Effective January 1, 2023, commercial banks in Kenya are re-introducing charges for transactions between mobile money wallets and bank accounts, which were waived on March 16, 2020, in the wake of the Covid-19 pandemic.
The waiver, largely intended to encourage cashless transactions in the face of the pandemic, did produce some results.
Statistics from the Central Bank of Kenya showed that the ratio of currency outside banks to total money supply averaged six per cent since the first lockdown in March 2020, compared to seven per cent in 2019 (and eight per cent in 2018).
The ratio is usually not a precise measure of cashlessness but is a window to its soul. Nonetheless, from it, we get an idea that the population had been transacting cashless.
Away from cashlessness, bank-to-mobile money wallet integration was a proposition built by banks to drive branchless banking and provide convenience to customers.
The bank-to-mobile money wallet channels (and other channels) are not meant to be a cash cow for banks (and doing so advances a very short-term view of income generation).
Well, banks have always argued that they needed to recoup initial investment costs, and probably rightly so.
It is very true that there is a wholesale integration cost to the bank-to-mobile money wallet channel and the costs are two-pronged.
First, the payment aggregators charge a fee for every transaction. Secondly, banks have to pre-fund their e-money wallets with mobile money wallets (essentially, a deposit of an equivalent value to guarantee customer transactions), which reflects an implied opportunity cost.
These are costs that the banks are not willing to absorb on behalf of the customer, just yet.
Consequently, the solution lies in a regulatory approach to the pricing, especially the costs that the aggregators charge banks.
And the solution entails the Central Bank of Kenya undertaking an infrastructure cost study to understand the base cost of providing aggregation to commercial banks.
This is informed by three factors: keeping with its mandate of refereeing the payment, clearing and settlement systems; it is within the jurisdiction of the apex bank as the licensing entity; and up to 70 per cent of total aggregation costs are retained by the aggregators and there is often little clarity on how the costs are arrived at.
The apex bank then uses the cost study to draw a glide path for the aggregation charges.
Additionally, the cost studies can be periodical, similar to the network cost studies done by the telecoms regulators to establish a glide path for mobile termination rates between mobile network operators.
The glide path for aggregation charges should only reflect cost recovery efforts (and not as profit-making centres).
Ultimately, and as shown in technology cost curves, the long-term unit investment costs fall to a point where cost recovery is minimal (Gordon Moore’s law).
Leaving the players, banks and payment aggregators, to create their own cost glide paths (as is the current case) may not be the best idea in the long term because these are profit-driven entities (and may not be willing to sacrifice their commercial margins).
