DEVELOPMENTS IN MOBILE PHONE BANKING

A suitable banking setting is considered as both the main pillar and also a stimulant of economic growth (Koivu, 2002). With the advent of technological economy, the Kenyan banking industry has emerged as a major consumer of information technology.The Banking industry in Kenya is governed by the Companies Act, the Banking Act, the Central Bank of Kenya Act and the various prudential guidelines issued by the Central Bank of Kenya (CBK, 2009) .Players in this sector have experienced increased competition over the last few years resulting from increased innovations among the players and new entrants into the market.The major banks in Kenya are: Barclays’ bank, The KCB group, Cooperative bank, Equity bank and Standard Chartered bank. Of these, Barclays bank, Standard Chartered and KCB group have been in operation the longest. As at December 2009 there were forty eight banking and non bank institutions, fifteen micro finance institutions and one hundred and nine foreign exchange bureaus. The CBK, which falls under the Minister for Finance docket, is responsible for formulating and implementing monetary policy and fostering the liquidity, solvency and proper functioning of the financial system.The need for suitable ways of getting financial resources through highly convenient means has lead to the rigorous expansion and modernization of banking methods. The huge demand by the Kenyan population for mostly financial leaning services, various institutions other than the conventional banks have joined the sector. This is mainly to reap from vast opportunities created in the banking industry. Equity bank in particular despite being the youngest in the list, is fastest growing and the most technologically aggressive bank in Kenya today.Kenyan banks are mainly concentrated in major towns all over the country with some few sparsely distributed within the countryside.In the 1990’s the major banks, for instance Barclays’ bank and Standard Chartered withdrew from many rural towns in Kenya citing unpredictability (Kimani, 2005). These banks are also famous for the unpopular rules they introduced in the same period where they raised the minimum balance to Ksh 10,000 thereby prompting an exodus of account holders who used to rely on the banks, especially civil servants who used the banks for receiving of salaries. Kenya banks have been rated some of the most expensive in the world, in terms of operating and other charges (DFID, 2005). This can perhaps explain the low numbers of account holders Kenya have in comparison with the country’s population. There are less than 9 million account holders in Kenya. This is in comparison with the country’s population of 36 million.Kenyan banks have adopted the use of information and communication technologies in their business (The African Executive, 2008). Huge amount of money have been invested in implementing the self and virtual banking services with the aim of improving the quality of customer service. Some of the ICT-based products and services include the introduction of SMS banking, ATMs, Anywhere banking software’s, Core banking solution, Electronic clearing systems and direct debit among others. In mid 2005, Kenya’s banking Industry moved and introduced Real Time Gross and Settlement System (RTGS) which was renamed Kenya Electronic Payment and Settlement System (KEPSS). This has the potential to facilitate transfer of financial data among banks. The introduction of e-banking services has contributed immensely towards decongestion of banking halls. This in the long run reduces long queues and saves customers a lot of time hence improving service delivery.Most banks have in the recent past embraced internet banking. The leading banks in Kenya have been at the forefront in the launch of customer friendly mobile banking products. e.g. Barclays bank has launched a free mobile banking service called Hello money, KCB have come up with KCB Connect, Equity have Eazzy 24/7 (Market intelligence, 2009). This has been taken by market experts as the banking industry’s response to the new competition front from Mobile money transfer services by the Telecommunication sector.In Kenya, the banking industry has been expanding in terms of branch networks. This has been heightened by the introduction of the famous branchless banking system. Branchless banking which incorporate the use of EFTs, ATM cards, SMS banking among other systems. This expansion has been clearly captured by CBK annual reports since 2002. Kenyan branch network has increased by more than 15% in a period of four years from 2002 to 2006 with Nairobi having the highest number of branches. Some regions such as North East Kenya have been left behind with only four branches which hardly show increase. This indicates that many Kenyan are left un-banked throughout the country’s eight provinces, as banks have customer bases concentrating in major cities. Also, the slow growth of Branches can be attributed to the rapid rise of alternatives, which include electronic financial product through mobile phones and personal computers (African Executive, 2008).2.3 MOBILE PHONE BANKINGThe use of mobile phones across the developing countries is one of the most notable technology stories of the first decade of the millennium. Supported by user friendly prepaid cards and fairly cheap handsets, the growth in mobile phone use can not be over emphasized. However, a good number of the new mobile users are the operators in the informal economies, with little or no access to modern financial services. In