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 mobile money operators.
The switch is being facilitated partly by the 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
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 one to three 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
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 fourth 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 (~$700) whereas the interbank switch is projected to have a cap of KES 500,000 (~$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 (~$27) to be KES 20 (~$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.
