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Mobile banking: passing fad or lasting trend?

The sale of banking prod- ucts over mobile phones has become increasing- ly popular in Kenya. This notwithstanding, physical

branches still play an integral role in distribution and some banks are actually expanding their brick and mortar footprint. However, else- where around the world, some banks have transitioned in ‘mobile only’ lenders. This has raised speculation as to whether Kenyan banks will transition to mobile-only lenders in the future.

A new study by KPMG titled ‘Global Trends and Their Impact on Banks’ puts forth some very inter- esting findings. It established that mobile money banking has become so popular around the world that one bank in Japan has decided to become a ‘mobile only’ lender.

Jibun Bank in Japan took the route to mobile-only banking as early as 2009 and has now consoli- dated a huge customer base of retail customers who exclusively access services via their mobile phones. For Jibun, mobile is the primary channel and not an add-on. Understandably, Jibun Bank has now become a case study for the broader banking indus- try, especially in markets such as Kenya where mobile banking has gained serious momentum in the recent past.

Banks are giving mobile bank- ing serious thought not necessarily because of the ‘if Jibun did it, we can do it’ mentality, but, rather, because the benefits of mobile banking are clear. It reduces spending on branch- es in term of rents, construction costs and staff recruitment and compen- sation, and frees up resources for improving products and customer service.

“Mobile is already the largest banking channel for the majority of banks by volume of transactions,” says KPMG in the report, which looks at the global banking industry.

Same story

Here in Kenya, it is more or less the same story. While banks have not fully transitioned to mobile only banks, as the case is for Jibun in Japan, there is an increasingly strong inclination toward the distri- bution of banking products through mobile phones. Mobile is no longer a mere add-on channel but an inte- gral part of most banks’ distribution strategy.

Equity Bank and Co-op Bank, for instance, have frozen recruitment at their branches as they migrate more customers to the mobile plat- form. In the case of Equity Bank, the migration has been made easier by the growing popularity of its mobile money service, Equitel. Equitel is emerging as a formidable challenger to market leader, M-Pesa, which belongs to Safaricom.

In other instances such as Commercial Bank of Africa’s (CBA), mobile has been essential in expand- ing the customer base. The bank recently reported that its innova- tive mobile-centric banking service, M-Shwari, had resulted in the acqui- sition of over 12 million customers.

Thanks to mobile, CBA is now at par with Equity Bank in terms of being the largest bank in the market on a basis of number of customers. This demonstrates just how integral the mobile channel is for banks seeking to grow their reach.

Mobile banking users are also inclined to buy more banking products than non-users, KPMG observes. This gives banks an oppor- tunity to cross-sell their products over mobile channels, which dras- tically lowers overall costs while simultaneously improving volume sales and profit margins.

It would also suffice to point out that more and more Kenyans own mobile phones. Mobile phone pen- etration now stands at 82 percent of the Kenyan population, making Kenya the third country in Africa (after Nigeria and South Africa) with the highest mobile phone penetra- tion on the continent. This is accord- ing to a July 2015 research by online retailer Jumia. On average a Kenyan owns three phones, which are used for different purposes, the research further shows.

Similarly, technological advance- ments that have multiple applica- tions in the banking sector have also emerged. Technology is rapidly mor- phing from an expensive challenge into a potent enabler of both cus- tomer experience and effective oper- ations. As a result, non-traditional players such as telecom companies are emerging as key competitors to traditional banking. This is visibly evident in the case of Safaricom, which now offers loans and savings product in collaboration with CBA through M-Shwari. It also has a rela- tively similar product in partnership with KCB called KCB-M-Pesa.

The key objective for banks is leveraging on technology such as mobile to create a customer-centric business. In fact, according to PwC, banks all around the world have placed creating a customer-centric business model as their top-most priority through to 2020.

There is also a great drive with- in government and other non-gov- ernmental organizations to increase the banked population throughout Africa. One of the main reasons for this large unbanked population in Africa is geographical inaccessibility and poor infrastructure, with many of the unbanked living in remote rural areas. However, even in some of the most remote areas, most peo- ple have a cellphone.

“In some of the least devel- oped regions, such as parts of Sub- Saharan Africa, there are much higher levels of mobile access com- pared to other basic services, such as electricity, sanitation and finan- cial services,” according to trade association GSMA’s 2014 Mobile Economy report. This makes mobile banking all the more viable and also ensures the steady support of government in terms of favor- able legislation.

All these factors suggests that more Kenyan banks will explore the mobile option, as branches are becoming increasingly ineffective in driving the customer-centric busi- ness model. “As technology enables every aspect of banking to go online, and as cash usage falls away, tradi- tional branches are no longer neces- sary,” says PwC.

Whereas mobile channels will increasingly become a core part of banks’ distrubution in Kenya, the million dollar question is whether some banks will ultimately make that full transition to mobile-only banking, as the case is in Japan.

For the case of Kenyan banks full transformation to mobile-only banking is highly unlikely, even in the long-term. Granted, mobile channels are becoming increasingly popular, not to mention cost effec- tive. This notwithstanding, branches still play a very important role.

