Category Archives: bank service

Cheque Truncation Part III

The much vaunted cheque truncation may be here at last after a notice at the bank branch that it will be in effect from Monday – January 16 – six months later than scheduled. Cheques may now take as little as one day to clear. However the notice also reminds & cautions bank customers that even cheques they write will hit their account within a day of presentation – and that they should watch that they don’t get inconvenienced .i.e. issue cheques that bounce (bad for them, good for the bank which will hit them with more charges)

Having cheques clear faster is also a matter of necessity for banks if they hope to have cheques remain relevant and preferred for small payments. The number of cheques used in Kenya in 2010 (15.7m) and 2011 (16.7) was lower than the 16.8 million used in each of the two years before – and having a cheque book is less of factor when people open personal accounts.

The volume of transactions and money moved by M-Pesa and other mobile money systems show they are the preferred way for instant payments. Banks did not help themselves in this by relegating banker’s cheques (previously the preferred way of paying school fees) to a slower clearing cycle – same as other regular cheques (to guard against fraud), even before direct deposits (to school accounts) and M-Pesa established themselves. By having cheques clear faster ensure they don’t go the way of the travellers’ cheques.

More on cheque truncation in Part I and Part II

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A to Z Chat with Michael Joseph

Ten days before he retires as CEO of Safaricom, Michael Joseph gave a talk at the Nairobi iHub on his ten years at the helm of the company, on the day to day job, and the up’s & down’s of the job in taking the company from a literal zero to hero.

A recap

Beginning:

Safaricom started with (inherited) 17,000 customers, 9 cell sites in Nairobi no billing system, switch in Extelecom House, 5 Vodafone employees and 55 Safaricom staff deployed from Telkom (not chosen) – all working in a 3 bedroom flat at Norfolk Towers. Has little cash (started with $20 million from Vodafone, and paid $10 million for a switch leaving the balance for salaries & rents) and launched on 23 October 200 (Saturday) and on Monday morning network collapsed (blamed on IT person).

Crazy Kenyans:

This was a theme in his talk of marketing in Kenya.
Family & friends the average Kenyan calls 2.3 people, a fact he pointed out to his France Telecom (Orange) counterpart when they launched a family & friends promotion in which orange customers could call 5 people for 1 shilling per minute. The (forever) promo has since been discontinued.
Free credit – a promotion to give away all the subscribers Kshs 200 free credit was a major mistake and after it was bungled by an IT person in Dubai, led to 5 days of congestion. Lesson learnt – don’t surprise customers.
When okoa jahazi was launched, 1.7 million applied, even those who had credit and didn’t need it (crazy Kenyans love new things)

Fibre:

Media don’t understand it, people expect after companies invested millions of dollars in undersea cables, internet prices would drop by 90% the next day. They still have to have a redundant network, and a network is pensive to maintain. They have 4 cables to Mombasa, and every day (Chinese) road contractors are cutting fibre without any punishment. Since 3 cables land at the same point in Mombasa, they will land points in Kilifi and Dar es Salaam for redundancy.
He regrets not investing in metro fibre 4 years ago, which they are now leasing.

Growth:

