Price of convenience: Hidden cost of mobile cash deals

Domino’s Pizza founder Tom Monaghan

Domino’s Pizza founder Tom Monaghan once quipped: “We don’t sell pizza. We sell delivery. We offer time to families who are looking for it.”

The fast-food firm, now on its 58th anniversary, decided to anchor its business model on selling ‘convenience’ to customers by delivering Pizza to them.

Within the first 15 years in business, the chain had opened over 200 stores as more customers accepted cash payment to have the meal delivered to them.

Indeed, more Kenyans are increasingly getting enticed with such services and are most likely to fall for any product that saves even a minute of their time, without scrutinising the ‘hidden’ extra cash that comes with such convenience.

From the middle class to the affluent, and lower class, many of them want to meet their needs as quickly as the demand comes knocking. And more often than not, they don’t stop to figure out the cost of this convenience.

The University of Nairobi School of Business Associate Professor Bitange Ndemo reckons that Kenyans are paying dearly for the convenience brought about by the digital wave.

“Digital transactions are actually expensive in Kenya. I think consumers are only looking at convenience and the feel-good perception that they won’t be facing anybody to bargain for the product,” said the former ICT Permanent Secretary.

Even for Kenyans in the Diaspora, the cost of sending money back home is high.

A 2014 report by Overseas Development Institute shows sub-Saharan Africa had the highest costs of sending remittances home, averaging 11.5 per cent to send $200 (Sh20,000), against an average global rate of eight per cent.

But, according to Equity Bank Chief Executive Officer James Mwangi, the country can no longer resist the digital wave. He sees the competition for financial transactions being concentrated around smartphones.

“The bank has ceased to be a place we go to. It has become what we do on our mobile phones,” said Mr Mwangi while vouching for digital transformation in the banking sector. 

Many financial service firms continue to record growth in the number of customers preferring to transact on their mobile phones, with the latest filings by Kenya Commercial Bank (KCB) showing that 87 per cent of customer transactions now happen outside branches. Of these, 57 per cent rely on the mobile phone.

A survey of 2,600 banking customers in six African countries released by a global management consulting firm McKinsey last month showed that majority of customers (53 per cent) across the economic segments preferred either Internet or mobile channels compared to 26 per cent who said they preferred visiting branches.

Aware of this development, financial service providers are breaking the four walls model of banking in favour of digital products.

Last week, Barclays Bank of Kenya launched a virtual banking product dubbed Timiza that will see customers borrow up to Sh150,000 per month, pay for utility bills, buy airtime, sign up for insurance cover and pay for taxi services.

“It is often said that big ships take long to turn, but big boys in the financial sector need to disrupt themselves by addressing the changing preferences of their customers,” said Managing Director Jeremy Awori during the launch.

“We want people to focus on their lives and achieving their ambitions. People don’t want to wake up in the morning to do banking.”

Non-financial service companies are also making flexible payment models and strengthening product delivery options to suit these preferences.

This includes leveraging payment models developed by financial service firms.  “It is also good for people keen on budget. Transacting digitally gives you the record of where and who you paid even when your mind is completely off,” said Mr Ndemo, adding that other customers also see it as secure and time-saving.

CONSUMER BEHAVIOUR

According to Safaricom Director of Consumer Business Sylvia Mulinge, only those organisations that understand and adapt fast to the changing consumer behaviour are poised for success.

But even as customers move to digital products, which is seen as a way of saving time and money, such convenience comes at a cost.

However, many customers, either knowingly or unknowingly, do not factor such cost in the choices they make. With the reduced over-reliance on cash, many customers have ended up paying more than they would with cash.

And when taking mobile loans, which comes with fewer formalities, not even the processing fee stands in their way.

Getting a Sh50,000 KCB-Mpesa loan to be repaid within one month attracts a facility fee of Sh1,955.

For Barclays’ newly launched Timiza, the same amount will attract a Sh585  processing fee then the interest of five per cent on the loan.

Customers taking a Mshwari loan of Sh50,000 incur a facility fee of Sh3,750 while getting the same amount from Tala mobile costs about Sh7,500.

