Banks battle to go fully digital in race for cheap deposits

By Jevans Nyabiage

Nairobi, Kenya: The era of branchless banking is now with us as Kenyan banks aggressively position themselves to offer their services through the mobile phone and Internet.

This is a two-pronged strategy for the banks as they hope to significantly reduce their costs while at the same time grow the number of customers. The latter will help them access cheap deposits and a wider client base for loans.

That is why NIC Bank’s launch last week of an online platform where customers can bank cheques and open accounts from the comfort of their offices or homes heralds a new race by banks to win over the “low maintenance” clients. 

NIC Bank — a mid-tier bank listed at the Nairobi Securities Exchange — launched its mobile banking platform called NIC Now.

A customer can deposit cheques, open an account, place standing orders, transfer funds, make balance enquiries and pay for utilities without actually going to the banking hall.

‘Now generation’

The service, according to the bank’s group managing director, John Gachora, is designed to serve a new generation of tech-savvy customers who have no time for long and chaotic queues or time-consuming procedures.

“This strategic shift is an answer to the emerging ‘Now Generation’ that wants everything at their fingertips. Through this strategy, we aim to move all our products to the Now platform to ensure our customer needs are being met in real time,” said Mr Gachora.

“Whether it is asset finance, stock trading, retail loans or SME banking, the aim of our Move to Now strategy is to make them available now. ”

The juicy aspect for banks is that they are likely to grow their income from transactions because customers will be willing to pay slightly more to save on time by accessing services through their phones or computers. In banking industry jargon, this is called non-funded income.

And because of a larger customer base, banks expect the volumes of transactions and their income from these transactions to grow exponentially.

The move by NIC Bank will also be helped along by the fact that more Kenyans are getting access to fast, cheaper Internet connections at home and in the office.

Kenya boasts four undersea fibre optic cables — Seacom, the East African Marine Systems (Teams), EASSY and Lower Indian Ocean Network (LION2) cable. This has seen the uptake of Internet grow over time.

The country now has more than 16 million Internet connections.

The rising middle class is also another target for commercial banks because they can afford to pay a few extra shillings for a convenient service. 

However, analysts are more upbeat about mobile banking than online banking.

“Online banking might not be really important right now. The flexibility and use of mobile phones just sounds so natural. Kenyans are used to mobile money, so progression to mobile banking is a key growth area,” said Mr Eric Musau, an analyst with Standard Investment Bank.

In a rare admission of “If you can’t beat them, join them”, banks have joined the race for micro-deposits. What they vigorously opposed in 2007 when Safaricom, in partnership with its key shareholder UK-based Vodafone, launched M-Pesa has now become a powerful tool in their bid to reach the unbanked.

Seven years after the rollout of the revolutionary mobile transfer service, banks have realised that mobile phones are a huge asset.

“Over the last five years, there has been a significant surge in demand for mobile banking and mobile payment services,” Mr Ken Njoroge, the CEO of Cellulant Corporation, said.

The trend, he said, is informed by several factors. First is the pull from consumers — they are getting younger and more tech savvy. The older consumers are also more exposed to technology, thanks to smartphones and the Internet.

Second is the push from competitive trends — for banks, the competition is coming from non-traditional competitors, so the pressure to innovate is very high.

Third, there are very attractive economics for growth — it is cheaper to serve and acquire customers via electronic channels.

Reaching the unbanked

Kenya’s largest bank by assets, KCB, has also been aggressive in pushing up the uptake of its mobile banking services.

In October last year, the bank launched a mobile banking platform targeted at the unbanked, which allows customers to open a bank account without physically visiting a banking hall.

Dubbed M-Benki, the platform allows customers to open and operate an account with as little as Sh1. KCB targets to open three million accounts by the end of this year using the service.

In December last year, mid-tier lender Family Bank joined the bandwagon, launching mobile banking product Pesamob that allows customers to open and operate Family Bank accounts without having to walk to any branch.

“We are targeting five million virtual account holders in the next nine months,” said Family Bank’s managing director, Mr Peter Munyiri, during the launch in December.

The account facilitates deposits, withdrawals, payment for goods and services as well as transfer of funds, which are sent to the recipient’s mobile number.

Loan applications can also be done, guaranteed and approved through the phone.

The lenders are hoping to increase their transaction income to help them ease their reliance on interest income.