actual sense, there are more people with mobile phone than those with bank accounts (Porteous, 2006). Various initiatives have therefore been initiated to use mobile phones to provide financial services to the unbanked. These services are in various forms that include long-distance remittances, micro payments, and informal airtime bartering schemes. They also go with various names, including mobile banking, mobile transfers, and mobile payments. Taken together, they are no longer merely pilots; in the Philippines, South Africa, Kenya, and elsewhere, these services are broadly available and increasingly popular.Due to its intrinsic features like personalization and flexibility, M-Commerce generally promises businesses unprecedented potential in market growth, productivity and profitability (Siau, et.al, 2001). In the current progressively competitive financial markets, Mobile Banking can easily be seen as an attempt to provide the needed added value for customers by offering more opportunities for conducting different banking actions. There are however two factors hampering the growth of both online and Mobile Phone banking in Kenya. These are lack of or extremely little influence from the market place and government statutory restrictions that tend to limit the ability of local private firms and, individuals to make their contributions internet infrastructure (Laforet, 2005). Mobile banking is still in its development phase in most countries, where small markets with few users have been reported for these markets (Goldfinger, 2002).With the recent entrance of mobile money transfer services like M-PESA, the banks have encountered a new and formidable challenge that was not anticipated. Kenyan banks have insisted that M-PESA operates banking services (deposit and withdrawal of cash) and should therefore be brought under the Banking Act. Analysts have said that the real fear facing banks is what Safaricom is capable of, with its innovations and large network.While commercial banks are partnering with retail chains, petrol stations, KPLC and other consumer outlets to enable their customers settle various utility bills, M-PESA service has also grown into this niche. For instance, registered customers can pay for their Safaricom Advantage (Postpay) bills as well as bills for services received from a selected number of M-PESA partners. M-PESA customers can also pay for DSTV services, pay for their investment contributions to investment groups like Zimele through M-PESA. All these were previously done through banks. Safaricom registered M-PESA users can now pay their electricity bills, buy goods and perform ATM withdrawals using M-PESA. As the list of M-PESA functions grow, there has been a cause for alarm by the commercial banks, which explains why there has been complaints of lack of regulatory framework by the banks in as far as M-PESA is concerned.2.4 MOBILE PHONE BANKING IN AFRICAThe Mobile Phone banking strategy was made available by local mobile phone service providers especially in Kenya as part of their corporate social responsibility. It however turned out to be a life changing service compared to other previous services within the services. The perceived difference between mobile service providers mainly lies on the pricing strategy, quality as well as the scope of services.Mobile banking has no universal form but rather varies from country to country and from operator to operator; rather, purposes and structures vary from country to country. The systems quite often offer a variety of financial functions that usually include micro payment to merchants, bill-payments to various utilities, P2P transfers between private individuals, and long-distance remittances among other services. Currently, different institutional and business models deliver these systems. Some are offered entirely by banks, others entirely by telecommunications providers, and still others involve a partnership between a bank and a telecommunications provider (Porteous, 2006).Regulatory factors, which can vary dramatically from country to country, play a strong role in determining which services can be delivered via which institutional arrangements (Mortimer-Schutts, 2007).2.4.2 DEVELOPMENTS IN MOBILE PHONE BANKINGThe mobile banking services are available to mobile phone users of the two major mobile services providers namely Safaricom and Zain. Safaricom’s service is branded “Mpesa” and Zains service goes by the “Zap” brand name. The latest entrants i.e. Orange / Telkom and Essar are also expected to roll out their mobile banking services in the course of time. Speaking in South Africa during a conference on mobile banking, Safaricom’s CEO Mr. Michael Joseph highlighted the needs and benefits of the M-PESA service, emphasizing its value outside the main urban areas where banking infrastructure is rarely available.The CEO recounted the origins of the M-PESA service in 2006 within a micro financing project and explains its current popularity. By saving users the hazards of carrying and transacting in cash M-PESA allows its users greater degree of mobility and flexibility. He stresses that M-PESA is a banking product. The banking infrastructure in Kenya is not well developed but there is a large network of airtime and phone dealers all over Kenya and this has played a key role in ensuring that M-PESA is an alternative to formal banking. Source: Ignacio et al 2008Figure 2.1. Example of what a customer sees on her phone in a cash withdrawal: The case of M-PESA in KenyaZain introduced its money transfer service, Zap, in Kenya