted
about 26% of the volume of mobile money transfers. Safaricom’s complaint
against Equitel was on the grounds that the use of two SIM-cards on a single
phone compromised data stored within the M-Pesa app. The regulator
(Communication Authority of Kenya, CAK) nonetheless allowed Equitel to go
ahead with a one-year trial period under the condition that it compensated its
subscribers for any losses they may incur on their M-Pesa accounts.

1212
A.A. Lashitew et al.
Safaricom from making the investments (Klein and Mayer, 2011), thus
aborting the significant welfare benefits (externalities) that accrued
from the success of M-Pesa.
5. Discussion and conclusion
Information and communication technologies hold the potential to
enable developing countries to ‘leapfrog’ into more advanced and effi-
cient production systems (James, 2009; Aron, 2017). Nowhere is this
more evident than in the emerging mobile money sector that leverages
expanding mobile phone access to extend financial and payment ser-
vices for unbanked populations. Mobile money has advanced financial
inclusion in countries like Kenya, Tanzania and Uganda, where more
than 35% of the population uses mobile phones for diverse financial
and payment services. In 2016, more people had mobile money ac-
counts than bank accounts in 19 developing countries, and there were
at least ten times as many mobile money agents as there were bank
branches in 37 countries (Suri and Jack, 2016). At the same time, a
large number of countries have virtually zero adopting rates, and many
developing countries are yet to introduce the service.
This study combines qualitative and quantitative data analysis to ex-
plain the development and diffusion of mobile money innovations and
examine their role in extending financial inclusion. Quantitative analysis
of mobile money adoption rates shows that latent demand for financial
services and expanding mobile phone access are not per se capable of
explaining the large cross-country variation in adoption rates. However,
we find that adoption rates are higher in countries that have greater GDP
growth rates, and have better regulated telecom sectors, whereas money
transfer services are more widely used in countries with greater level of
per capita income and lower levels of rule of law. These results suggest
that regulatory and general market conditions are perhaps more important
determinants of the diffusion of mobile money innovations than other
demand and supply related factors.
To get fine-grained understanding of the development and diffusion
of mobile money innovations, we extend our quantitative exercise by
conducting an in-depth study of M-Pesa, the world’s most successful
mobile money service. We combine interviews from an extensive
fieldwork and written historical accounts of M-Pesa to analyze the
evolution of various functions in the M-Pesa innovation system. We use
Fig. 3. A summary of the elements of the functions of the M-Pesa innovation system, and their relationships.
1213
Research Policy 48 (2019) 1201–1215
the functional innovation system approach (Hekkert et al., 2007;
Bergek et al., 2008) to capture the complex interplay of functions in
mobile money innovations, which straddles actors across diverse in-
dustries. Fig. 3 summarizes the results of this analysis by portraying the
complex relationship between the different innovation functions. The
guidance of the innovation search by Safaricom was central to the in-
novation process since it influenced the structure and effectiveness all
other functions, as indicated by the arrows pointing from it. Fig. 3 also
indicates that the nature of the entrepreneurial experimentation and
legitimation efforts influenced the effectiveness of market formation
and resource mobilization efforts, as well as the pace of knowledge
development and diffusion. This confirms that innovation processes do
not exhibit a linear sequence of activities but rather exhibit a complex
relationship among different functions (Van de Ven, 2017).
Fig. 3 highlights the centrality of the guidance of the search function
in defining the other innovation functions. This function included set-
ting the innovation agenda, which determined the goal of the innova-
tion and the roles of various actors therein. The lead firm in M-Pesa
played a key role in initiating a lengthy process of entrepreneurial ex-
perimentation, and was also responsible for knowledge development
and diffusion, market formation and resource mobilization and the
acquisition of legitimacy. Safaricom’s extensive ties with influential
actors, and its ability to leverage those ties strategically through in-
tensive cooperation and partnerships, was fundamental for the in-
stitutionalization of M-Pesa. The operator’s ownership and manage-
ment ties with Vodafone enabled it to build a customized software
platform, and its ties with the government provided it with the reg-
ulatory space for experimentation. The near universal diffusion of M-
Pesa in Kenya was also achieved through collaborations with com-
mercial banks and retailors that integrated the service with their sys-
tems. Coordination efforts that involved reaching out to diverse actors
to acquire resources, and bundling these resources in a unique way was
thus an integral aspect of the development of mobile money in Kenya.
The presence of a capable private sector player with regulatory support
facilitated the coordination of actors, mobilization of resources and
acquisition of legitimacy. At the same time, this led to power asym-
metries that strengthened the dominant position of the first entering
service provider.
The development of mobile money, as in other cases of innovation,
A.A. Lashitew et al.
tended to precede regulatory developments. Moreover, it was a com-
plex process that required significant early investments for building a
technological platform and a dedicated agent network. The Kenyan
experience indicates that, without a regulatory environment that re-
duced market uncertainties, making these investments would have
become too risky for commercial businesses. Further, the case demon-
strated the challenge of navigating between the two competing goals of
regulation – supporting innovation, and fostering competition. While
supporting the innovation process could become a priority in the early
stage of the innovation, this needs to be attended by a gradual shift of
focus towards ensuring that the dominant operator does not exploit its
position to stifle competition.
In addition to shedding light on the development and diffusion of
mobile money innovations in developing country contexts, our analysis
advances empirical understanding on the emergence of appropriate
technologies. To analyze the political processes that determined dis-
tributional outcomes of mobile money innovations, we extend the TIS
approach by integrating it with an adaptation of the power-interest
framework (Freeman, 2010; Mitchell et al., 1997). The results show
how appropriate or inclusive technologies emerge through a process of
contestation among actors with competing visions and end-goals. The
results suggest that the extent to which an innovation becomes in-
clusive or appropriate depends on the power of the strategic actor(s)
that represents social issues, the (perceived) alignment of social and
business goals, and the interplay of other relevant institutional and
market contingencies. The balance of power among actors pursuing
social and commercial end-goals can thus influence the extent to which
the innovation agenda is couched around social issues, with implica-
tions for the distribution of innovation rents.
Future research can build on these results by illuminating the con-
ditions that give rise to goal incompatibilities or power asymmetries in
Appendix A
Fig. A1. Adoption rates of mobile money services by geographic region.
Note: Average adoption rates by continent are calculated by excluding countries with zero adoption rate.
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Acknowledgements
This work was funded by the Ministry of Foreign Affairs of The
Netherlands through NWO-WOTRO as part of the research agenda of
the Knowledge Platform for Development Policies (Grant number W
08.350.102). The authors would like to thank NWO-WOTRO for making
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