Expectations: Safaricom expected to have 400,000 customers in 5 years, with about 50% of the market (against Kencell’s 50%). Had their first million customers in 2003, second in 2004, and by growing ½ million customers a month, is now a billion-dollar company.
The company growing at 20 – 25% a year; he used to report to 2 owners, now has over 700,000 (including his secretary ) who bought shares expecting the price to triple to 20 shillings. Safaricom has to balance their needs and revenue, and are still investing (they have the only 3G network in Kenya despite what their competitors say) while competing with Zain/Airtel’s subsidized/risky price cuts, and Essar who have petroleum and steel.
Competition: the battle with Zain/Airtel is being won: their subscriber numbers have not dropped – and while revenue has dropped, minutes (usage) has gone up as has traffic into the network and they will watch their costs.
Finances: With the first $20m spent, they had to borrow money. They were to get a Belgium export credit loan if they bought equipment from Siemens, but since shareholders would not sign guarantees, Safaricom had to pledge their network (which at the time was not strong enough to manage their subscriber base, but when he signed equipment was shipped and this took away their congestion problems (at that time)
Green initiatives: They are greener now than before, have 60 sites running on wind power (backed by generator). Their main concern is not their data equipment, but for air conditioning to cool batteries, so are always looking at new ways to cool the batteries – e.g. bury batteries in the ground, and new (but pricey) batteries from Canada that don’t have to be cooled. Their HQ has smart systems, so lights go off when no one is in the room. They can do more, but local wind generator cost $80,000, and the ones from India that cost $20,000 are easily toppled by Kenya’s wind gusts. They are looking at solar sites, but again need air conditioning for batteries.
Investment decisions: They would start in Nairobi and Mombasa then looked at expanding the market. They measure ROI every six months, expect payback form a base station in 1 year – and 80% payback in 6 months. While they outsource physical maintenance – towers, lights, fencing, fuel, power remains a big cost – they have 5,000 generators to run when electricity (KPLC) cuts off.
Outsourcing strategy: he is not a fan of this as outsourcing partners don’t reinvest until they have to. He said Bharti Airtel EBITDA in India is down from 45% to 35% this year because they outsourced a lot of key costs, which are now coming back. Safaricom may outsource network management, but not outsource customer care because quality will drop.

Innovation:

They have a team of 40 people who spend time looking around the world for new ideas, and with the Vodafone group e.g. sambaza was already in Sudan & Egypt – and have had great successes like Sambaza, Okoa Jahazi, M-Pesa and M-Kesho.
Innovation without disruption says the company is very innovative in the mobile space and they innovate to make money, not for innovation space, as his goal is to deliver to shareholders. He takes pride that the company has won international awards, in Silicon Valley, not the UN.
Local developers when vendors want to sell new ideas, Kenyans write to them with their new great ideas, -but everyone has to sign their legal waiver to protect the company from being sued.
On revenue share, his belief is that Safaricom should get the lion’s share – developers will be using their airtime, customers, marketing, distributors and collection method so it should be 80:20; if you want to keep 80%, go to Zain. But sometimes people can get good splits with Safaricom e.g. he did not believe ring back tones would make money, so mistakenly signed a deal that gave most of the money to developers.
Safaricom has not stolen anybody ideas – they have been sued a few times and won every time because they document everything. Also, many ideas belong to nobody, and while someone claims they invented m-kesho is his (MJ) personal idea – and Safaricom have enjoined themselves alongside Equity Bank, who are being sued by an inventor.

Key decisions:

Pre-paid billing: could not afford a post-paid billing system, so they opted to go for pre-paid customers and bought a (cheaper) prepaid system that cost $200,000 – in hindsight was a key decision.
Per second billing: he made the decision to bill per second even though per minute billing generated 20 – 25% more per call. He did not have scientific proof but had seen it in South America and felt his market was the mwananchi (ordinary person) who would use airtime in small increments.
Customer service: was free & 24/7 – which was a good decision because people don’t read phone instructions booklets. it was not very expensive and they hired 200 university graduates. People then were even calling from Kencell and today people still call to ask how to send SMS.
Guiding principle – do it because it makes financial sense. Safaricom needs to be seen as a Kenyan company, with all their spend is in Kenya, unlike their competitors who are purely foreign-owned. If Safaricom, has to outsource, he insists that the company have to have an office in Nairobi or he won’t buy from them. He mentioned Karanja Macharia of Mobile Planet has done very well by being a local partner and who won over foreign SMS firms.

