Mobile Banking Project Proposal 6b49o

EFFECTIVENESS OF MOBILE BANKING IN KENYA

A RESEARCH PROJECT PROPOSAL SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF DEGREE OF MASTER OF BUSINESS ISTRATION (MBA), SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI

NOVEMBER 2012

TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION ......................................................................... 1 1.1 Background of the Study ................................................................................. 1 1.1.1 Mobile Banking ......................................................................................... 2 1.1.2 The Banking Industry in Kenya ................................................................. 3 1.2 Statement of the problem ................................................................................ 4 1.3

Objectives of the study .............................................................................. 6

1.4 Value of the study............................................................................................ 6 CHAPTER TWO: LITERATURE REVIEW ............................................................. 7 2.1 Introduction ..................................................................................................... 7 2.2 Introduction to M-Commerce .......................................................................... 7 2.3 Mobile banking: M-Commerce in the banking sector..................................... 8 2.4 Trends in Mobile Banking ............................................................................... 9 2.6 Mobile Banking Business Models ................................................................. 13 2.6.1 Bank-led model ........................................................................................ 13 2.6.2 Bank-focused model ................................................................................ 13 2.6.3 Non bank-led model ................................................................................. 14 2.7 Advantages of mobile banking to providers and consumers ......................... 14 2.7.1 Benefits to banks ...................................................................................... 14 2.7.2 Benefits for customers ............................................................................. 15 2.8 Critical success factors for M-banking .......................................................... 15 2.9 Challenges for a mobile banking solution ..................................................... 16 CHAPTER THREE: RESEARCH METHODOLOGY ............................................ 19 3.1 Introduction ................................................................................................... 19 3.2 Research Design ............................................................................................ 19 3.3 Study Population ........................................................................................... 19 3.4 Data Collection .............................................................................................. 19 3.5 Data Analysis ................................................................................................ 20

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REFERENCES .......................................................................................................... 21 APPENDICES ........................................................................................................... 27 APPENDIX 1: QUESTIONNAIRE .......................................................................... 27 APPENDIX 2: LIST OF BANKS ............................................................................. 31

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CHAPTER ONE: INTRODUCTION 1.1 Background of the Study The remarkable gains made towards mobile phone access have seen a steady progress in the scope of innovations emanating from exploitation of these fairly new technologies. What has characterized the Kenyan mobile landscape is a rapid uptake of various services key among them the mobile based products. Mobile banking is one innovation which has progressively rendered itself in pervasive ways cutting across numerous sectors of economy and industry.

An appropriate banking environment is considered a key pillar as well as an enabler of economic growth. With the continuously emerging wave of information driven economy, the banking industry in Kenya has inevitably found itself unable to resist technological indulgence. The need for convenient ways of accessing financial resources beyond the conventional norms has seen the recurrent expansion and modernization of banking patterns. Given the huge demand for finance oriented services, institutions beside the historical banks have ed the fray in an attempt to grab a piece of the perceived cake of opportunity within the banking industry.

According to Financial Sector Deepening Kenya (FSD Kenya), the most recent data in available indicates that only 19% of adult Kenyans reported having access to a formal, regulated financial institution while over a third (38%) indicated no access to even the most rudimentary form of informal financial service. This leaves a percentage of more than 80% outside the bracket of the reach of mainstream banking.

The pent up demand for an affordable and reliable way of holding funds while ensuring that risk levels are consigned to a minimum is consistently unfolding. A system with the potential to obliterate the historical hurdles of cost and free access which have for a long time stood in the way of willing partakers of banking services evokes immediate attention and interest. The unprecedented uptake of mobile phone banking services in Kenya is a testament to this fact.

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1.1.1 Mobile Banking Mobile banking (also known as M-Banking, mbanking or SMS banking) is a term used for performing balance checks, transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA). The Mobile Phone banking and mobile banking (M-Banking) are used interchangeably. It is used to denote the access to banking services and facilities offered by financial institutions such as -based savings, payment transactions and other products by use of an electronic mobile device. Mobile banking has yielded a multiple effect on the number of solutions available to clients. This is in addition to more efficient transactional environment and the high substitution of banking points. Porteous (2006) distinguishes two aspects of mobile banking: Additive and transformational characteristics. Additive aspects are those in which the mobile phone is merely another channel to an existing bank . Mobile banking is additive when it merely adds to the range of choices or enhances the convenience of existing customers of mainstream financial institutions. Transformational characteristics arise when the financial product linked to the use of the phone is targeted at persons who do not hold formal bank s with the conventional banking institutions.

