The delivery channels that South African banks use to service customers have changed drastically over the last 20 years. The original branch-only banks of the 1980’s have evolved into sophisticated electronic delivery channels such as telephone banking, automated teller machines (ATMs), online banking, and more recently, cell phone banking.
Online banking has become a de facto standard for South African banks, and all the major banks have some type of online banking service. The business drivers of online banking included additional transaction revenues, savings from reduced transactional costs, opportunities to acquire new customers and the improved ability to retain customers. The estimated cost savings are significant, with a simple traditional bank transaction estimated to be 11 times more expensive than an online banking transaction.
Yet, internet penetration is still relatively low with 4.6 million South African internet users measured in 20081. With an estimated population figure of 49.32 million2 this translates to a 9.3% penetration, which is very low, and with an annual expected growth of 12.5% it is going to be some time before internet and internet banking can significantly reach most South Africans.
Since cell phone telephony launched in South Africa in 1994, this revolutionary technology has made significant inroads into the South African population. The graph below shows that the number of unique cell phone users is estimated at 34.01 million users with the number of connections (number of SIM cards sold) estimated at 50.02 million. Globally, the rate of adoption of cell phones has varied significantly in different markets, and using income differentials as an explanation of these adoption rates does not seem to be a convincing claim as the highest take-up of mobile telephony has been observed in poor regions such as India and Africa. The graph below shows that South Africa itself has seen massive growth in mobile phone penetration.
2Statistics South Africa, 2009
Growth of cellphone connections and users in South Africa (WorldWideWorx, 2009)
In the modern age of electronic information flow, banking has become an industry that is based on intensive information and transaction flow and cell phones are ideally positioned as an information and transaction channel.
‘Cell phone banking’ in the context of this article means access from a cell phone to the various traditional services relating to banking and bank transactions. This generally includes informational services such as balance enquiries and basic statements, transactional services such as inter-account transfers and payments to third parties, as well as prepaid airtime top-ups.
The significant growth in cell phone technology in South Africa presented a potentially attractive opportunity for retail banks in South Africa to extend their electronic banking channels into cell phones, and all of the larger retail banks in South Africa offer some version of cell phone banking.
The biggest reasons why cell phone banking was seen as an opportunity for retail banks included:
- Providing additional value added service to customers
- Access to customers who don’t have internet
- Decreased cost of transactions
- Banking can be done anywhere and at any time
- Customer retention
Typical cell phone banking transactions
Cell phone banking transactions can be classified based on how information flows. When the cell phone user actively requests a service or information, this can be classified as a pull transaction. A balance enquiry is a good example of a pull transaction. Transactions like beneficiary payments, inter-account transfers or prepaid airtime top-ups are also pull transactions. Pull transactions generally require two-way communication between the bank and the user.
When the bank sends information to a cell phone user, based on a set of rules, this is classified as a push transaction. Sending a transaction notification via SMS or a minimum balance alert are good examples of push transactions. Push transactions are generally one-way communications from the bank to the customer.
Cell phone transactions can also be classified based on the nature of the service. Transaction-based services, such as an inter-account transfers or beneficiary payments, involve moving money from one source to another. Inquiry-based transactions just require a response from the bank to a user’s query.
Push transactions are not as complex as pull transactions. Some cell phone banking offerings are more complex than others that only offer a limited number of services. Cell phone banking will never be the same as full-service banking received at a branch, but nevertheless fills a necessary gap for many customers.
The primary transactions generally implemented on South African cell phone banking are:
- Balance enquiries;
- Inter-account transfers;
- Beneficiary, person-to-person and third party payments;
- Prepaid airtime;
- Other value-added services.
The most popular transactions are balance enquiries and prepaid airtime purchases. Cell phone banking also provides a perfect channel to make payments to third parties.
Due to the limited display size of the cell phone screen, the amount of information that can be displayed on the cell phone is limited. Often banks use SMS (Short Message Service) or MMS (Multimedia Message Service) to send information relating to accounts to customers.
Why is cell phone banking important to the banks?
Cell phones have been identified as the one mechanism that can fundamentally change the relationship between banks and their customers. Cell phone banking has also been identified as having remarkable potential in retaining bank customers and converting cell phone users to banking users.
Brown and Molla (2005, p.1) say that “Most banks are continually looking for alternative ways of relating to customers, reducing costs, (and) improving efficiencies”. This is supported by Perumal & Shanmugam (2004, p.6) who cites reduction in transaction costs as a major benefit of electronic banking. Cell phone banking can provide the ‘banking anywhere, anytime’ benefit that most other delivery channels cannot provide. It serves as a powerful sales channel for financial services, banking and other products as seen in the successes reported by First National Bank with a reported 1.29 million registered customers and ABSA with a reported 1.6 million customers. Both banks have also reported significant sales of prepaid airtime as well as other products such as prepaid electricity and traffic fines through their cell phone banking channels. Actual numbers have not been released but FNB claims that 13% of the R605 million worth of transactions through their cell phone banking products are prepaid sales. This translates into about R80 million per month, which means that prepaid sales account for 60% of their transactions in volume terms.
