Bold bet on digital models dims future of bank branches

You no longer have to be tied down to a desk or branch to transact or interact with us. Take us anywhere you go, and transact at any time.”

This was Chase Bank’s assurance to customers on the day it launched its Mfukoni mobile application in 2014.

Prior to this, the Tier III lender had depended on Internet banking to grow its customer base in a market with cut-throat competition.

With 1,600 employees and 58 branches, it ended up roping in both low and high-end customers. As its three weeks under receivership revealed, it counts among its depositors the Law Society of Kenya, United Nations Sacco and Kisii, Trans Nzoia and Kilifi county governments.

Agency banking

The growth in digital technologies and consumers’ embrace of connectivity means banks no longer need to open hundreds of bank branches to attract or retain depositors.

The trend of customers turning to online and mobile applications, and agency banking is supported by busy work schedules and rapidly growing access to Internet services.

According to Standard Investment Bank’s latest analysis on the banking sector, the country had 35,846 banking agents by the end of 2014, a 52.6 per cent growth over the previous year.

In 2013, they were 23,477 agents, up from just 8,809 in 2010.

The value of transactions through agents has also been on the rise. In 2013, Sh236.2 billion was transacted through agents. This increased to Sh345.7 billion in 2014.

Even Barclays Bank of Kenya, which at one point described agency banking as “unattractive”, has bowed to the pressure to take financial services to customers through third parties (agents) to cut operating costs.

The bank partnered with the Postal Corporation of Kenya in March to allow its 800,000 depositors to access services through the corporation’s 400 outlets.

According to an analysis from Mentoria Consulting, for banks to remain competitive, they have to embrace disruptive technology. The lenders who delved into this early enough have reaped the dividends.

At Equity Bank, for instance, depositors are migrating from bank branches and ATMs to agency and mobile banking platforms in droves, the numbers show.

In the lender’s financial year ended December 31, 2015, ATM transactions dropped 6 per cent, while agency banking transactions rose to 51 million from 38 million in 2014.

Maintenance expenses

CEO James Mwangi said in the 25 years he has been in the sector, last year was the first time he witnessed a drop in banking costs.

“We see the future of the bank driven by digital. We are now starting to retire the expensive brick-and-mortar-funded infrastructure that requires capital to set up, as well as maintenance expenses,” he said during an investor briefing.

Further, in the 12 months to December last year, only 533 Equity Bank customers went to various branches to apply for loans. A massive 1.9 million customers opted for digital applications. The bank allows customers to apply up for up to Sh3 million in loans digitally.

And though Equity’s customer base has more than doubled from four million in 2011 to 10.1 million last year, branch transactions have dropped to 23 million. Its mobile money platform, Equitel, registered 79 million transactions in just six months.

Kenya Commercial Bank (KCB) has witnessed a similar trend, with 3.5 million customers applying for loans through their mobile phones in a year that saw Sh9.1 billion disbursed through KCB M-Pesa.

The lender is keen to grow its non-branch channels. As opposed to 2014 when branch transactions accounted for 42 per cent of total transactions, non-branch transactions rose strongly to 70 per cent last year. Agency transactions alone surged 143 per cent to 7.5 million, with Sh31 billion moved through KCB Mtaani agents.

Co-operative Bank, another lender with a large customer and asset base, had only 25 per cent of its transactions conducted through branches in 2015, down from 32 per cent in 2014.

The bank’s agency banking shot to more than 16 million transactions, a 45.6 per cent growth. Its MCo-op Cash, a mobile-based platform, registered 65 per cent growth in terms of number of transactions, and disbursed Sh1.64 billion, a 630 per cent growth over the previous year.

“Agency banking was a great innovation that transferred operational costs to a third party, thereby increasing the convenience for the customer and cutting costs for banks,” said Mentoria Consulting’s analysis.

And cutting costs is taking priority as it gets harder for banks to profit. Among Tier I lenders, for instance, Equity’s staff costs took up 32 per cent of total costs. Standard Chartered’s salaries accounted for 38 per cent of costs, while Co-operative Bank and KCB tied at 42 per cent.

Barclays Bank Kenya, which has just started embracing agency banking, saw 53 per cent of its total costs going to paying staff.

For Equity Bank, the shift to non-branch transactions is expected to also reduce stationery, electricity and water costs.

“Maybe with time our bank tellers will have to become sales persons. You may come to a banking hall and find you are alone,” he said.

Sidian Bank, which recently rebranded from K-Rep Bank, said it is pegging its growth on mobile and Internet banking, as well as wider access to ATMs.

The bank has only 37 branches, with its managing director, Titus Karanja, saying the lender would only add three more, since “branch significance is declining.”

HFC is also keen to grow its agency model, recently signing a deal with Postbank to ride on the latter lender’s 99 branches.

In addition, the mortgage financier wants to take agency banking to the next level by recruiting agents who can run outlets up to as late as 11pm.

Next level

The downside to customers’ shift away from branches is the inevitable job loss.

In 2014, for instance, Co-op Bank laid off 160 mid-level managers at a cost of Sh1.3 billion. In 2013, National Bank retrenched 200 employees through a voluntary early retirement scheme, and froze any new recruitments.

KCB Group shed 120 jobs at a cost of Sh1.2 billion in a three-year restructuring plan that ran to 2014.

The three banks independently hired McKinsey & Co to review their operations.

In 2013, Barclays Bank also trimmed its workforce by 170 employees at a cost of Sh788 million.

According to a Cytonn Investments report on banking, the increased uptake of new technologies and expansion into new markets will continue to be key drivers of growth in the sector.

“The use of alternative channels will reduce operating expenses and improve efficiency,” the firm said.

Mentoria Consulting added that the current environment within which the banking sector operates may push banks to more restructuring to strengthen their competitive positions.

“The branch model should mainly be preserved for long-term relationships with clients where human interaction is essential,” the firm said.

[email protected]