While taking loans to service within say one month is cheaper when applied on a mobile phone than at the branch, the same does not hold on loans of same amount lasting for say 12 months.

For instance, Equity’s Equitel loan of Sh50,000 repayable in one month attracts Sh1,130 as interest, appraisal fee of Sh500 and Sh50 as government duty.

The same mobile loan will attract the interest of Sh8,013.83 if serviced for a year. However, when a customer opts to apply directly at the branch, this will come with a total cost of Sh6,622 in a year. This is a saving of Sh1,392.

To get a secured loan of Sh50,000 on Cooperative Bank’s MCo-op Cash will cost Sh580 as interest if repaid within one month and Sh600 if borrowed by a business. If within three months, it costs Sh1,767.16 as interest on mobile but Sh2,585 if at the branch.

However, banks are counting on the huge volumes of transactions that customers do every day.

Without proper planning, a customer who opts to make three withdrawals from their bank account into their mobile phone and later use it to pay bills or send it to family or friends incurs high transaction costs.

For example, sending Sh5,000 from Equity Bank’s Equitel application to an M-Pesa or Airtel Money customer will cost Sh60.50 while transferring the same will require Sh60 or Sh132 depending on whether the recipient is registered or not.

According to banks’ data, most of the customers taking mobile loans prefer short-term facilities.

This means that a customer who runs a business and needs money all the time may opt for this regular short-term loans to manage liquidity.

The bank then benefits from the processing fees charged per every application. A customer who takes a Sh50,000 KCB- Mpesa loan every month for one year will incur a total interest of about Sh23,460.

In the full year ended December 31, 2017 KCB had 88.8 million mobile transactions and disbursed Sh29.6 billion loans via mobile.

As at end of September the same year, Equity had 54.4 million transactions valued at Sh39.3 billion.

A customer who wanted to use mobile money service to pay bills such as electricity, television, internet, water and student’s loan will also incur additional costs of paying to pay.

Discussing the paradox of prices, Eduardo Porter in the book, “The Price of Everything,” notes that even though grown-ups are expected to be wiser in making choices, they still indulge in “more extreme follies, paying often-stratospheric prices.”

“People will travel across town to save $20 (Sh2,000) off a $100 (Sh20,000) sweater but not to save $20 off a $1,000 (Sh100,000) computer, an odd choice considering that both actions are priced equally: $20 for a trip across town,” observes Porter.

In Nairobi, many businesses dealing in essential items such as clothes, shoes and food are selling the proposition of convenience to many customers.

The trend of home or office deliveries is on the rise with customers often making a choice between getting stuck in traffic jam or queuing for the service and getting the item delivered where they are.

Same applies to the rise of e-commerce firms such as Jumia, Safaricom’s Masoko and OLX. Here, one can and pay for it online. According to Ndemo, who is also an advisor to the Better than Cash Alliance, most of the time people think about convenience than the price they are charged.

Ndemo says he spends most of his time writing, and will, therefore, appreciate fewer movements.

He adds that the more people attach importance on time, the more they favour digital transactions. “If I come out of my desk to go and buy pizza, it will cost me one hour.

Every day, I figure out if I am worth going all the way to save Sh200 or I would rather write my article and finish. He is not alone. Global consumer research firm Nielsen said last week in its Consumer Confidence and Spending Intentions survey that more Kenyans will increasingly shop online as they get hooked to “on the go lifestyle.”

However, Mulinge says that getting customers to appreciate digital financial services only requires that you sell to them the incentives that the product will offer.

INSTANT ASSURANCE

If you think of the price in terms of ability to offer instant transactions, saving time and the pride of instant assurance through a message that the transaction has gone through, then more customers will appreciate the service,” she says. She calls for companies to disclose as much as possible how much of the customer’s data will be used in making predictive analytics to decide how much to loan to them.

“Everybody needs like a 29-hour day to do what they are required to do in 24 hours. The best thing that you can sell is what price you are setting in front of customers,” says Ms Mulinge.

And for as long as people continue to allocate more time for themselves and see more value in spending it on other “useful” things than to go for shopping or travel to make payments, Ndemo sees them increasingly being ready to pay any price to enjoy the convenience.