Digital banking provides alternative revenue for Kenyan lenders

Kenya’s commercial banks are moving full throttle into digital banking as the new frontier for growth with analysts viewing the change as key in managing costs and bolstering revenues.

With mobile penetration in Kenya standing at 90 per cent, banks are now shifting transactions such as account opening, deposits, withdrawals, loan application and disbursements, investments and utility payments from banking halls to mobile phones.

A survey conducted in 2015 by consultancy firm KPMG shows that the cost of banking transactions in a branch is 43 times more than that via a mobile phone and 13 times more for an automated teller machine (ATM) than through a mobile channel.

In Kenya, the cost of an ATM transaction averages Ksh33 ($0.32) including a 10 per cent excise tax.

A cross-section of bankers and analysts polled by The EastAfrican said digital banking is an innovation that has radically altered the way banking was conducted in the past.

“More and more, banks are migrating from the traditional brick and mortar branches to digital channels to reduce the cost of transactions and ensure banking services are delivered more efficiently to their customers,” said Habil Olaka, chief executive, Kenya Bankers Association (KBA).

According to Mr Olaka, the benefits of cost reduction on physical branches will be transferred to consumers who will have to pay less on banking transactions while at the same time benefitting from fast and efficient delivery of services. 

However, the margin of cost savings to consumers could vary across the industry since different banks have different cost structures.

Self-service

According to Dr James Mwangi, chief executive of Equity Bank Group, bank customers are now being equipped with banking skills and tools that allow them to do banking on their own through their mobile phones, tablets or laptops.

“These tools are given to the customers and they are empowered through training to do banking anytime,” said Mr Mwangi.

“The customers then have full control of their finances and are able to interact with the bank directly without any intermediaries,” he added.

It is argued that digitisation of banking services overcomes barriers of time, distance and human bias.

“Banks have been a physical space defined by time and place where customers go to do banking. This will all change. Banking services have started moving into self-service platforms through devices such as the mobile phone, apps, online banking and technology-driven tools,” said Mr Mwangi.

According to the Central Bank, digital banking will have a remarkable impact on the economy in terms of promoting financial inclusion though the sizes of loans processed through mobile phones are still small.

“The impact digital banking has had in terms of financial inclusion is phenomenal but the values are not really substantial. I think the impact, even though the values are small, is huge,” said Governor Patrick Njoroge.

Mobile-only banks

Globally, lenders such as Jibun Bank of Japan — a joint venture between the Bank of Tokyo (Mitsubishi UFJ) and the US-based KDDI mobile phone network —  have already transformed themselves into mobile-only banks, with the adoption of mobile banking services estimated at 38 per cent in Europe.

In Kenya, top banks such as Equity Bank, Co-operative Bank and KCB have migrated over 80 per cent of their transactions from banking halls to alternative digital channels, with loan application and payments now being done on mobile phones.

Latest data from the International Telecommunications Union shows that close to one out of two people in the world are using the Internet while one out of seven people in the Least Developed Countries (LDCs) use the Internet.

Almost one billion households in the world have Internet access, of which 230 million are in China, 60 million in India and 20 million in the world’s 48 LDCs.

According to KPMG, banks worldwide are now reviewing their business plans to reduce spending on branches and improve customer convenience in accessing financial services.

According to the report dubbed Global Trends and their Impact on Banks (July 2015) massive demand for mobile banking is increasingly driving a shift in investment strategies by banks in a development that should lead to more branch closures and a reduction in investment in new outlets.

“Despite the political challenges and frequently hostile media coverage of branch closures, we see a clear and pronounced shift from investment in branch networks to more and more overt ‘mobile first’ strategies,” says the report.

Amish Gupta, chief executive of AG Capital Ltd, said banks are concerned about the shrinking interest margins and are looking for new avenues to manage operating costs.

Digital platforms

“Banks have realised that their deposits and loans have more success on digital platforms. They are concerned that because their margins are narrowing they need to manage operating costs,” said Mr Gupta.

According to consultancy firm Deloitte, banks are looking to technology to help simplify the banking experience for customers and to increase the speed with which new products can be brought to the market.

“Technology will be at the centre of almost everything banks do in the areas of growth, innovation, compliance and operational efficiencies,” said Deloitte.