Leadership

Best advice was from a boss in Scotland – a leader has to make decisions, don’t be afraid to make them, (e.g. asking people to leave the company) and if you’re right 7 out of 10 are right, you are doing well. He considers himself a benevolent dictator, who while he consults internally, makes the decision, he sees external consultants having no responsibility for their advice. He admits he has made wrong decisions (as an engineer in charge of marketing for the company)
When a competitor changes your business plans: don’t panic, and reassure your people; they had studied airtel in Sri Lanka and saw how they came in with low prices and ‘destroyed’ the industry to a level that the government had to intervene. They have had a measured response – they could have dropped prices further, but their promotions are working.
Lessons learnt: (i) you won’t learn anything from a book (ii) have absolute integrity (iii) lead from the front – being a leader is not about being seeing at team building exercises or having your name on the door (iv) research – if you don’t know what you’re doing, act like you know

M-Pesa:

Vodafone won £1 million DFID (UK) award for deepening financial penetration for the unbanked, which they also had to match financially – and they were to develop a system for the disbursement and repayment of microfinance loans. They tested in Thika for 6 months and realized that it had more potential as a money transfer tool, and they launched M-pesa in March 2007.
M-pesa success has not come from technology, but from the distribution network –(20,000) points around the country

Role of government:

GoK should play an enabling not punitive role as a regulator. But what is enabling about getting a license? Vodafone paid $55m for a license to operate in Kenya and another $25m for 3G. Their competitors have failed to beat Safaricom and run to the government to complain about Safaricom’s dominance. Safaricom opposed the CCK regulatory rules as unfair – and he wondered why EABL, Bidco and Kenya Airways (all with 80-90% e) were not subject to such rules – and why the government was sending the wrong signal to investors by seeming to crack down on Safaricom
Right regulator: ICT is going to create jobs, and has a good PS now, but GoK has to pick the right people to run the industry, not people who happen to be married to a relative of the president or come from his town (he said he told this to Kibaki and got a good laugh).
Kenya as a BPO centre: Kenya should be careful about investing heavily in this as a pillar of vision 2030 as this as it is l very fickle, and there is no loyalty you’re the flavour today, but what happens tomorrow? Can’t rely on time zone and English speaking skills, as companies will still take away their business to the next country to offer an incentive or when things go wrong. E.g. Delta air moved their outsourced customer service from India back to the US, when customers complained they could not understand the CS agents

Safaricom vs. Banks:

M-pesa is unregulated; when they got into it, there was no law covering that, but they sought and got ‘blessing’ from the mobile and banking regulators.
Big (foreign) multinational banks who had shut down rural branches abandoning their customer opposed m-pesa and fought in government & parliament and would have succeeded till he persuaded acting finance minister John Michuki to green light m-pesa.
M-kesho allows people to save in small increments, and get interest immediately is a revolutionary product (he came up with), and in 3 months new 700,000 savings accounts, (which was more than all the saving accounts that existed in the country – and money that was not there has moved from the informal to the formal banking sector). On M-kesho had to partner with a bank (did not want to hold people deposit/too much regulation) and signed on with Equity Bank who have nationwide reach to make it work and took the risk. This exclusive deal which ends in May 2011
Warning to banks: he has told the banking community that retail banking will disappear in 10 years time. Customers will not go there (to brick & mortar branches) except for loans, as ordinary banking will be on the mobile phone whose convenience is unprecedented. E.g. The biggest transaction days for M-pesa are when schools reopen (previously people would be queuing in banking halls for expensive money orders)

Social Media:

He is not a fan of social media because people can take advantage of anonymity to write lies about him. He is not on Facebook or Twitter, but his successor is, and the company uses these tools a lot for marketing.
SMS is a very dangerous phenomenon – and during Kenya election violence, they found many of the hate messages did not originate in Kenya, (came from South Africa). Safaricom responded by ending out peace SMS to subscribers, which was also controversial

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Karibu Member

On July 20 Equity released their half year results at Equity Centre headquarters in Nairobi CEO James Mwangi mentioned that they are usually the first with results (this time pipped by KCB who are in the middle of a rights issue)

Positive economic outlook: He noted that the picture is much improved from last year; with good agricultural harvests and prices, high exchange rate, government social programs rolled out (Vision 2030 social equity programs for the youth & marginalized), positive progress in the political arena in terms of new constitution, formation of the East African community with 126 million people, remittances are above 2006 figures, tourist arrival are ahead of the 2007 figures, and overall the economy of Kenya is expected to grow by 4.5 – 5% this year.