Sarker and Wells (2003) assert that the only single access requirement or barrier to the resultant mobile banking will be the mobile phone. However, worldwide market penetration of affordable cellular devices and growing network service diffusion makes this intricacy almost fully resolved hence setting a firm pedestal for mobile banking escalation.

The effects of usage associated with mobile phone banking in Kenya are yet to be consolidated or quantified in a well documented fashion. With the dramatic adoption of mobile banking services this study seeks to extend its scope of analysis to indicators that reflect the nature of usage. This ranges from overall patterns of use, access and provision strategies and consumption patterns. Mobile banking started with the creation of services by banks which could be accessed through the mobile phone. These facilities aimed to enable customers’ access information relating to their s. 2

Subsequent innovations have seen the mobile banking phenomena continue to grow steadily. Mobile banking takes several dimensions of execution all representing a new distribution channel that allows financial institutions and other commercial actors to offer financial services outside traditional bank premises. 1.1.2 The Banking Industry in Kenya The banking sector in Kenya is governed by the company’s Act, the Banking Act and the Central bank Act and the various prudential guidelines issued by Central Bank of Kenya .The banking sector was liberalised in 1995 and exchange controls lifted. The Central Bank of Kenya is responsible for formulating and implementing monetary policy directed to achieving stability in the general level of prices and fosters the liquidity, solvency and proper functioning of a stable market based financial system while ing the economic policy of the Government (Central Bank of Kenya, 2011).

As at 31st December 2011, the banking sector comprised of the Central Bank of Kenya, as the regulatory authority, 44 banking institutions (43 Commercial banks and 1 Mortgage finance company), 2 representative offices of foreign banks, 5 Deposit-Taking Microfinance Institutions and 126 Forex Bureaus. 31 of the banking institutions are locally owned while 13 are foreign owned.

The locally owned financial institutions comprise of 3 banks with public shareholding, 27 privately owned commercial banks, 1 mortgage finance company while 5 Deposit-Taking Microfinance Institutions and 126 forex bureaus are privately owned (Central Bank of Kenya, 2011). The foreign owned financial institutions comprise of nine locally incorporated foreign banks and four branches of foreign incorporated banks. The sector was dominated by local private institutions with 27 institutions ing for 58.0 percent of the industry’s total assets and 64% of total financial institutions. The foreign owned financial institutions were 13 and ed for 37.2 percent of the industry’s total assets as at 31.12.2011 and 36% of total number of financial institutions. Multinational banks play an important role of intermediation in the economy which is vital for the smooth and efficient running of the economy (Central Bank of Kenya, 2011). 3

In 2011, a number of banks responded to the growing need of convenient straight-through payments using mobile solutions. As a result, a number of banks continued to sign up partnerships with money transfer service providers as they improve their banking-on-the-move menus. In only four years of existence of mobile phone money transfer services, four mobile operators have enrolled over 15 million customers. Some of the notable mobile money solutions launched during the year include; M-Kesho, Mobicash, Orange money, Yu-cash, Elma, PesaPap, Pesa-Connect among others. M-Pesa was still the most widely used method of mobile money transfer as evidenced by the 305.7 million transactions effected and valued at Ksh. 727.8 billion in the year (Central Bank of Kenya, 2011).

Banks continued to embrace the use of the Internet as a remote delivery channel for banking services. The most common online services include; viewing of s, inquiries and requests, salary payments, clearing cheques status query, instant alerts of status and transfer of funds. The microfinance industry in Kenya is also experiencing positive growth and change. Microfinance has over the years evolved from charity based social and financial empowerment programmes to fully operational financial institutions, which continue to contribute towards bridging the gap of financial inclusion. Further, the microfinance sector is witnessing increased interest from commercial banks (Central Bank of Kenya,2011).

