After Internet banking, chip card-based technology is next big thing

In the past, for a customer to transact any business with their bank, they had to make a trip to the banking hall. Not so these days. Customers can carry out business with their bank using mobile phones or via the Internet.

Technology has dramatically transformed banking beyond the traditional brick-and-mortar concept. Many Kenyan banks are now offering Internet and mobile banking services.

In fact, local banks have been at the forefront (even by global standards) of adopting technology to drive business volumes and enhance customer service.

Moreover, technology is playing an instrumental role in promoting financial inclusion. Mobile banking innovations such as M-Pesa have significantly lowered the number of unbanked people in Kenya.

Available data show that whereas only 26 per cent of Kenyans had access to formal financial services in 2006, that number had risen to 42 per cent in 2011.

The World Bank predicts that by 2020, mobile banking could impact the lives of two billion people in developing countries. Given this emerging reality, banks and other financial industry players have to keep pace with the rapid march of technology in the digital age.

A 2012 research report by Deutsche Bank titled ‘The Future of (Mobile) Payments’ notes: “The rise of mobile and online payments opens up new opportunities, but of course also presents new risks for financial services providers.

“Those financial services providers who do not modernise their upstream and downstream value chains or subject them to the transformation process required for the digital network architecture could suffer painful losses over the medium term. Thus, pressure is growing on the traditional banking world.”

Utilisation of technology in banking ensures that financial services reach even the remotest of places where physical banking facilities are lacking. Using Internet and mobile platforms, financial institutions are able to surmount geographical hurdles and play a vital role in national development.

It is worth noting that Kenya’s Vision 2030 seeks to promote a safe, efficient and inclusive financial system to facilitate resource mobilisation. In this regard, the financial services industry is expected to spearhead the mobilisation of resources required to fund flagship projects and spur economic growth. Technology thus comes in handy in enabling financial institutions to play their part in realising the Vision 2030.

Recent studies reveal that efficient adoption of technology creates a win-win situation for both providers and consumers of financial services. Putting up physical banking facilities is quite expensive. It costs not less than Sh20 million for a Kenyan bank to put up a new branch. And it takes time before a new branch breaks even.

However, using technology, banks are able to avoid huge costs of expansion while retaining the ability to reach out to more customers by offering convenient, affordable services.

They also save on costs like those of printing stationery and cheque books, reducing waste and improving efficiency. On the other hand, customers enjoy lower transaction costs and, of course, the convenience that comes with ‘banking on the go’.

But Internet and mobile banking come with certain risks, most notably fraud. As technology evolves, fraudsters adopt more sophisticated ways of circumventing existing controls.

Banks are still faced with the challenge of finding innovative ways of staying ahead of fraudsters and ensuring their customers’ funds remain safe.

Globally, fraud remains a major concern for the financial services industry. The private and public sectors in Kenya lost over Sh1 billion to fraudsters in 2012, according to the Central Bank of Kenya.

Whereas Internet banking has opened up a whole new realm of payment solutions such as those based on debit cards, it is fraught with risks. Why is this so? Most of the debit and credit cards in use today are based on the magnetic stripe technology invented way back in the 1960s.

This antiquated technology involves attaching a magnetic stripe to a plastic card for security reasons. Though relatively cheaper to produce, the magnetic stripe card is susceptible to fraud through skimming.

This is how it works. A customer swipes their debit card at the point of sale (PoS) at a supermarket. The PoS equipment scans and stores the information. This information can be accessed by fraudsters and other unauthorised persons using, for instance, small cameras placed near the PoS to skim the data in the card.

The stolen information can then be copied to a fake debit card and used to make fraudulent transactions using money in the customer’s bank account. The same case applies to credit cards whereby the victim ends up with a huge bill for goods and services they never bought.

Fortunately, new innovations in chip-based card technology are helping to curb banking-related fraud. For instance, if one is shopping using a chip-embedded debit card, they have to input their pin number at the PoS.

Besides a PIN number, the card may require the user to give other authenticating information that is only known to them. That makes it hard for fraudsters to access vital information in the chip-card.

Using this card, banks will be in a position to take Internet-based banking to the next level by offering customers secure payment solutions.

Essentially, chip-based card technology plays a complementary role to existing technology-based banking platforms by addressing looming challenges like fraud. It serves to make the Internet platform a secure tool for banking.

Ecobank was the first bank to introduce this novel technology in the Kenyan market. Globally, business is rapidly embracing chip technology. It is a matter of time before magnetic stripe cards fade away from the scene and cease to be acceptable by many businesses.

In a nutshell, the financial services industry is about to undergo yet another tectonic shift in the way it leverages technology to not only reduce costs and enhance customer service but also address challenges such as fraud. The ultimate beneficiary is the customer who will enjoy secure banking from wherever they are.

Mr Okpanachi is the Managing Director of Ecobank Kenya.