Invigorating Payment Ecosystems in Kenya through FinTech

By:
Eric Mokwaro Bosire
Technological innovations, demand for efficiency and the urge for financial inclusion has
stimulated the adoption of more convenient payment systems globally. Electronic and
mobile advancements have also embraced digital payment systems such as mobile money,
plastic money and online payments.
As tech-savvy customers demand for an efficient, quicker and secure methods of settling
their financial obligations, financial institutions are also working hard to become
competitive in the market hence the adoption of financial technologies in payment
systems.
Global Trends
Top trends in 2017 payments, records a possibility of total global digital payments hitting
USD 3.6 trillion by the end of the year spurred by increased presence of smartphones.
This is approximately a 20 per cent increase from USD 3 trillion recorded in 2015.
A greater proportion of digital payments is settled through plastic money. However, as
transactions through debit cards expanded by 0.6 per cent in 2015 to reach a USD 202
billion-mark, preference for credit cards in the market seemed to have shrunk by the same
margin to hit USD 85 billion.
Rise in digital payments is attributable to increased internet penetration and mobile
phone subscriptions. Global mobile phone subscriptions hit 4.8 billion in 2016 and
expected to increase to 5.7 billion by the year 2020.
It is estimated that close to 277 different mobile money services are live in 92 countries
across the globe. This translates to more than 500 billion mobile money accounts,
processing more than 43 million transactions per day.
Sub-Saharan Africa accounts for 140 mobile money services in 39 countries. There were
more than 277 million mobile money accounts in the register as at December 2016 with
100 million of them being active.
In Kenya, there were 42.8 million mobile phone subscribers and 30 million registered
mobile money users as at December 2017.
Within the past decade, the banking industry has also been revolutionized by mobile
banking products with a record 120 per cent increase in the volume of transactions to and
from bank accounts through mobile money.

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Kenya’s Policy Framework
Kenya’s development blueprint, vision 2030 appreciates the position of the financial
sector in both economic and social development. And seeks to encourage a vibrant sector
which promotes both inclusion and investments.
The enactment of the national payments systems Act of 2011, made adequate guidelines
for designation and supervision of payment systems in Kenya.
The Nairobi international financial act of 2017, established the Nairobi international
financial centre with a mandate to facilitating and supporting an efficient and globally
competitive financial sector in Kenya. This centre is a flagship project of the Kenya vision
2030.
There has been a favorable and flexible regulatory regime in the country over the past one
decade that has enabled developments in both bank and non-bank infrastructure to
thrive.
To this end, payment systems have evolved to adopt several digital platforms such as
mobile money, online and internet banking, electronic transfers and plastic money.
Payment Systems in Kenya
Broadly, payment systems in Kenya can be categorized into two, large value and low value
payment systems. The large value systems include the Kenya electronic payment and
settlement system (KEPSS) which is a real time gross settlement system (RTGS),
introduced in 2005 and overseen by the Central Bank of Kenya.
Regional payments systems like the East African Community payment system (EAPS) and
the regional payment and settlement system (REPSS) also fall under this category. The
latter two are meant to aid in settling financial obligations within the EAC and COMESA
regions respectively.
Low value payment systems sometimes referred to as retail payment systems include
mobile money and plastic money which drive e-commerce and other commercial dealings
within the economy.
Plastic Money
Plastic money include debit cards, credit cards and prepaid cards which provide
contactless access to one’s finances. However, acceptance and usage of cards in Kenya has
not been impressive due to varied misconceptions.
According to the Central Bank of Kenya, as at January 2018, debit cards were the majority
in the market at 14.8 million as compared to prepaid cards which were 1.4 million and
credit cards at 236,928 only.
It is likely, the low number of credit card holders is informed by the perception that paying
through credit cards is more expensive and riskier than using cash. It is also an indication
of low consumer sensitization.
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Customers have also complained of inconveniences in credit card malfunction due to
systems breakdown. For instance, in 2008 an individual went to court seeking damages
for a dishonored credit card and in 2009, he was awarded a sum of Kes. 2.5 million as
compensation.
To address risks associated with plastic money, the Kenyan financial sector has over time
endeavored to put in place not only convenient but also safe technologies to combat fraud.
For example, in 2013 the banking sector advocated for a change from the traditional
magnetic strip cards to EMV chip cards which present better security and global
acceptability.
Mobile Money in Kenya
Communications Authority of Kenya (CAK), records mobile money payments as gaining
massive acceptance in Kenya. This is evidenced by a 36 per cent increase in the Preference
for mobile money services as at 2016.
In addition, as at December 2017, there were 198,234 mobile money agents with 30
million subscribers. 607.4 million transactions were done between October and
December 2017 with a value of Kes. 1.76 trillion.
Over the same period, mobile money supported 308.6 million mobile commerce
transactions valued at Kes. 1.17 trillion with a person to person transfer valued at Kes.
596.4 billion.
Evidently, mobile money services provide the convenience of instant transfer of funds
from one person to another, paying bills, paying for goods and services, paying for rent
and even school fees.
Other financial institutions such as insurance companies and Sacco’s are also coming up
with innovative products seeking to exploit the potential of mobile money economy.
In partnership with banks, it is now possible to open a bank account such as M-Swari,
KCB M-Pesa and Equitel and even operate your bank account remotely through your
mobile phone.
FSD Kenya, records Kenya’s financial inclusion to have improved from as low as 27 per
cent in 2013 to about 75 per cent as at 2017, thanks to mobile money services which are
now used by more than 71 per cent of the adult population and preferred by the youth.
FSD Kenya, further established that M-Pesa has been able to raise approximately 2 per
cent of Kenyan households out of poverty.
Payments by Cheque
On the other hand, Kenyans are not funs of payment by cheque if data from the central
bank is anything to go by. As at January 2018, cheque debits amounted to Kes. 227.8
billion and credits through EFTs amounted to Kes. 48.6 billion.