1.2 Statement of the problem The field of M-Banking is fairly new and fast evolving. It also rests at the overlap of several domains including those of banking, telecommunications and security. The overlap substantially raises issues of operational or regulatory concern. Porteous (2006) asserts that mobile banking has the potential to be transformational owing to various facts. First, it uses existing mobile communications infrastructure which already reaches unbanked persons. Secondly it may be driven by new players, such as mobile phone industry operators, with different target markets from traditional banks who are able to harness the power of new distribution networks for cash transactions.

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The Kenyan case offers sufficient evidence to the claim that competition triggers creativity and innovation. To survive in a competitive market firms must maintain new products. The sustained presence of mobile products being floated to customers on a consistent basis depicts high standards of innovativeness. Continuous innovation not only yields new products but rather promotes efficiently in performance of activities. As a result the price for new services introduced to the market declines consistently.

A number of studies have been done in Kenya on M-banking and the responses to challenges encountered in restricted banking hours and accessibility to the banks and other money transfer institutions. Maina (2001) focused on, perceived quality and value preposition but failed to study the effectiveness of the M-banking service in the banking industry. Another study done by Odhiambo (2003) focused on factors that influenced customer satisfaction and services offered by mobile firms but failed to focus on the effectiveness of such a product/ service. Gitari (2006) focused on the challenges organization face in meeting consumer expectations but there was no documented research data available to show people’s response to the new facility of accessing their money through their mobile hand-sets beyond normal working hours, easily and almost everywhere. The above study still focused on perceived quality and value proposition but failed to assess the effectiveness of the mobile banking service in meeting the banking needs of the customers. A more recent study conducted by Munywoki J.M (2010), focused on customer perception of M-pesa services provided by small and medium sized businesses. This study only focused on one product M-pesa. Although extensive research had been carried out to establish how the banking sector responded to the challenges of the changing environment, no research had been done on the effectiveness of the entire M-banking service in the Kenyan banking sector.

The study will seek to explore the effectiveness of mobile banking services in the Kenyan banking sector and establish the challenges that are encountered in implementing M-banking. The questions the study will attempt to answer will therefore be: Has mobile banking been effective in the Kenyan banking sector? What challenges have been encountered in implementing mobile banking?

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1.3 Objectives of the study This study has two objectives: (i) To establish the effects of mobile banking in the Kenyan banking sector (ii) To establish the challenges encountered in implementing mobile banking in Kenya

1.4 Value of the study This study will be of value to the banks’ management in helping them to understand the key drivers, benefits and challenges of mobile banking. This will enable them to make better decisions on how best to utilize the M-banking service in order to maximize the gains from the range of services available. The management of the banks will also be able to understand the impact the mobile phone revolution is having on the banking sector in Kenya hence helping them to find ways to embrace the technology rather than shy away from it.

For the scholars and researchers the study will provide a base on which future studies can be conducted on a similar concept to establish the growth of M-banking.

For mobile phone

operators, it provides a platform on which to evaluate future business opportunities in the banking sector within Kenya. The study will also act as a mechanism on the already established M-banking services and provide a basis on which to improve on the same.

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CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction This chapter contains the literature review which begins with the introduction of mobile commerce which is narrowed down to mobile banking industry. The mobile banking market, mobile banking in Kenya and the mode of mobile banking operation are also discussed. It looks at the technology employed by banks in carrying out mobile banking services. The diffusion, adoption and development of mobile banking are also discussed. It goes further to explain the advantages of m-banking and the macroeconomic impact of mobile banking in Kenya. This will serve as a frame work for this research work.