Branches help foster a strong brand, a brand that inspires trust. And trust is of utmost importance in banking, especially in consideration of the recent collapse of banks such as Imperial Bank in Kenya. It is no surprise, therefore, that Kenyan banks collectively opened 33 new branches in the six months leading to June 2015, according to data from the Central Bank of Kenya (CBK).

The 33 branches were mostly opened at the county level, signaling banks’ desire to deepen their reach at the grassroots and snap up the emerging opportunities of devolu- tion. “This (increase in branches) was distributed across all the coun- ties in the country,” said the CBK in a statement.

For many new customers, branches are the first point of con- tact with a bank. It is through the branch that a customer begins for- mulating opinions about the bank. It is through the branch that the bank’s brand is built. This is why brands such as Equity Bank, which is widely popular among the lower income earners, dedicates a lot of attention to branches in low income areas. Similarly, brands such as KCB, which have been around for a while, are held in high esteem because of their expansive branch network and customer service. The same can also be said about Barclays Bank.

Not all aspects of retail banking can be done over a mobile phone. The issuance of large loans is predi- cated on a deep relationship between borrower and bank.This necessitates actual physical contact between the borrower and bank, something that can only be made possible through physical branches.

The rise in mobile banking in Kenya is therefore not likely to come at the complete exclusion of physical branches. Admittedly, banks may reduce their physical footprint. But they will still retain some branches, or even open new ones in maiden markets.

What seems more plausible is mobile banking existing side by side with physical branches. It is also likely that physical branches will increasingly integrate technology into the traditional banking expe- rience. “Branches will be with us for a long time but interactions will be through devices such as touch- screens and tablet computers,” notes KPMG.

“The growing influence of technology on banking will lead to fewer, smaller and digitally enabled branches and larger hub ‘banking centers’ in densely populated areas,” adds KPMG.



As argued, the most likely outcome of the technological revolution in Kenya’s banking space is that mobile channels will exist side by side with physical branches. More precisely, technology will be more deeply inte- grated into the broader customer experience.

The use of technology, despite its many benefits, also comes at a price. It requires heavy initial investments in terms of data storage and subse- quent data analysis. The amount of data that customers produce when interacting with banking products via their mobile phones is immense. Most banks don’t have the backend logistics or qualified personnel to handle this tremendous volume of data and have to lease data storage services.

Leasing is, however, not sustain- able as the cost is variable and set to increase subject to future uncertain- ties. Similarly, data stored on leased servers is not under the full control of the institution that leases the storage space. This can introduce security and management challenges, espe- cially in the case of sensitive data such as in the banking sector.

For these reasons, Equity Bank plans to set up its own data cen- ters for its own use and to lease to other parties on commercial terms. In 2014, the bank booked space to build a Sh3 billion electronic data center at the upcoming Konza Technology City.

Meanwhile, most banks that gen- erate a surplus of data through the mobile banking platform and other digital tools will need to lease data storage space, or follow in Equity’s steps and build their own servers. The   market   for   data   storage in Kenya is primarily served by East Africa Data Centre (EADC), located along Mombasa road in Nairobi. EADC doubled its capacity to 1,000 square feet from 500 square feet in 2014 at a cost of Sh1 billion, owing to increased demand for outsourced electronic storage over the past few years.

Because of the scarcity of data storage services vis-à-vis high demand, storage charges are typi- cally high. Consequently, the cost of storing data sometimes threatens to offset the cost savings that mobile banking and digital channels pres- ent. This has inspired the entry of new data storage players into the market who promise lower charges.

A venture capital fund, East Africa Capital Partners (EACP), is setting up a Sh4.6 billion data cen- ter in Mombasa and Dar es Salaam seeking to tap the rising demand  for outsourcing of ICT infrastruc- ture. “Historically, the charges for data center services have been very expensive. We will be competing on price dynamics; basically charging lower than what is available in the market,” said EACP’s chief executive Richard Bell.

Tremendous volumes of data, as mobile banking generates, also has wider applications. The analysis of large volumes of data, referred to as data analytics, is one of the meg- atrends in the technology industry. Analytics helps organizations draw vital insights from otherwise unin- telligible sets of data. It is something that banks can greatly benefit from. For instance, a bank can use analytics on large data sets to gain insights on how frequently their cus- tomers use the mobile banking plat- form to make deposits, withdrawals, to shop and so on. This information is crucial in planning and developing new products or improving existing ones.

Data storage and analytics calls for heavy investment. If banks wish to pursue mobile banking and integrate technology into everyday banking services, they will need to make these investments. This cer- tainly calls for banks to go back to the drawing board and come up with strong pitches for their investors.

Presently, investors are under a lot of pressure from banks, who not only need capital injections to participate in the wave of big tick- et deals in sectors such as infra- structure and energy, but also need capital to innovate and adopt new technologies to support trends such as mobile banking.

Banks that have a long history of rewarding investors handsomely in terms of dividends or share price appreciation are likely to continue enjoying the support of investors, particularly now when the need for additional capital has tremendously increased