Slightly over a year ago, Commercial Bank of Africa and telecoms operator Safaricom launched a banking platform dubbed M-Shwari that allows customers to open an account and access micro-loans from the bank.

The high uptake of M-Shwari has seen CBA become the second-largest retail bank in terms of the number of deposit accounts.

Late last year, the bank announced that it had crossed the five million accounts mark.

M-Shwari allows subscribers to open a bank account with CBA through their mobile phones, save money and borrow based on their M-Pesa usage.

A Central Bank of Kenya (CBK) report showed the number of deposit accounts in the country had crossed the 20 million mark. This growth is attributed to M-Shwari.

It is this success that has seen several other banks launch mobile money products that allow access to credit without going to the bank. 

The Kenya Bankers Association notes that there are banks that perceive mobile operators as potential competitors to some extent.

“The fact that mobile operators offer money transfer services that were traditionally left to banks has led to some business and revenue loss for these institutions, to the extent that if left unregulated, it may have an effect on the larger banking scene,” said KBA in a recent report on mobile banking.

However, most rural folks prefer mobile money services for their day-to-day transactions, which has forced banks to rethink their positions.

The allure could be in the numbers.

Safaricom has 19.4 million subscribers, a rich market that banks would like to reach to market their services and grow account numbers.

According to CBK data, M-Shwari helped push the number of loan borrowers by 1.7 million in six months between January and June 2013.

This was an astronomical 82 per cent growth in the number of loan accounts from only about 95,000 new borrowers enlisted in the whole of 2012.

CBK said as at June 30 last year, the number of bank customer deposit and loan accounts stood at 18.9 million and 3.8 million, respectively.

Slice of mobile money

The amount of money transacted through mobile phones is also extremely high, which is why banks are racing to get a slice of it from phone companies.

Current statistics from CBK show that mobile phone transactions have dwarfed those on payment cards — Automated Teller Machine (ATM), pre-paid, charge, credit and debit cards — and point of sale machines, combined.

In the 11 months to November 2013, 732.59 million mobile payments were made, whose value was Sh1.72 trillion.

This is higher than Kenya’s Sh1.6 trillion Budget for the current financial year.

The cards recorded 285.72 million transactions, whose value was Sh1.412 trillion, over the same period last year.

In December alone, Kenyans transacted Sh182.5 billion from 69.14 million transactions using mobile phones.

This was a jump from Sh175.22 billion moved in November from 68.7 million transactions. The increase could be attributed to the festive season when many people send money to their rural home.

This means that on average, the country transacted Sh158.5 billion per month last year using mobile phones. Or a massive Sh5.28 billion per day.

This is pointer to the future that commercial banks are eyeing. A future where banks will not need to invest billions of shillings in brick and mortar but in technology to cut costs.

“I think technology will not replace bricks and mortar 100 per cent, but it will take over the things that make most sense for the consumer and bank to do electronically,” said Mr Njoroge, whose firm Cellulant is a key player in banking software and  operates in nine countries in Africa.

“This will decongest banking halls and reserve them for value-added transactions such as negotiating and discussing a mortgage. This inevitably will reduce the number of branches required to serve customers.”

This is vindicated by a recent KBA study that found a majority of Kenyans use mobile banking for bills and money transfers.

Only three out of 10 Kenyans go to banks to deal with the teller, while only eight per cent use ATMs.

Many of those who backed mobile-banking said it saves time, is secure, and cheaper than physical visits to the banking hall.

The study also found that 22 per cent of respondents use mobile phones for financial or banking transactions, but do not operate a bank account, illustrating that the mobile phone has become a bank.

The use of mobile phones in Kenya has increased radically in the past three years. According to the Communications Authority of Kenya (CAK), there are more than 30 million subscribers.

Fraud fears

But as the adoption of technology rises, so do fears of vulnerability to online fraud.

The survey by KBA said lenders cited security concerns, reliability of the system and possible breaches of privacy as the biggest concerns in running mobile banking products.

Deloitte’s Financial Crime Survey 2013 found that financial institutions in the East Africa region lost more than $30 million (Sh2.6 billion) to fraud, though the figure could be as high as $89.4 million (Sh7.7 billion) as most institutions opt not to report such cases.

“As regards fraud and risk, everything that is new and innovative carries a certain level of risk,” said Njoroge. “What is most important is that the rewards far outweigh the risks. This is a timeless cycle of evolution that every bank and payment provider will need to continuously evaluate.”

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