2.2 Introduction to M-Commerce Mobile commerce (M-Commerce) is an extension of M-Commerce, and these allow consumers to interact with other one another or businesses in a wireless mode, anytime and in anywhere. The use of mobile phone for buying and selling of goods and services is regarded as mobile commerce. MCommerce is usually called mobile commerce, which allows customers, to make any kind of transaction including service enquiry, transferring of money, buying and selling of goods through internet service on the mobile phone. Mobile commerce has its own drawback, though it‟s slowly, but definitely, portraying signs of strong recovery (Tiwari & Buse 2007). Mobile commerce has been used interchangeably, and this is sometimes misused and confused with mobile banking, this is therefore, important to put more clarity on m-commerce which is a subset of Mobile Business (Cronin 2004). Mobile business is activities carried out by organisations to sell goods and services such as those commercial and other processes; human resource management (HRM), customer relationship management (CRM), procurement and production while M-Commerce involves buying and services, and other activities which are associated with such transactions in the business segment and consumer segment. M-Commerce is been adopted just as E-Commerce though it is slower and the extent of progress are different in all part of the world (Deans 2002). Japan and Europe are taking the lead because of their decision to establish a single wireless standard (Dean 2002; Coursaries et al 2004).

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The word ‘mobile’ is related to mobile businesses which connote the possibilities of having access to business activities anywhere and anytime in the world and which is managed by computer mediated network. The facility makes service availability to independent of ’s geographically location as oppose to electronic (Stanoveska-Slabeva 2003). Mobile commerce comprises of Mobile banking, innovation driven by the banking industry, and others such as mobile entertainment, mobile marketing and advertising, mobile information services, and mobile ticketing (Tiwari & Buse 2007). The mobile commerce has its unique features which give it an edge over other form of commercial transaction; these are instant connectivity, immediacy, localization, pro-active functionality, ubiquity and simple authentication procedures (Tsalgatidou & Pitoura 2001).

2.3 Mobile banking: M-Commerce in the banking sector Mobile commerce is a broad term that encomes all forms of interaction with a consumer through a mobile device, such as issuing electronic coupons, providing loyalty services, and creating dedicated websites that a specifically designed to facilitate mobile browsing (Alex 2010). In the banking industry, services that are finance-related which involves mobile telecommunication technologies is known as Mobile financial services. These services are therefore categorised into mobile payment and mobile banking. In regards to this research we will focus on mobile banking. Mobile Banking is a type of m-commerce service that allows consumers to perform banking services (i.e. alerts, banking transactions and balance enquiries) with the use of their mobile devices (Corbitt and Barnes 2003). It is very important to understand what banking business is all about. Banks are businesses that deal in money (Hammonds 2006:4) therefore banking involves any service given and received from the bank, people open s with banks to save money, other people go to the bank to borrow money (Sobczak 1997:6).

Mobile banking could be defined as a facility which provides banking services such as balance enquiry, funds transfer, bill payment, and transaction history via a ’s mobile phone (Stair & Reynolds 2008). Kondabagil (2007:24) defines mobile banking as an occurrence, when customers access a bank’s networks using cellular phones, pagers, personal digital assistants, or similar devices through telecommunication wireless networks. Mobile banking (m-banking) could also be defined as an application of mobile commerce that enables customers to bank virtually at any convenient time and place (Suoranta, 2003).

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Tiwari et al (2006a:5) believes that a cornerstone of m-commerce is built by m-banking; many banks are taken advantage of this innovation in order to increase customer satisfaction, manage cost, increase profits and bring positive transformation of payment system in the economy. In 2004, Finland-based Nordea bank experiences a high growth of 30% from the utilisation of transactionbased mobile financial services (Atkins 2005). Mobile Banking as the term connotes is banking “on the move” with the aid of a mobile telecommunication device (Ciuci 2010) which can be used for a different purpose at anytime and anywhere. Mobile banking (M-banking) allows customers to receive short message (SMS) through their phone, wireless application protocol (WAP) and Java enables phone other banking activities using GPRS (General Packet Radio Service) such as direct payments confirmation and funds transfer (Mallat et al 2004). From research 30 per cent of households in the United Kingdom use their mobile phones to perform banking operations (MMA 2009). Research also shows that, internet has only a penetration rate of 6 % in a population of 140 million in Nigeria but mobile technology is close to 50 per cent penetration with prospects for growth (Ciuci 2010). Mobile devices show a promising way to the future which can reach larger population of customers irrespective of their location and this can lead to customer’s loyalty.

