BANKING & PAYMENT TECHNOLOGIES EAST AFRICA, 2009: Banking on high-tech services

Banking on high-tech services

Speakers at our recent Banking & Payment Technologies Conference & Exhibition, held over 17-19 February 2009 at the KICC, Nairobi are extensively quoted in the article below which appeared in the Daily Nation on 3 March 2009.

The adoption of new technologies is sweeping through the financial services industry, spurred by a new legislation that legitimises electronic transactions. This is attributed to intense competition, falling margins, rising risks on lending and customer expectations and the quest for efficient service delivery

Mr Girisch Nair, the group chief executive of mobile phone payments provider mTranZact, says lowering transaction costs even 1 percent would mean over one billion extra dollars would directly reach the poor each year. “That’s not chump change,” he says.

“The single challenge for the developing economies is not to get unbanked to the bank but to get the bank to get the bank to the unbanked.” The World Bank estimates that in many countries, more than half the population has never had a bank account.

On January 2, 2009, President Mwai Kibaki signed the Kenya Communications (Amendment) Act, 2008 into law. Mr Michael Murungi, an ICT and Telecommunications legal expert, says the law is the country’s boldest legislative intervention in the ICT industry in over a decade and represents Kenya’s attempt to adopt the United Nation’s Model Law on Electronic Commerce, 1996.

Electronic records

The new law intends to promote e-government and e-commerce by increasing public confidence in electronic transactions, giving legal recognition to the use of electronic records and even electronic (digital) signatures.

The law created new offences with respect to electronic records and transactions and the use of computing and telecommunications equipment (cybercrimes), and sought to remove perceived legal uncertainties about the admissibility of electronic records as evidence in court proceedings.

Mr Antony Munguti, the business development director at Advantech Consulting, a local technology consultancy, says: “The demand for online payments is set to grow and the need to adopt various online payment options to meet customer preferences and hence the need for a vigorous investment in e-commerce and e-payments by banks. This is an opportunity for banks as a new revenue stream as long as risks are mitigated.”

Kenya’s payments can be categorised as large value payment systems, retail payment systems, Nairobi automated clearing house and ATM switches (Kenswitch and PesaPoint), securities payment and settlement systems like CDS and CDSC for government and NSE securities respectively.

There are also cross-border money transfers including Western Union, MoneyGram and IRINET, mobile payments (M-Pesa and Zap) and internet banking. In countries such as South Africa, Tunisia, and Egypt where e-payment is practiced, the payments landscape is rapidly evolving and turning into a complex business frontier.

Mr Joseph DiVanna, CEO of UK-based financial consultancy Maris Strategies, says technology enables banks to facilitate commerce and support consumer lifestyles.

“With the meltdown of the banking industry in Europe and the US, African banks have an opportunity to leapfrog their Western counterparts by leveraging their technological investments. This is why during the last 24 months we have seen experiments, trials and prototypes of banking products spring up all over Africa,” Mr DiVanna says.

He says that to be successful, African banks must learn to think like customers, spend time with customers and ascertain how banking can be used to facilitate today’s changing African lifestyles. “The key is to change our perspective on banking and payments. Where bankers see transactions, customers simply see payments,” he adds.

Customer credit cards, ATMs and POS transactions tell a lot about customers’ lifestyle, he says, so banks need to learn to manage relationships using these convenient channels. “Banks have been upstaged by the mobile operators in terms of providing low-cost money transfer services for customers and are now having to play catch-up,” Mr DiVanna said.

“They need to decide whether mobile operators are competitors or potential partners that could help them extend banking services to the majority of Africa’s population that remains unbanked.”

Mr DiVanna, who was the chairman the Banking and Payment Technologies conference held in Nairobi recently, says combining the security systems and experience of banks with the wide reach of mobile operators, the industry could come up with unique solutions and services that would transform African economies.

“The question is whether there is business leadership in place that has the vision to think beyond crude competition to explore the partnerships that could create a new era for banking in East Africa,” he adds.

Regulations

Mr Barry Coetzee, the chief executive officer of iVeri Payment Technologies, says there is little doubt that “insufficient regulation” led to rampant innovation of risky financial products that resulted in the current international financial crisis. “Regulation can lead to financial innovation by creating an environment for vendors and banks to evade regulations that are restrictive, or to move investment in innovations to greener pastures,” Mr Coetzee says.

Mr Raghavan Kunigahalli, chief technology officer with SBA Technologies, which offers intelligent software solutions in Kenya, says although there has been several successful and popular pilot efforts in mobile financial services, such as money transfer, branchless banking and m-commerce, recent revelations of security breaches and vulnerabilities with mobile communications are not encouraging enough to provide a complete assurance to protect end customers cash.

“These lucrative market opportunities to banking and financial services when combined with protective techniques necessary to shield customers and business enterprises from rising threats and security risks, there is clearly a need for interoperable risk-averse technology solution,” Mr Kunigahalli says.

Despite the security concerns making, Amazon.com, an online retailer, net sales were up 18 per cent to $6.7 billion in the fourth quarter of 2008 against $5.67 billion in the previous year. For quarter one 2009, Amazon projects net sales between $ 4.525 billion and $4.925 billion and predicts that its operation income for this period would to reach between $125 and $ 210 million.

But the US online merchants lost $4 billion to fraud in 2008, even though loss rate remained steady at 1.4 per cent of sales compared to the previous two years. Order rejection rates due to suspicion of fraud dropped from 4.2 per cent in 2007 to 2.9 per cent in 2008, which indicates that online retailers have accepted a greater percentage of orders.

Security solutions

PayPal’s third quarter 2008 financial results show total payment volume was $14.81 billion, 28 per cent growth. It has 65.3 million active users and recorded a 25 per cent growth in transactions to 2,14.5 million.

The chief executive officer of Nirph Digital, Mr Theunis Botha says the number of identity fraud victims has increased 22 per cent in the United States costing 9.9 million victims a total of $48 billion in 2008. Nirph Digital provides biometric security solutions for banks, governments, and private enterprises.

Fraud in banking and payment systems is in many forms, among them being ATM network, cheque fraud, precision strikes, phishing attacks, and insider threats.

In computing, phishing is the fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity in an electronic communication. When doing online transactions one can take information and create Paypal accounts or other online payment accounts, which run into millions of dollars per month in fraud.

Nirph has a customer identification system (CIS) that authenticates people based on biometric data and identifies fraudsters instantaneously before they can strike. “Different banks running CIS can automatically share fraud information, thereby eliminating the possibility of the same person defrauding both institutions and enhances and automates current know your customer (KYC) systems,” says Mr Botha.

The region lacks a switch, and to tap into this, CashDingo has one in the pipeline. The World Cup is a key target for CashDingo because Kenya is a tourism hub, and if the country is not ready for efficient e-transactions, the country’s reputation will suffer as much as tourism and trade.

Imagine a tour company that loses a booking because they cannot process a card transaction or sell their services online or a merchant who loses a customer because the client does not have cash on hand. “This happens all the time in Kenya,” according to Mark Sibthorpe, CEO of CashDingo, “I tried to book a Safari this past December but backed off when the agent could not process my debit card.

CashDingo intends to implement a regional switch and payment gateway for banks and merchants. Mr Sibthorpe says the result will have an effect on the entire economy as transactions will become more efficient, faster and less costly.