Bank focus: How does bank focus strategically?
– They have introduce new concept to influence direction of the bank, which for many years operated at micro finance until five years ago went into commercial banking. They have now created structure and are building capacity to move into investment banking (highest IRR per unit of capital), and merchant banking (private equity, venture capital) around east Africa.
– About 400,000 customers graduated to upper and middle SME’s class. They have invested in a level 4 data centre, with a 65 million-card switch and banking platform that can handle 35 million. also boldly claimed that they have overtaken Safaricom to be Kenya’s premier brand
– Innovation will continue through more collaboration with Telco (e.g they have opened 400,000 m-kesho accounts) without agents (yet) and are doing about 20,000 ones per day. Their their dream of opening 10 million accounts is still alive. They are acquiring merchants for visa and MasterCard (3,000 merchants in Kenya) and CBK has approved 4,000 retail outlets to become agents; they want agents to do transaction processing (withdrawals/deposits) at a commission, and equity do loan processing – so when you go buy milk and bread from kiosks, you may be able to withdraw cash

Bank performance: compared to last June
– Added 20 branches (now 165) but none in 2010, and 550 ATM’s (up from 494) and say they have achieved staff stability (5,169 from ,5,056) – no more huge growth in numbers
– Have 4.96 million deposit accounts (up from 3,.9m) and loans 833,819 loan accounts (up from 710k)
– Loans of 68.3 billion (up 27%) deposits 87.8 (up 53%) and assets 122.5 billion (up 40%) – CEO noted that with the economic recover they ate going back to the days when deposits used to grow at 70 % p.a.
– Interest income was 7.3billion (up 45%), commission income 3.8 billion, total income was 10 .1 billion and with expenses at 6.27 billion, (up 36%), profit before tax for teh half year was 3.88 billion [~$48 million] (up 46% from last June)

Summary: He’s optimistic because unlike last year, income is now growing faster than expenses, staff costs grew at 16% compared to previous 40% and asset quality back to 2007 (before Kenya election chaos and drought). The CEO was keen to emphasized that capital base of bank good, and shareholders will not be diluted this year or next year and that their investment in human resource, capital and systems are large enough and stable enough for the next three years, meaning that they can at least double in size without making new investments or seeking new capital.

Q&A

Regional diversification How have Sudan and Uganda performed?
Sudan: Contributed to profit in first year of investment almost ~$2m– not bad for Greenfield. So far only operated in equatorial Sudan, which they can run from Uganda. They have also got lots of corporates to sign with them as their bankings, which used to take 4 days, now takes seconds with equity. The CEO expect S. Sudan to have a peaceful referendum vote next year, which will yield Africa’s 54th state

Uganda: Here, they have been bleeding – in Q1 lost 12b shillings (Kshs 600m), Q2 made los of 3b shillings (Kshs 120m) – but expect to break even this month, and be out of loss in September. In Uganda they made a made mistake, as they did not freeze lending when they bought the other bank – left in the old managers who lent $16 million in 3 months. He believes its much improved; even though they bought a non deposit taking organization, they now have more deposits than loans, (have mobilized Kshs 4b deposits, compared to loans at Kshs 3b) and have 440,000 savers in Ug.

Their increase in provisions in H1 of 2010 (up 211%) is as a result of making a one off hit to clean up Uganda books and the investment was a learning process for them. In hindsight they should have frozen lending and it’s a good lesson they will apply in more countries – the cost would have been much higher if they had made their first outside investment in south Africa or Nigeria and they still have their plan to be in 10 African countries in the next 5 years and now have a 50 member expansion team.

The next foray in East Africa is likely to be Tanzania, earlier they had wanted Rwanda, but there was no easy entry point. But with the new east African community protocol, staff will be able to work without work permits, and it will be much easier to travel across borders

Cyber crime: While he said there have been no hacking attempts on their secure systems, his managers mentioned that there have been attempts to phish or skim originating from eastern Europeans who see Africa as a soft target – however the attacks are not specific to Equity Bank (who are a leading issuer of visa cards) who are on their guard and have not lost through this fraud.