2.4 Trends in Mobile Banking The advent of the Internet has revolutionized the way the financial services industry conducts business, empowering organizations with new business models and new ways to offer 24 hour accessibility to their customers. The ability to offer financial transactions online has also created new players in the financial services industry, such as online banks, online brokers and wealth managers who offer personalized services, although such players still for a tiny percentage of the industry. The banking industry in recent times has been undergoing radical change and this is taking place in all aspects of the banking sector. One of these new changes in the banking industry is the information technology system (IT) and is mainly used by banks to reduce turnaround time and improve business in general. The introduction of mobile technology and its devices have indeed brought about efficiency in the manner in which commercial and business activities are been carried out (Tiwari and Buse, 2007; UNCTAD, 2007). Among this technological development is the introduction of mobile telephony. Mobile telephony serves as a platform for launching out innovative mobile phone applications and services (UNCTAD, 2007). 9

The use of mobile technologies for commercial purpose has generated the concept of mobile commerce. Mobile banking is an application of mobile commerce which enables customers to bank virtually at any convenient time and place (Suoranta, 2003). There has been evidence of increase in the number of people subscribing for mobile phone in developed and developing countries (Boadi et al., 2007; UNCTAD, 2007). The fastest growing market in the world now is the mobile industry (UNCTAD, 2007).

2.5 Utility of Mobile Banking from Banks’ Perspective At this stage it would be relevant to understand the usefulness of Mobile Banking from the banks’ perspective. It is therefore imperative to understand the business environment in which banks operate and to identify customer groups that the banks may seek to target via Mobile Banking. Intensified Competition in the Banking Sector Bank products are of immaterial nature sold increasingly with the help of computer networks spanning across the globe. The global networks provide the customer with world-wide services, for instance the use of credit cards while abroad. The creation of an EU-wide single domestic market has led to intensification of competition in the EU in all business fields including in the banking sector. The ongoing Globalisation has further intensified the competition. Technical developments coupled with the process of Globalisation, have made it possible for banks to offer their services in far-flung areas without investing money to build branches and hire additional staff. This opportunity, of course, is a two-way street: On the one hand, a bank gets access to new markets. On the other hand it is faced with increased competition on its home turf. To master this combination of opportunities and challenges banks need – apart from business consolidation and cooperation – organic growth. It is therefore necessary to retain the existing customer base while simultaneously acquiring new, economically prosperous customers. Seen in conjunction with the price-sensitivity of customers and the resultant low relevance of the brandname banks are compelled to introduce innovative services that potentially attract prospective customers while retaining others.

Even though the brand-name remains a critical factor on of the need for trust in banking business, the globalisation and the technological developments, however, have reduced entry 10

barriers so that the number of available reputed brands has increased significantly; thereby intensifying the competition (Tiwari & Buse 2007).

Adapting to Requirements of Core Target Groups Banks, today, are increasingly confronted with technology-savvy customers who are often on the move. As Wolfgang Klein, Private Customers Director at Postbank, a leading German bank, puts it: “Today’s customers want to organise banking transactions while on the move, irrespective of opening hours”. Banks are responding to this development by introducing mobile services. Core target groups of Mobile Banking are often divided in three categories, youngsters, young adults and business people.

Mobile Banking as Distribution Channel Mobile Banking enhances the number of existing channels of distribution that a bank employs to offer its services. The efficiency of a distribution channel can be measured by its fulfillment of three major objectives, which are closely related to each other.

Increasing Sales Volume One of the primary tasks of a distribution channel is to increase the volume of demand for products at profitable prices. This objective is arrived by increasing operational efficiency so that those losses are minimized that are caused by delays in catering to customer orders. Further, a favourable reputation of the firm’s logistical capacities may help generate additional orders. Reducing Costs of Distribution Due to increased competition a distribution channel must organize business processes efficiently so as to reduce distribution costs. This pressure can be coped with by rationalizing organizational structures to increase productivity.

