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Is the death of the bank branch as a transaction channel on the horizon?

In the past five years, Kenya’s banking sector has changed fundamentally on the back of technology. Agency banking and mobile banking have allowed banks to meet customers at their point of convenience, eliminating the need for customers to walk into banks and queue for hours in order to deposit cash, do account transfers, request and receive loans or perform other basic transactions. This has acceler- ated financial inclusion, particularly for people who did not have access to physical branches.

According to Dr. Patrick Njoroge, the  Central  Bank  of  Kenya (CBK)

governor, “Kenya has leveraged on mobile phone technology and made remarkable strides in financial inclu- sion with the current 38.3 million mobile phone subscribers. This has allowed access to formal financial services to grow from 26 per cent in 2006 to over 75 per cent currently.” Dr. Njoroge, who named the African Central Banker of  the year at the recent 10th African Banker Awards held by the African Development Bank, was speaking in August at the TICAD VI Forum for

African Financial Inclusion.

With mobile and agency trans- actions becoming more  prevalent

demand for these distrubution chan- nels has naturally increased. For instance, the number of agents has quadrupled since 2011 to more than 40,000 in 2015, according to the CBK banking sector report for 2015.

Conversely, the higher number of mobile, agency and digital distru- bution channels has decimated foot traffic in banking halls. Fewer people are walking into banks. The average customer is today more likely to bank on a day to day basis without ever setting foot inside a banking hall. They will instead leverage on new channels such as agents, mobile money and online banking.

The banking hall as a transac- tion channel is consequently losing its relevance. Equity Bank is  one of the players which has not only identified this trend early enough, but also adjusted its approach to business  appropriately.


Halting branch expansion

Equity Bank in October announced a freeze on the opening of new branches, signaling the lender’s repositioning to digital platforms.

“Customers’  banking    trends have declared the death of the bank branch as transaction channel as we know it, as they increasingly embrace self-service technology plat- forms that give them freedom, choice and control,” said Dr. James Mwangi, the Equity Bank chief executive. The shift to digital platforms is a “customer-led revolution,” he added. According to the chief executive, more than 80 per cent of all loans in Equity Bank are now accessed through mobile phones, underscor- ing the growing popularity of the mobile phone as a distrubution channel.“We have all witnessed how rapid adoption of mobile and other digital channels have transformed how people bank,” he said, empha- sizing the fact that the shift to digital platforms is primarily driven by cus-

tomer’s changing needs.

Equity Bank will now leverage on its IT platform, which has been built using Sh20 billion through the years, to drive customer engagement on digital platforms.

Equity Bank might be the first bank to boldly announce that it is not opening new branches in favor of digital platforms, but it is not the only bank which is harnessing the power of these new distrubution platforms.

Cooperative Bank from 2015 started stationing agents inside its branches to familiarize customers with the agents and eventually woo them to this banking channel. The intended outcome of this exercise is to reduce the traffic at banking halls by strategically positioning agents in estates and in close proximity to customers’ places of work.

Commercial Bank of Africa, which runs M-Shwari in partnership with Safaricom, indicated in its 2015 annual report that the platform had

12.6 million customers by December 2015, disbursing loans worth Sh40 billion.


KCB Mpesa

KCB, which is the region’s  larg- est bank by assets, has on-board- ed an estimated 6.5 million people on KCB-MPESA. It has disbursed slightly over Sh11.3 billion ever since it launched the program in March 2015.

“We believe the future of bank- ing is in digital. We are reimagining digital financial services to com- plement the traditional brick and mortar model that was in yesteryears the hallmark of banking,” said KCB Group CEO Joshua Oigara.

It is clear that the entire banking sector has developed a sharp appre- ciation of just how big a role digital platforms are playing in the sector. Many are embracing the platforms. What is not clear are the precise motivations for doing so.

Admittedly, the move to

digital platforms has been pri- marily inspired by changing cus- tomer preferences, but there are also other considerations that banks have made.


Cost savings and data analytics Digital platforms have less opera- tional costs, though the initial capital expenditure for setting up the sys- tems may be steep, as evidenced by the fact that Equity Bank has over the years pumped in sh20 billion into building its IT infrastructure. In the long-run, however, digital plat- forms are more cost-effective since they require fewer personnel.

Cost savings is a strong proposi- tion for banks, especially now when they have to contend with thinning margins due to the recently enacted Banking Amendment Act. The new law has put a cap on lending rates and a floor on deposits. A commer- cial bank cannot charge interests to borrowers at more than 4.5 per cent of the CBK base lending rate nor give interest on deposits of less than 70 per cent of the CBK benchmark. This has essentially fixed inter-

est spreads—the difference between lending and deposits rates, which is in essence the amount a bank makes from every shilling of deposi- tors’ money—at 7 per cent. Initially, interest spreads in Kenya were as high as fifteen per cent, explaining why profit has grown at double digit rates in past years. This year, growth is expected to be in the single digits in line with lower spreads.