Agency banking opportunities: – From September this year, customers whose salaries pass through Equity will be able to apply for loans from mobile phones or ATM’s, not fill out any forms, and automatically get approved a loan (without human interaction)
– They do about 2,500 M-Pesa transactions each day through their ATM’s from which they earn more than normal ATM charges, gettingabout Kshs 50 – 60 per m-pesa transaction as customers come and withdraw amounts that other agents can’t facilitate owing to float

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Agency Banking and Micro-Savings

Banking Hall Woes: Last week I spent about 6 hours in 6 different banking halls, trying to deposit or withdraw cash, make cross-bank transfers, utility payments and complete other bank transactions. Some observations:
– Banks with several empty ‘teller’ windows even as customers queues get very long
– Employees who sit at the front desk but don’t serve customers as they do back office transactions, reports & reconciliations
– Disinterested employees who’d rather gossip in vernacular than serve customers
– @kainvestor tweeted: it takes 1 hour, 2 branches and 4 tellers to get one foreign bankers cheque done at #StanChart. Still waiting #fail
– Customers who ‘book’ places in the queue. As the queue shortens near the front, they walk up from where they have been sitting and edge back in front of the person, who they had queued with thirty minutes earlier
– Older banks like Barclays as you to bring a passport photo and get a referee signature to open an account, while new banks like equity bank and family staff will snap your picture with a digital camera.
– There are no more developments in e-banking being rolled out in Kenya; new bank – customer interface deployments are in the areas of phone/mobile/m-banking
– Despite the millions of masses on mobile banking, the bulk of business in Kenya is cheques-based. Cheques remain awkward, prone to errors, and are resented as a form of payment as recipients have to wait for up to four working days to get money from the date they present their cheques. Assuming there are no errors, clear over four working days.
– From a Central Bank of Kenya 2009 supervision report you can get an idea which banks halls are likely to be crowded going by their number of deposit customers: Equity Bank is No. 1 with 4.0 million followed by Co-op bank with 970,000, KCB 751K, Barclays 748K, and Family 574K. Least crowded may be banks like City Finance 654, UBA 832, Development bank 1,022, Middle East 1,462, and Equatorial 1,981.
(images from Afromusing’s post on how to get Safaricom 3G on your ipad)

Mobile money banking solutions Banks have tried to minimize the prevalence of queues, usually longest at month ends rather than mid-month, by offering alternative channels such as mobile banking and ATM facilities. A few years ago, the push was to develop Internet-based banking, but that seems to have been set aside by the industry to focus on (mobile) phone-based avenues.
Last month also brought M-kesho, a partnership between mobile giant Safaricom and a leading bank Equity Bank. This one was very notable as it was marketed as one in which Equity Bank account holders could earn interest on money saved through their mobile phone – and this has been widely written about widely:

From the blogs – Idd Salim. Nothing new, Zain Zap has done this since 2007, but Safaricom is like Man U. They have ‘refs‘ who favor them game after game and win battles that are not even their own.
– Kainvestor: Too complex and not particularly new
– Rombo , Safaricom’s 17,500 M-Pesa agents will now operate as part of Equity Bank (account opening, withdrawal/deposit) which has 80 branches countrywide
– Majibu: (after M-kesho) Safaricom can do better – by working with local developers and allowing them to develop on their platform. Safaricom needs to learn from the likes of Apple, the success of the iStore is because each developer is given an equal chance.
– White African: As others have pointed out, this isn’t exactly groundbreaking and new. Why is it big then? It’s big because of who is doing it: the giants of the banking (equity) and mobile sector (Safaricom).
– @wanjiku suggested that her bank, Family bank should partner with Zain

Others – A comment at the CGAP who advised on the creation of M-pesa noted that hopes that system failures that plague m-pesa will be a thing of the past
– Equity Bank’s CEO made one comment on TV, about how this made sense as they (Equity) had launched a mobile banking application (EAZZy), but they found over time that could not compete with M-pesa so were folding it to join M-pesa.