In a recent report, Mas & Kumar (2008, p.8) identified the strategic drivers for banks to implement cell phone banking as increasing market penetration – especially the currently underserved market segments; selling more services to existing customers; retaining customers; and reducing the cost of service provision. The report emphasised the benefits of cell phone banking and how it can address each of these drivers but did not quantify the benefit or incremental value cell phone banking can bring to the bank.
Cell phone banking is ideally positioned to service the LSM 1-5 market and create access to an untapped revenue source for banks. However, closer scrutiny of some of these strategic drivers reveals that the penetration of banking amongst South African adults is significantly lower within the LSM 1-5 group (estimated at 48%) than within the LSM 6-10 group (estimated at 77%).
An examination of the cost of cell phone banking (when compared to other electronic access channels) shows that cell phone banking can significantly reduce the cost of deploying customer touch points. If the assumption is made that the same cost-efficiencies are created with cell phone banking as with online banking, then the savings as estimated by Jayawardhena & Foley (2000) are also relevant here, though accurate estimations have not been publicly released. With cell phone banking the cost of transactions to the customer is also markedly decreased, firstly due to convenience (the customer does not need to travel anywhere to access his/her account) and secondly the cost savings mentioned above can be passed on to the customer. FNB stated that cell phone banking is now its cheapest transaction channel per transaction, yet did not give actual figures.
The recent Mobility 2009 survey found that the top five services in cell phone banking were balance enquiry, buying airtime, statement/mini-statement, notification of account limit and transfer funds between accounts – all of which would previously have required a customer without internet access to travel to a bank branch or ATM to access.
The costs to access cell phone banking for the user still needs to be considered, as the customer generally needs to pick up the mobile network access cost. First National Bank currently does not charge any banking fees for their cell phone banking service, and ABSA has also had free cell phone banking promotions.
Retention data on bank accounts is not widely published as it is deemed to be key competitive information; hence it has been very difficult to ascertain the retention problems banks might be facing in the LSM 1-5 segment. However, some assumptions can be made about entry-level account retention when examining a recent report by Bankable Frontiers on the Mzansi Account initiative. The Mzansi account is an entry-level bank account, based on a magnetic strip debit card platform, developed by the South African banking industry and launched collaboratively by the four largest commercial banks (together with the state-owned Postbank) in October 2004.
This report states that 42% of the 3.8-million accounts opened (at the four largest retail banks) have become inactive – that is, they were either closed, were never activated or dormant (unused) for 12 months. The report also suggested that nearest equivalent accounts (similar entry-level accounts offered by the banks) had similar churn rates.
No empirical study that establishes the retention rates of cell phone banking customers versus non-cell phone banking customers was found, but at a recent conference Len Pienaar, CEO of FNB’s Mobile and Transact Solutions division, stated that cell phone banking customers have significantly higher retention rates than non-cell phone banking customers, specifically in the lower LSM markets.
Cell phone banking presents an attractive opportunity for retail banks in South Africa to grow their client and at the same time their asset base. Two of the most convincing arguments for cell phone banking are:
- Access to customers who don’t have internet
- Customer retention
In South Africa in particular, cell phone banking enables the banks to reach out to the mass market and hence expand the bank’s client base. Unfortunately, there are no reliable figures about retention available as yet; however most of the South African banks are already offering cell phone banking to their customers and see it as a growing trend.
Bankable Frontier Associates, 2009. The Mzansi Bank Account Initiative in South Africa. Report commissioned by the Finmark Trust. Boston: Bankable Frontier Associates.
Brown, I., Molla, A., 2005. Determinants of Internet and Cell Phone Banking Adoption in South Africa. The Journal of Internet Banking and Commerce, Vol. 10 No. 1 pp. Unknown [Online] Available at: http://www.arraydev.com/commerce/JIBC/2005-02/brown.HTM [Accessed at 21 August 2009].
Jayawardhena, C., Foley, P., 2000. Changes in the banking sector – the case of Internet banking in the UK. Internet Research: Electronic Networking Applications and Policy, Vol. 10 No. 1, pp. 19-31.
Mas, I., Kumar, K., 2008. Banking on Mobiles: Why, How, for Whom? CGAP Focus note, No. 48 June 2008, pp 1-28.
Perumal, V., Shanmugam, B., 2004. Internet banking: boon or bane. Journal of Internet Banking and Commerce, Vol. 9 No. 3, pp. 1-6.
Pienaar, L., 2009. FNB Mobile & Transact Solutions: Where did we come from? As presented to the GSMA MMT Conference. Barcelona, Spain, 22-25 June 2009. First National Bank: Johannesburg.
This article has been adapted from Cellphone Banking: An Introduction, a study chapter authored by Yolande van Wyk. This chapter is included in study material for several Milpark Business School banking qualifications, namely Certificate in Banking, Higher Diploma in Banking and BCom in Banking Management. Yolande is the CEO of Smart Services at FNB.
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