Revenue streams

Exotix Partners, an investment bank operating in Nairobi, said in a note that commercial banks could boost their profitability by introducing new revenue streams, increasing bal- ance sheet volumes, reducing their cost base and concentrating on high- er quality borrowers. Most banks are going the cost base reduction way.

In  this  regard,  automation of

transactions has emerged as a key strategy to cut back on costs and reduce staff count in banking halls. Although banks have downplayed the fact that a greater inclination towards digital platforms will lead to staff redundancies, it is a develop- ment that will play into their hands. It will reduce their operational costs and preserve their bottom lines at a time when margins are tight.



Automation also comes with the added advantage of analytics. Digital platforms churn out tremendous volumes of raw data. If well ana- lyzed and understood, this raw data can fundamentally improve market research. The process by which the raw data is analyzed with the pur- pose of drawing actionable conclu

sions about the information is called data analytics.

Data analytics is used in various industries to allow companies to make better business decisions. For instance, data analytics can help a company to introduce market-driven products—that is, products based on the precise needs of consumers.

“It is important that innovators and financial service providers lis- ten and understand the concerns  of their prospective customers. This will generate a wider range of appro- priately designed financial products, based on customers’ diverse needs and characteristics,” said CBK’s Dr. Njoroge.

Digital platforms will help banks understand their customers’ needs with greater precision through data analytic tools. Traditional research may not always achieve  this  due to limitations such as geographical reach and customers’ unwillingness to disclose information to a research- er. In comparison, it is much harder to lie or refrain from disclosing infor- mation to your phone or computer, indicating the positive impact that digital platforms are having on mar- ket research.

Digital platforms will be par- ticularly key for delivering tailored solutions to small and medium sized enterprises (SMEs). “Banks need to appreciate that SMEs are very unique businesses with vast- ly heterogeneous needs. As such, SMEs require tailored solutions that are attentive to specific customer needs,” said Tim Gitonga, Managing Director of Spire Bank, formerly Equatorial Commercial Bank.

“There is no better tool to achieve closer relations with custom- ers than technology. Banks should embrace alternative outreach models such as mobile banking and agency banking to reach SMEs and develop active relationships with them on an ongoing basis,” added Mr. Gitonga. The  bank’s  Go  Mobile   app

for mobile banking was rec- ognized in the Best Bank in Mobile Banking Category at the 2014 Think Business Banking Awards at Safari Park, Nairobi.


Emerging concerns

Even as banks shift to digital plat- forms, there are still lingering con- cerns over cyber security. This is because the increased digitization of the banking sector comes with inher- ent risks, key among them being higher vulnerability to hackers.

PKF Kenya, a leading audit and advisory firm, has echoed these con- cerns before. Atul Shah, the CEO of the firm, noted that after the government, the banking sector and financial services are ranked second and third, respectively, in terms of vulnerability to hackers.

Mr. Shah warned that no bank or company should think it is too big to be hacked. “No company is too big to be hacked. Leading US Bank J.P. Morgan, whose $235 bil- lion market value is more than 10 times the $20 billion combined mar- ket value of all listed firms on the Nairobi Securities Exchange, was not spared. J.P Morgan suffered a high-profile hack in August 2014, just two months after it had commit- ted a mindboggling $250 million to cyber security,” he noted.



The concerns of Mr. Shah are shared across the sector. Dr. Njoroge has been very categorical about the inherent threat of cyber security that accompanies increased digitization of the banking sector.

“Questions of data privacy amidst the explosion of cybercrime are of particular concern. Questions about ownership and control of the vast data that is generated through the digital financial services also need urgent attention,” said Dr. Njoroge.

Banks that embrace digital platforms therefore need to make sufficient budgetary allocations for cybercrime. These cyber security budgetary allocations could some- times be high, offsetting the potential cost savings that a digital platform brings in terms of reduced personnel. Consequently, the premise that digi- tal channels are more cost-effective could be flawed, despite the fact that they present greater convenience for customers.

These fresh concerns over cyber security and whether digital plat- forms actually save overall costs could preempt the death of physical branches.

Banks will therefore be more inclined to maintain a balance approach where they retain a branch presence for branding purposes, while still leveraging on digital chan- nels to grow their customer base and achieve greater engagement.

Rather than die, what is more likely is that branches will transi- tion. They will no longer be channels for transactions, but increasingly, relationship and branding centers. Therefore, the increased popularity of digital platforms for transactions will not phase out physical bank branches completely, but give them a new function altogether.

We will start seeing more peo- ple going to the bank branches to deepen their relationship with their banks.

Banks, on the other hand, will add   new   product   categories   at