Kenyan Banks Launch Real-Time Interbank Switch in Response To Mobile Money

The Kenya Bankers Association (KBA) is launching a platform it calls the ‘Real-Time Interbank Switch which it says “will create an interbank mechanism to enable interoperability across KBA members for all retail payment streams,” according to KBA chief executive Habil Olaka.

This is essentially a bank to bank P2P transfer mechanism that aims to try and capture the losses in the domestic remittances market estimated at KES 2.3 Billion that the banking industry had ceded to the Mobile Money operators.

The switch is being facilitated partly by Financial Sector Deepening Kenya (FSD), a donor funded agency that has the UK’s DFID, Sweden’s SIDA and the Bill and Melinda Gates Foundation as its partners with the aim of deepening financial inclusion in Africa.

Problem Switch Seeks to Solve

Banking Queue

Currently, the only electronic real-time bank payment transactions are those that occur between two accounts in the same bank, and hence the fastest way for a consumer to make a payment to another bank was to withdraw cash from his bank account, travel to the nearest branch of the beneficiaries’ bank and make a cash deposit for it to reflect immediately.

Before, bank to bank transactions initiated electronically say using internet banking would have to go through the end of day inter-bank settlement process that could take 1-3 days and denies the consumer the benefits of real-time or near real-time transactions that they currently enjoy with mobile money transactions.

How the Switch Works

mobile-bank

The switch will create a real-time interbank mechanism for all bank account holders in Kenya to be able to transfer money directly to one another.

Consumers will be required to register an MSISDN with their banks indicating a nominated account to be linked to that one mobile number, which will be used for transactions initiation and notifications purposes, hence the mobile number becomes the unique identifier.

Consumers will then be able to send their funds to a mobile number, which has a linked account or card on the back end.

Beneficiaries without a bank account will be able to get a one time code to transact from licensed agents.

Business Model

The KBA intend to launch the service using an operating company to which the banks will fund at a equity:debt ratio of 1:4, being KES 140M in Equity to KES 540 Million in Debt.

This operating company is projected to handle 400 million transactions in the first year and grow to 1.6 Billion transactions by the 4th year of operations. This will be a huge increment on the 29.68 Million transactions the banking industry currently does annually.

This is in comparison to the 911 million transactions currently being done on mobile money annually in the country.

Unique Benefits the Switch Offers Over Mobile Money

First, the banks seek to take advantage of their licences to transact larger sums of money and hence would enable consumers to make remittances of a larger value than they presently can on mobile money. Currently mobile money operators have transaction caps of KES 70,000 (~USD 700) whereas the interbank switch is projected to have a cap of KES 500,000 (~USD 5,000) per payment transaction.

Second, the switch aims to undercut industry leader M-Pesa by for example making the cost of sending KES 2,700 (~USD 27) to be KES 20 (~USD O.20) which is compared to the current cost of KES 55 for a P2P send of the same amount not to mention a KES 49 withdrawal charge. Bank withdrawal charges for the recipient range from free to around KES 30 flat fee for the beneficiary as long as they are withdrawing from their own banks’ ATMs, and beneficiaries will have access to the global EMV card payment and ATM withdrawal network for received funds.

This will have the effect of widening and deepening the meaning of financial inclusion for Kenyan consumers by increasing the banked rate, connecting them to the global banking infrastructure and all the associated structured financing services that they can obtain from banks that they have prior been unable to obtain from mobile money services.

It remains to be seen how the Mobile Money sector in Kenya will react to this but for now, the head of Safaricoms’ Corporate Affairs, Stephen Chege says that they do not feel that M-Pesa will be threatened and that there is still a lot of room for growth in Kenya’s burgeoning payments industry.

The Rise of Agency Banking in Kenya

Agency Banking

According to the Central Bank of Kenya’s guidelines on Agent Banking, a Bank “Agent” means an entity that has been contracted by an institution and approved by the Central Bank to provide the services of the institution on behalf of the institution, institution usually being a bank.

Agency banking is then the Provision of banking services by a third – party agency to customers on behalf of a licensed, prudentially – regulated financial institution, such as a bank or any other deposit taking Commercial Bank.

Agency banking was made legal following an amendment to the Banking Act 2010.

A bank agent is usually equipped with a EMV certified P.O.S. terminal with which they can process withdrawals and deposits after the consumer swipes their EMV certified bank debit or credit card.

These P.O.S. devices connect to the core banking system via a GPRS data connection using any of the major MNOs’ networks.

POS

The Bank agency model has been a hub and spoke model, with agents being associated with a nearby bank branch from which their liquidity is managed by the bank, hence in a sense, still rides the existing brick and mortar networks of the Bank. This may explain why in Kenya, the banks with the largest physical branch presence, Equity, Co-operative and Kenya Commercial Bank; have also led in the agency banking expansion.

According to a Helix Digital Finance special report on Agency Banking in Kenya, Agency banking has been the fastest growing in terms of agents share and Equity Bank has even leapfrogged past Airtel Money Kenya to become the second largest in terms of agent share at 11%. The market leader Safaricom M-Pesa had its share of agents drop from 90% in 2013 to 79% in 2014 due to the regulatory decision mandating it to open up it’s agent network, a decision that bank agents seem to have taken more advantage of by recruiting existing m-pesa agents rather than solely focussing on recruiting exclusive agents as they did in the past.

What this Means for MNO Mobile Money Providers

This rapid expansion of the banks’ agent networks indicates a market need for more structured financial products rather than simply the money transfer, airtime and bill payments use-cases that have been the mainstay of their services.

In response to this need, the MNOs have already started partnering with banks to offer micro-loan and micro-savings products such as the Safaricom M-Shwari (in partnership with CBA bank) and the Airtel Money ‘Kopa Chapaa’ (in partnership with Faulu Kenya Bank).

These micro-loans tend to be short term loans at relatively high interest rates such as 7.5% of the loan amount to be repaid usually within one month. Also the maximum loan amounts tend to be fairly small e.g. 100 USD for Airtel Money’s Kopa Chapaa.

These micro-finance products service a need in the market for quick small stop-gap loans and daily savings of cash for small scale traders and such, but they don’t address the full need for the full suite of structured financial services such as long-term asset loans and asset/life insurance products. This is where the banks retain an advantage and have decided to increase their reach for daily transactions beyond their brick and mortar physical branch network.

It remains to be seen who will get the upper hand in the struggle between MNOs and Banks, and in the end, MNOs may have to apply for full bank grade financial service licences in order to be fully able to compete with the banks.