Moving Beyond Bank Walls

This highlight is adapted from “Notes on Branchless Banking in Kenya,” which was released in Nov. 2007. Read the full document here.

What is branchless banking? Branchless banking is defined as the delivery of financial services outside conventional bank branches using information and communications technologies and non-bank retail agents.

Branchless banking - the provision of financial services outside of traditional bank branches - is spreading quickly in Kenya. In only 8 months of operation, M-PESA, a mobile phone-based payment service operated by Safaricom (a mobile operator jointly owned by Vodafone and the Kenyan government) has attracted close to a million registered users. This is in a country with approximately 3 million bank accounts.

Banks and microfinance institutions (MFIs) are also finding ways to move beyond their traditional branch offices. Kenyans can now access basic financial services at post offices, supermarkets, and other outlets through point-of-sale (POS) terminals, magstripe cards, and mobile phones.

The need to move beyond bank branches

Why is all this happening? Kenyan banks have limited infrastructure for reaching out to customers - only two ATMs per 100,000 people, and banking is relatively expensive - average fees and minimum balance requirements are five times higher than those in 62 other countries.

With such barriers, access to finance is limited in Kenya. Only about 19 percent of the adult population has access to formal financial services through banks, with an additional 8 percent served by MFIs and savings and credit cooperatives. However, mobile phone penetration is much higher: 55 percent of Kenyans either own a phone or have access to one. These figures give an idea of both the need to expand access and the potential of mobile phone and other branchless systems to do so.

The non-bank model

Different types of institutions - both banks and non-bank entities such as mobile phone companies - are becoming involved in branchless banking. Launched in February 2007, M-PESA is the first e-money product offered by a non-bank in Kenya. The service operates as a separate e-wallet on the mobile. It can be used to send money and buy prepaid airtime via text message, and to deposit and withdraw money at an M-PESA “agent”.

Agents include Safaricom dealers, other retailers such as petrol stations, and post offices. The agents are considered independent providers of a Safaricom service. In an effort to reduce risks of money laundering and to limit potential losses, M-PESA caps the maximum account balance at around US$750 and the maximum transaction size at around US$530.

The bank model

Some banks, especially those targeting the lower end of the market, have started exploring branchless banking models, but most are still at the planning stage. A few new services, however, have recently sprung up in the area of money transfers:

• K-Rep Bank, in partnership with mobile service provider Celtel and software provider Packetstream, has launched a money transfer service (Sokotele) facilitated by POS terminals and with mobile phones facilitating data transfers.
• Kenya Post Office Savings Bank (Postbank) and the Postal Corporation of Kenya are also rolling out POS terminals in post offices to allow for easy money transfers. Every active Postbank customer will be converted to a card-based system.
• Equity Bank, Kenya’s largest bank by number of clients (1.4 million), is offering limited cash-out services at supermarkets, in combination with purchases.
• PesaPoint, an ATM network, recently developed a payment service for employers called WagePoint. Participating companies provide employees with magstripe cards, which they use to withdraw salaries either at an ATM on company premises or, for a fee, at other PesaPoint ATMs.
• A few MFIs also see branchless banking as an integral part of their growth strategy. One of these, Jamii Bora, has already equipped its branches and field staff with POS terminals and its 150,000 members with magstripe cards.
• Technology Associates offers mTranZact which can enable clients of participating banks the ability to conduct transactions via mobile phones and Visa- and MasterCard-certified POS terminals.

The need for regulation

Banking law and regulations do not set clear standards regarding the ability to use agents to perform banking functions. In fact, non-banks are permitted to perform various payment functions virtually unregulated.

Because Kenya has no national payment system law, banks and non-banks engaged in financial services are subject to completely different regulatory regimes. While banks are subject to the requirements of Kenya’s Banking Act and Central Bank regulations, non-bank payment service providers, such as M-PESA, are not.

To date, the Government of Kenya and the Central Bank have shown a strong interest in branchless banking and a commitment to instituting legal and regulatory changes to support new services and enable increased outreach. The government is now working on a comprehensive financial sector reform and development strategy. Improving access to finance will be one of the strategy’s three main pillars; the other two are safety and efficiency.

Going forward, Kenya is in a position to shape its payments system and its regulation and supervision. A proposed National Payments System Bill could authorize the Central Bank to set minimum requirements for the establishment and operation of bank and nonbank payment service providers, to define reporting requirements, and to conduct on-site inspections.