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This is despite measures by the banking industry to enhance security procedures for
cheques. In 2009, value capping for cheques was introduced by the central bank which
set the maximum amount for a single cheque leaf at Kes. 1 million.
Later, cheque truncation was introduced which saw a tremendous reduction in the
number of days a cheque can clear from 21 to 1 day. Clients are now able to access their
funds within 3 days of presenting a cheque. Cheque truncation uses images and escorting
electronic information.
Other Developments on the Payments Ecosystem
In a move to accelerate cashless payments, Visa Inc. in partnership with the banking
sector unveiled M-visa in 2016. This feature links visa cards with mobile phones through
a QR Code scanner.
It can be used in both person to merchant payments and person to person payments. So
far, Kenya Commercial Bank, Co-operative Bank, NIC bank and Family bank have
domesticated the system.
Pesalink is another real time interbank money transfer platform that is has transformed
the payments systems in Kenya electronically. It is run by the Kenya bankers’ association
through its establishment integrated payment services limited.
Pesalink comes with high tech encryption options to foster safety and efficiency of
transactions. Although, the highest amount one can transact at any given time has been
capped at Kes. 999,999.
Government Initiatives Enhancing FinTech
In 2014, the government issued regulations for the matatu (public service vehicles)
industry to install and start using cashless payment systems. Some providers offered
solutions such as my 1963 card by Safaricom, Bebapay by equity bank in collaboration
with google and abiria card by Kenya commercial bank.
Unfortunately, the system aborted due to implementation gaps and lack of
interoperability of systems as commuters were required to use a different card for a
different provider.
Another notable project by the government is the introduction of e-citizen portal through
which citizens access government services like Police clearance certificate, renewal of
driving licenses, and passports. The portal comes with a convenient payment option using
mobile money.
Further, in a bid to improve service delivery, the government has now introduced huduma
cards through which citizens will be required to use in paying for government services.
In 2017, the government introduced a first 10 per cent, 3-year, M-Akiba infrastructure
bond in which it sought to give Kenyans a chance to investing through mobile money and
Pesalink.

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The bond also aimed at boosting the savings culture within the country which is estimated
to be at 11 per cent of the GDP. This rate is very low hence undermining domestic
investments.
The first issue which opened on March 23rd, 2017 was fully subscribed to, days before its
intended close date of April 10th, 2017. But the second one which sold between June 30th
through September 2017, was under subscribed achieving only 25 per cent of the target.
The undersubscription was later attributed to extended political uncertainty in Kenya
during the same period and inadequate marketing campaigns.
Risks Associated with FinTech
Technologies that promise real time payment solutions however, come with a bouquet of
risks. For instance, fraudsters thrive in stealing quick opportunities to enrich themselves
and disappear before detection.
Some fraud prevalent with digital payments include identity fraud in which the fraudster
impersonates the owner and initiates a payment advice using stolen data and equipment.
Also, it includes intercepting a payment advice and altering instructions thereof and
illegally acquiring access to sensitive data and information.
Further, manipulation of parties with an intent of getting them issue a payment advice in
good faith but later ends in bad hands. The possibility of criminals using digital payments
to launder proceeds from illegal activities and even financing terrorism is also live.
Ideally, for digital payments to command reliability from the customer, they are required
to be available to the customer continuously. However, this is not the case, as customers
have in the past complained of operational malfunction, system delays and transaction
errors.
Notably, a slight error in the submission of mobile money instructions may lead to loss of
money due to challenges in reversing or cancelling a payment that has already been
completed.
Mitigation against FinTech Risks
Therefore, it is prudent to not only put in place robust safety mechanisms either to
prevent fraud before it happens or detect it as soon as possible but also implement them
effectively.
Technology again offers solutions like immediate and automatic screening, surveillance
cameras, use of biometrics and building cyber-resilience. Receiving confirmation alerts
through Short message systems, E-mails and calls will also help in reducing fraud.
There is also need for the financial sector to heighten financial literacy and consumer
sensitization and awareness with a view to reducing errors, manipulation by fraudsters
and fraud.

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The proceeds of crime and anti-money laundering act provides for the retention of
information about the parties within a transaction, geographical location, time of the
transaction and the transaction itself to help in tracing and tracking perpetrators.
Through an industry guidance note by the central bank of Kenya, commercial banks are
now required to file a yearly report on money laundering and terrorism finance. They will
also be required to capacity build all top management on money laundering and terrorism
financing.
Interoperability adds value to both the organization and the customer. The customer is
presented with increased functionality and convenience through seamless services across
all providers.
It therefore behooves policy makers to embrace interoperability in both cards and mobile
money. But security measures should be enhanced, otherwise fraudsters may create
loopholes and benefit out of them.
To mitigate against system malfunction, it is imperative for organizations to put in place
business continuity plans to facilitate faster and sustainable recovery of services.
This should go hand in hand with sufficient communication and provision of information
to all affected parties to reduce anxieties and speculations.