after Safaricom’s wildly successful M-PESA service. This was expected to allow Zain build its market share and build its customer loyalty in the face of increased competition. A unique aspect of Zap is that, its charges are much lower than Safaricom’s M-PESA service. It seems obvious that each mobile network will look to build strategic alliances with as many service providers as possible in the banking sector as well as other traditional money transfer services like Money gram, Posta Pay and Western Union who dominate the multi-billion shilling international money remittance business.2.4.1 Technology of Mobile Phone BankingThe terms m-banking, m-payments, m-transfers, m-payments, and m-financerefer jointly to functions that associated with mobile telephones to operate their bank accounts, store money in an account linked to their handsets, transfer funds, or even access credit or insurance products (Donner et al, 2008). This paper uses the compound term m-banking/payments systems to refer to the most common features especially the M-PESA and bill payment functions. The first targets for these applications were consumers in the developed world. Other than complementing important services offered by the conventional banking system, such as ATMs, voicemail/landline interfaces, smart cards, point-of-sale networks, and internet resources, the mobile platform gives a convenient additional method of a paperless economy (Karjaluoto, 2002). For users and subscribers in the developing world, on the other hand, the personal appeal of these m-banking/m-payments systems may actually be less about convenience and more about accessibility and general affordability (infodev, 2006). An exploration is currently underway between local banks, mobile operators, digital hardware and software providers, regulatory authorities, and users to determine the future of m-banking/m-payments services in the developing world (infodev, 2006). Mobile phone operators in Kenya have identified m-banking/m-payments systems as a prospective service to offer clients, increasing overall client loyalty while also generating real fees (infodev, 2006). Financial institutions and intermediaries that have in the past had problems in provision of profitable and convenient services through traditional channels to poor clients will be faced out (Ivatury, 2008). M-PESA therefore came in handy to which lower the cost of serving low-income customers with essential banking services. Government regulators see a similar appeal but are working out the legal implications of the technologies, particularly concerning security and taxation. Most m-banking systems in the developing world enable users to do three main things. It enables them to store value (currency) in an account easily accessible via them mobile handset. Should the user have a bank account, this simply a question of linking to a bank account. If the user however does not have an account, the process creates a bank account for her or creates a pseudo bank account, held by a third party or the user’smobile operator. It also allows user to convert cash in and out of the stored value account. If the account is linked to a bank account, then users can visit banks to cash-in and cash-out. Users can generally and much easily transfer funds between accounts linked to two mobile phones, by using a set of SMS messages (or menu commands) and PIN numbers (Donner et al, 2008). The Mobile Phones offer a new way to move money from place to place and present an alternative to the payment systems offered by banks, remittance firms, pawn shops, etc. The uptake of m-banking/m-payments systems has been particularly strong in the Philippines, where three million customers use systems offered by mobile operators Smart and Globe (Infodev, 2006); in South Africa, where over 450,000 people use Wizzit (Ivatury & Pickens, 2006) or one of two other national systems (Porteous, 2007); and in Kenya, where nearly two million users registered with Safaricom M-PESA system within a year of its nationwide rollout (Ivatury & Mas, 2008; Vaughan, 2007).2.5 CHALLENGES FACING MOBILE PHONE BANKINGThere are several major challenges and issues facing mobile phone banking today. These include:2.5.1 Perceived RiskSecurity and trust remains the major factors influencing the establishment and use of new technologies for financial transactions (McKnight et al 2002). For the success of mobile phone banking, there is need for security of personal details and financial information. As a result, the lower the perception of risk involved in using mobile phone banking, the more likely that it will be adopted. Security has been a major concern in the telephone banking quarters (Feinman et al., 1999; Financial Services Security Lab Background, 2001). Customers are concerned of giving their bank account details via mobile for fear of the same being intercepted. Other potential threats include the issue of User authentication may be disabled, in default mode, divulging the contents of the device to anyone who possesses it. The operators have however tried to rectify this insisting on production of national identification cards before any operation.2.5.2 CongestionCongestion is another major challenge as far as mobile banking is concerned. This is especially very common during peak periods. Lots of people tend to carry out banking transactions through the mobile phone at the end of the month and during the evening and weekends thus causing congestion on the network.2.5.3 Accessibility

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