More mobile variants: What does that mean for other banks? Despite @wanjiku’s earlier suggestion Family Bank went ahead and signed with Safaricom, not Zain, upgrading their existing mobile application into one called existing mobile banking application into new called Pesapapwhich also allows transfer from account to/from m-pesa and mobile service providers Cellulant rolled out at the same time with one called lipuka

Other thoughts on agency banking Vis a Vis m-kesho – Safaricom has very subdued brochures about M-kesho – with which one can transfer funds to from their bank account at Equity and all the benefits (micro savings) and product hype is by the Equity side. Odds are that most of Equity’s 4 million customers are M-pesa account holders already
– M-pesa cash has been held in trust by CBA Bank since its inception. Will Equity angle for a piece of that?

Enter Agency Banking: The sub-text of M-kesho and other variants is the emergence of agency banking in Kenya, a process endorsed by the Government of Kenya to bring more banking services to more of the (unbanked) population. Agency banking is supposed to take customers out of the bank halls and out to kiosks and villages; as @Rombokins noted, Equity Bank scales up from having 80 branches, and can now (potentially) sell its products through 17,000 agents of M-pesa.
CBK recently published their Agency Banking Guidelines which include provisions on what agents can and can do

Can Do: – Agents can be limited liability companies, cooperative societies, parastatals, trusts, partnerships or individuals. Agent applicants are judged based on their network (number of agents per province), services to be provided, anti-money laundering procedure, strategy and financial projections envisioned from agency business. Other factors considered will be company registration documents, audited accounts, availability of funds, bad credit reference, reputation, unclear source of funding, or criminal prosecution – which are some of the reasons for an application to be struck out. Also a license can be withdrawn if an agent is loss making, or a sole proprietor passes on
– The agent may provide services to multiple institutions (no contract between institution and agent shall be exclusive and an )
– All agent settlements must be in real-time
– Agents must receipt all transactions
– Some of the services agents can perform include cash deposit/withdrawals, loan repayments, bill payments,
Salary payments, debit cards, collection of mail

Can’t do: Faith-based, non-profit, non-governmental organizations are not eligible to engage in agency banking
– Agents may not use such names as ‘bank’, ‘finance’ in their brands
– agents may not charge customers for services directly
– Agents may not transact when the system is not operating (e.g. m-pesa downtime?)
Agents may not open accounts, offer guarantees, or appraise loans
– agents may not undertake cheques deposit or encashment (cash only) and may not transact in any foreign currency

Summary: Banks still require that customers come to the halls, for most services, but with agencies can they get served better (and perhaps cheaper) elsewhere? The use of dealers and agents helped transform the telecommunications sector in the span of a decade – from having a monolithic giant (Kenya post & telecommunications) where Kenyans had to queue and buy lines, pay for equipment and other bills (and which served ~100,000 customers) to now where customers able to do the same at kiosks all around the country (serving 20 million customers) Can banks mirror the phone model of growth through agents? It’s a tough call as the safekeeping of money or the incurring of a debt (by taking a loan) is one that calls for caution on the part of the customer.

But taking a loan is a sophisticated process – as most customers need to ask the loan officer what rate am I getting? what is the payback and installment? Even if someone is desperate and signs for a loan without reading an agreement, or swipe a credit card readily, they will over time come to learn the cost of transacting as they will read and review documents, especially if they feel they are being shortchanged. It seems that lending is beyond the training and capacity of agents – and the CBK has recognized this by limiting them to being a medium for repayments. So if you want to get a loan with m-kesho, you get that information from a (trained) Equity loan officer, not an M-pesa agent.

Finally, micro-savings or savings by poor people is more about the principal, not interest. i.e there has to be a mandatory obligation to save, which is difficult for someone trying to build up savings to revoke. E.g. group schemes, chamas, investment clubs, SACCO’s have an obligation to save that binds its members through a social bond of their mutual upliftment. An obligatory commitment is also a factor in larger savings programs like mortgages or pensions.

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Bankelele

Nairobi writer on Banking, Finance, Technology, and Investments

Category Archives: bank service

Cheque Truncation Part III

Top Kenyan banking stories of 2011

A to Z Chat with Michael Joseph

Karibu Member

Agency Banking and Micro-Savings