For the past decade, Kenya has hogged global limelight thanks to mobile money transfer service, M-Pesa. It is because of this service that the country has earned unassailable reputation as a leader in innovation not only in the region, but worldwide.
Given its novelty, M-Pesa has been raking in billions of shillings in revenue for Safaricom, the most profitable firm in East Africa. And now commercial banks reckon it is time they had a piece of this sweet pie.
The lenders plan to launch a service that will eat into M-Pesa’s market share. The Real Time Interbank Switch, or the Switch, is scheduled to be launched in November by the Kenya Bankers Association.
“It will create “an interbank mechanism to enable interoperability across KBA members for all retail payment streams,” KBA chief executive Habil Olaka told Smart Company.
“We just want to fill the gap left in terms of possible transaction values allowed by mobile phones and introducing a variety for our customers. The switch is a new innovation for the rapidly growing local banking ecosystem.”
The Switch, if successfully implemented, is likely to stamp Kenya’s regional mark for innovation and accelerate financial inclusion.
It will also certainly lead to cut-throat competition among players.
While the system is being sold as a bank-to-bank product with KBA saying it is not out to compete with money transfer services, documents being used to sell the idea and which Smart Company has seen, show that lenders are out to regain the Sh2.3 billion market lost to mobile phone and other money transfer operators.
Details provided by Central Bank show that at least 2.5 million money transfer transactions are carried out daily with banks accounting for only 3.2 per cent of the total.
In 2014, for example mobile money transfer conducted 911.34 million deals with banks effecting only 29.68 million.
KBA, however, admits the system was created to remove reliance on mobile money service providers when customers want to move money directly from their bank accounts to a third party.
“We are not fighting mobile money but innovation and technology bring several applications with it, some of them we cannot even predict for now,” Mr Olaka said.
Safaricom Corporate Affairs Director Stephen Chege said the move by bankers will not shake M-Pesa, describing Kenya’s payment market as “nascent and still growing”.
“This is an expected development. Safaricom believes that there is room for more innovative solutions in the payments space. We welcome developments that will result in more options being made available to the consumer,” Mr Chege said.
“We believe this will enhance efficiency in the Kenyan payment system as a whole.”
The Switch is funded by Financial Sector Deepening, a donor funded agency, with both Central Bank and Competition Authority of Kenya having been involved to take care of any regulatory and competition issues that may arise.
Current FSD financiers include the UK’s Department for International Development (DFID), the Swedish International Development Agency (Sida), and the Bill and Melinda Gates Foundation. FSD’s objective is to help make markets work for the poor.
The Sh700 million plan mooted in 2012 will see banks form an operating company, complete with its governance structure to handle the money transfer business.
The plan seen by Smart Company is at an advanced stage.
Apart from creating an inter-bank mechanism to enable all bank account holders to transfer money to one other, lenders are also devising a new mechanism that facilitates mobile money transfer to those without bank accounts.
Those without an account will get a code for making payments or withdrawing cash from agents.
KBA first undertook a strategic review of how the industry processes transactions in 2012 and to explore opportunities to enhance inter-operability while increasing market share for local banks.
A consultant team funded by FSD then focused on the option to establish a real-time inter-bank Switch, which is now taking shape. In the plan, customers will be required to register a mobile phone number with their banks indicating a nominated account to be linked to one mobile number through which all transactions will be routed.
Customers will then be able to send money to the mobile number linked to an account. They could send the cash directly to a bank account or to a card.
Both clients, sending and receiving cash, will receive a confirmation text from the system.
“The plan will enable lower transaction fees. Currently M-Pesa cost for sending Sh2,700 is Sh55 (withdrawal is Sh49). The Switch aims at lowered transactions costs of approximately Sh20 for a similar amount,” reads the strategy document.
Beyond aiming to lower transaction charges in the mobile money market, bankers are seeking to expand range of transactions from Sh50 to Sh500,000 for person-to-person deals.
And this is where the new outfit is likely to give M-Pesa a run for its money.
The system is projected to handle 400 million transactions in its first year and grow fourfold in five years to 1.6 billion.
Banks are expected to bear the cost of the project through equity and debt on a ratio contribution of 1:4. KBA said Sh140 million will be equity while Sh540 million will be debt.
The operating company is also expected to break even by the start of the second year with initial net incomes predicted to be Sh60 billion.
Banks will be required to integrate with the Switch to provide the P2P (person to person) service in real time as funds transfer from card or account will be initiated from ATM; POS (point of sale) terminal; Internet banking and mobile banking.
“In case a technical error or time-out (25 sec) occurs, a reversal transaction is initiated and processed. In case of user error (e.g. wrongly credited account), a manual refund is processed.
Dispute and charge back process will be handled by banks,” says the strategy document.
“While processing a transaction, the Switch will calculate interchange fees according to set financial conditions; processing fees for services provided by the Switch company; processing fees for messages; net positions of member-banks for sending to the Central Bank for settlement.”
Perhaps the key invention by the plan is the ‘cash by code’ service. The code will be given to customers who have not yet registered for the service or do not have a bank account. Money will be sent to individual mobile numbers but not to a mobile money account such as M-Pesa or Airtel Money.
The Switch will receive the person to person transaction and link it to the appropriate account.
If it fails to locate a mobile number, the Switch will hold the transaction for 24 hours and send a text notification to the receiver’s number with a six-digit code.
The receiver then gets an SMS with a numeric code. The SMS could read like this: “You have received money. Kindly go to any bank agent, ATM or branch to withdraw using this 873921. Request the sender for the additional 3-digit code.”
“The sender then receives a 3 digit code which they forward to the receiver who can use it for withdrawal either in cash through a bank branch, agent or ATM or use at a merchant location to pay for goods and services,” the document explains.
The code sent by text will expire after 24 hours when an automatic reversal will be triggered if no withdrawal or transaction is made.
The Switch provides automated control of fixed minimum and maximum transaction amounts during P2P transaction processing.
Minimum transaction amount is Sh10 (equal nearest whole number amount in USD, GBP, EUR) per transaction. Any amounts outside these limits are declined. Maximum transaction amount Sh500,000 (equal amount in USD, GBP, EUR) per transaction.
The P2P funds transfer service is also limited to local institutions registered in the country.
The Switch’s “look-up service table” will contain records about one mobile phone number and one account number.
In Kenya where most customers own multiple bank accounts for various reasons, the choice to be limited to just one account may not be easy to make.
If a customer changes one of the records, the latest update will over write the existing information.
In case a receiver’s account is in a currency other than the defined transaction and settlement unit, it’s the bank’s responsibility to conduct currency conversion operations in accordance with their internal procedures. No currency conversion will be done at the switch.