Fintech Making Payroll for Underbanked Possible

Image by Noor Islam Kazi from Pixabay.

How labor is used in the East African country of Kenya has not changed much in decades besides increased mechanization. For example, today, like in the British colonial days, large farm owners still use day laborers to clear the land, plant, weed, harvest the crop, and any other task requiring many pairs of hands. Usually, these day laborers come into the farm once or twice a month. On the other days, they go to other farms in their locality to do similar menial jobs. They, therefore, expect to be paid at the end of each day they work. In the cities and towns, similar work arrangements can be found in construction and manufacturing.

How labor is used in the East African country of

However, what has drastically changed over the years is how the payrolls for this category of employees are created and managed. The most significant change to this aspect of management happened in the last two decades. To really appreciate what has been achieved in that time, one has to go back and explore how day laborers were paid before this period and why the change had to happen the way it did.

The absurdity of paying a day laborer through the bank

It had always been near impossible to payday laborers through the bank. Indeed, it was a common practice before 2000 even for permanent employees in both the public and private sector to queue outside their employer’s office at the end of each month to receive their salary in bills and coins.

The first reason that it was difficult to payday laborers in particular through the bank is that often there were far too few days in a month that they showed up for work. And even when they show up a couple of days, they always expect to be paid at the end of the day because they are not sure they will come the next day. Second, their pay was usually so meager that processing it through the bank was an absurd proposition because of what it would take and, in particular, the cost. Even today, the average daily wage for a laborer in a Kenyan farm or construction site is about $6 based on minimum wage laws and stipulations. Meanwhile, banks charge as much as $2 per transaction. Even more, in rural Kenya, the nearest bank branch was usually about 50 to 100 miles away.

The banks themselves saw only the large farm owners and other large-scale entrepreneurs as their potential customers. Not the day laborers they hired from time to time. Indeed, the reasons for the existence of the unbanked have not changed and are more or less similar around the world. For example, according to a survey by the Federal Deposit Insurance Corporation (FDIC), close to 50% of Americans who are unbanked give insufficient funds to meet minimum balance requirements as the reason. About 40% cite high fees as the reason. These reasons have always applied to developing countries like Kenya, but physical inaccessibility has always remained a major factor.

Unexpected Fintech solution

Usually, before the laborers came to work on the farm, the farmer would drive 50–100 miles to withdraw cash from the nearest bank. They would request the bank to give them loose change to pay everyone with little trouble of breaking the money. As expected, carrying cash was always a risky affair. Indeed, it was common in the 1990s for farmers, construction site managers, and factory owners to be attacked by robbers while in transit from the bank or at their premises because they had in their possession large sums of money intended to be used to pay wages.

At the turn of the millennium, the Kenyan government licensed the first two mobile telephony companies to operate. One of two was Safaricom, a joint venture between the Kenyan government and Vodafone Group, the British telecommunications company. Almost immediately, subscribers started to show an appetite for a means to send and receive money through their newly acquired mobile phones. Until this time, the most available option for those who worked in the city to send money to families in the village was the bus crew that drove there every day. Many times, the money was lost as many bus drivers were not always honest. Some Kenyans became creative with the airtime. They realized they could buy airtime and send it as a text to their families in the village, who in turn would sell it and get the money.

In 2005, Safaricom launched MPesa as a pilot project based on a report on mobile telephony usage in Africa funded by the now-dissolved Department for International Development (DFID), an agency of the United Kingdom government that was responsible for administering aid overseas.

Two years later, they launched the service officially, but not before facing strong opposition from commercial banks who thought it was risky business to allow a mobile telephony company to provide financial services. Today, nearly every adult Kenyan uses MPesa, and a significant portion of the economy is processed through it every day.

Now, when mobile money service is mentioned, the first thing that comes to the minds of many, especially those in Europe and North America, is an app downloaded from Play Store or Apple store and installed on a smartphone that one then uses to access financial services. If that is how MPesa worked, it could still exclude a significant part of the population too poor to afford a smartphone, including day laborers in Kenyan farms, construction sites, and factories. To use MPesa, one does not need to download and install an app. The entire service is offered through shortcode text messaging. And this has remained the genius of MPesa to date. It makes the service accessible to the poorest of the Kenyan society because all they need is a simple feature phone that they can buy for as low as $3. They also don’t need to go through any complicated registration. An agent at their village shop can help with that.

But how exactly has MPesa changed how day laborers are paid in Kenya?

Changed lives

For one, entrepreneurs, farmers, and construction site managers no longer need to risk their lives carrying or keeping vast sums of money in their homes or premises. Instead, the moment they need to make payments, they simply make a transfer from their bank account to their MPesa account and send out the payments as short messages to the laborers who worked in the day. Meanwhile, the cost that the laborer incurs for the transaction is about 30 cents. This they have to pay when they visit a local agent to withdraw the money. But they also have the option of sending the money to others as short messages, paying for goods and services, or settling bills right from their simple feature phone.

Today most mobile money service providers, including MPesa and others that have launched over time, have taken steps to make it easier to make mass or bulk payments. MPesa has created a way to affect bulk payment, which saves even more time. If you have 500 laborers, you can simply input their numbers and release the payment once to all of them. Meanwhile, the cost of each transaction for the employer is about 40 cents. This is way lower than what a bank would charge. Indeed, the service reduces the time and the for administering payroll. But perhaps more importantly, it also increases the inclusivity of the world’s poorest into the financial system.

Today low-income earners don’t use mobile money service to only receive and send payments. They can also save, including period locked savings. They can also access credit facilities based on how diligently they become in making repayments.

MPesa has been adopted and expanded to various other African countries. It has also turned into a success story in Afghanistan. In 2014 a similar service was launched in Romania and had spread to several other Eastern European countries.

But MPesa is not the only financial technology solution that makes it easy for workers to get paid and spend their money.

Looking into the future

For the longest time, payroll service providers have focused on making payments through traditional payment methods that work better for employers and employees. Today there is a growing shift to incorporate digital payment methods into the emerging payroll systems. In several countries, especially in the developing, there are Fintech startups that have set up shops to explore this area.

For example, in the Philippines, Sprout and Salarium are startups building payroll capacity that leverages the payment methods we have available today. This embrace of this trend is going to bring even more people into the financial system. But it is not only the employees who stand to benefit. Businesses benefit too as their options for labor sources are expanded. They end up having people more fulfilled working for them.

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Fintech Making Payroll for Underbanked Possible was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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