Pain and gain as Kenya adopts digital payments
What you need to know:
- Commercial banks and customers have gained from greater efficiency and cash safety, but are now exposed to high rates of cyber crime.
- The Ministry of Information estimates that Kenya loses Sh2 billion annually to thieves operating in cyberspace. Banks do not report most of the cases in fear of losing customer confidence.
On the early morning of January 6, 2007 a Wells Fargo security van carrying Sh22 million from Molo to Nakuru was attacked by robbers riding on the back of a pick-up.
The thugs sprayed the van with bullets killing three administration police officers and a Wells Fargo employee. The brutal act forced the government, through then Internal Security minister John Michuki, to introduce new regulations of carrying cash on transit, which included the introduction of an escort car with extra security agents.
The banks also had their own response – using technology to reduce their holding of hard cash.
Global trends indicate that a shift from cash to electronic payments can save countries one to two percentage points of GDP annually. Cash is an expensive and vulnerable mode of payment.
Thugs mainly target holders of hard cash, whether in large or small amounts for quick crimes.
LAST MILE
To phase out the use of cash, banks have improved their information systems to allow for Internet and mobile banking, real time cash settlement, cheque truncation and increased card usage.
Most employers nowadays require their employees to have bank accounts for processing salaries. Banks charge between Sh50 and Sh300 for the service but workers prefer the arrangement because it creates a relationship upon which they can access credit.
The planned introduction of electronic cards to replace cash payments in the unruly and corrupt public transport sector is expected to launch Kenya’s entry to the final stretch of becoming a cash-lite economy.
Several bus transport companies have started accepting card and mobile money payments for fares.
FSD Kenya, an organisation that conducts research on the financial sector, reckons that being cash-lite does not mean total elimination of hard cash from the economy but should be backed by intermediaries that facilitate quick transfer from virtual to physical cash.
“Given very small transaction sizes, retail transactions may be the ‘last mile’ payment type to tackle,” said Julie Zollmann, of Bankable Frontier Associates, which has researched on Kenya’s path to being a cash-lite economy.
Retail outlets will have to invest in technology to support the shift to a cash-less economy.
Banks have already made huge capital investments in the purchase of new systems to handle the new channels of payments.
NIC Bank, for instance, spent Sh870 million in 2012 to install a new information system, T-24. Others that have changed their core banking systems in the recent past include National, Co-operative, Family and Consolidated banks.
Bank managers say automation has helped improve operating efficiency, helping cut down waiting times in banking halls.
“This is evidenced by the increase in the number of customers being served by a bank employee,” said the Central Bank of Kenya (CBK).
NEW WARFRONT
Banks efficiency score – a ratio of total number of bank customers to staff – rose to 640 in 2013 from 501 a year earlier and 190 in 2007. This indicates that bank customers have been growing with minimal increase in staff.
Customer convenience too has improved with increase in options to access money.
But the migration to digital payments has not been without its challenges. Having reduced the rate of cash robberies, banks have just discovered a new warfront against the more sophisticated cyber thieves.
The Ministry of Information estimates that Kenya loses Sh2 billion annually to thieves operating in cyberspace. Banks do not report most of the cases in fear of losing customer confidence.
The Kenya Cyber Security report of 2014 notes there was an increase in financial fraud last year that affected the majority of banks.
The fraud was executed through different vectors such as ATM skimming, mobile banking, credit card theft and insider collusion.
“Many financial institutions are introducing vulnerable web and mobile applications,” said Serianu Limited, authors of the report.
Serianu said it sampled 33 online banking portals and found that only two had adequate security deployed.
CBK has stepped in by introducing standard risk guidelines to be observed by the lenders in managing their information systems. Banks are also in the process of moving to the more secure PIN and chip technology in the use of cards.
Movement of huge sums of money from one bank branch to another has now reduced with most of the large transactions done electronically.
The CBK now requires all transfer transactions exceeding Sh1 million be done through the real time gross settlement (RTGS) platform.
On RTGS the amount is expected to reflect in the bank account of the recipient two hours after issuance of the transfer instructions.
The clearing cycle of cheques has been cut to two working days with the introduction of cheque imaging, commonly referred to as truncation, making the paper attractive as an alternative to cash payment.
The clearing cycle is expected to be cut to a day when the system is fully implemented.
The article first appeared in The Business Daily.