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Increasing Customer Satisfaction Mobile Banking may help increase the customer satisfaction by streamlining of business processes to increase efficiency, more attention and better consulting for customers due to automation of routine processes and innovative “anywhere, anytime” services customized for individual preferences. The collected data can also be utilised to create customer profiles. Increased customer satisfaction can help reduce the customer attrition rate

Mobile Banking as Source of Revenue Mobile Banking can also serve as a source of revenue. Mobile services can be offered on a basis. The price, in this case, should be reasonable enough so that customers are willing to pay them but at the same time they should be – from a financial point of view – higher than the costs incurred by the bank. Additional revenues can be generated through offering innovative, services to existing customers and attracting new customers by offering innovative services.

Mobile Banking as Image Product Finally, Mobile Banking can be also used as an image product to gain strategic advantages. A bank may hope to win or retain a positive image amongst technology-savvy sections of the society and strengthen the brand-reputation of being innovative and visionary [8]. The image of being a technology leader can help the bank win customers looking for modern products and services and at the same time help it retain its own existing base of technology-savvy customers, some of whom otherwise might have switched to other banks while looking for such a product. Further, the bank can profit from an early-mover advantage by actively shaping technological standards that are based on one’s own strengths. This is, of course, fraught with a substantial risk of incurring financial and image losses if the propagated technology fails to establish (Tiwari & Buse 2007).

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2.6 Mobile Banking Business Models A wide spectrum of Mobile/branchless banking models is evolving. However, no matter what business model, if mobile banking is being used to attract low-income populations in often rural locations, the business model will depend on banking agents, i.e. retail or postal outlets that process financial transactions on behalf telecoms or banks. The banking agent is an important part of the mobile banking business model since customer care, service quality, and cash management will depend on them. Many telecoms will work through their local airtime resellers. However, banks in Colombia, Brazil, Peru, and other markets use pharmacies, bakeries, etc.

Three models have been identified and developed, and they are primarily different from one another based on who established the relationship (Banks or the Non-Bank/ Telecommunication Company) of opening, deposit or withdrawer, borrowing, etc., with the customers. There are differences in the Bank-led model, Bank Focused model and Non-bank-led model (Porteous, 2006; Anyasi & Otuba 2009). 2.6.1 Bank-led model This is when customers perform transaction with the use of their phones, which is different, from the branch-base with the help of a trade partners. This is an alternative to conventional branchbased banking. This method could be created by t venture between banks and telecommunication companies. This system allows customers relationship to be established and managed by the bank. 2.6.2 Bank-focused model The bank focus model is when a traditional banks decides to use the low-cost delivery channels, which is a non-traditional banking system to provide banking services to its customers such as the use of m-banking facilities, automatic teller machine (ATMs), internet banking, e.tc., The bank-focus model is additive in nature and is an extension of the conventional branch-based banking (Porteous 2006).

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2.6.3 Non bank-led model The non-bank-led does not get involve unless required to do so when the need arises as a safe keeper of surplus funds, and this allows the telecommunication company handle all the functions (Aguirre et al 2008). However, mobile banking services that are focused on low income earners of the population size which are regularly found in the rural area will need to reply on retail outlets. A lot of telecommunications agents operate through their airtime resellers while banks muses bakeries, pharmacies, e.tc which can be found in some countries such as Colombia (ibid.).

2.7 Advantages of mobile banking to providers and consumers The use of mobile phones has a positive and significant impact on a country’s economic growth, and its impact may be as twice as large in developing countries as to developed countries (ITU 2005, Salzaman et al 2001). Mobile banking is fast growing and is moving at a fast rate. The fast development of information technology in the global world has paved way for the development of this sector. The banks were faced with different challenges as a result of the large increase in their customer base in the past few decades, and these has brought about many innovative products and services which could foster the rapid development of the banking sector. And one of such innovation is the mobile banking which is targeted at three different categories of people between the ages of 14 & 18 years; secondly the young adult and thirdly, the business people (Muller-Veerse 2000). Mobile banking has many benefits for both the banks and the customers. 2.7.1 Benefits to banks The mobile banking is expected to increase customer satisfaction, reduce the cost of distribution, e.tc, but trust and credibility has been the greatest challenge of mobile banking from their provider (Oxford business Group 2008; Langendoerfer 2002). And many effort that are been made to increase customers awareness and confidence in online facilities for banking appears insufficient (Merry 2005). The higher the number of people using mobile banking, the higher the money saved. According to Robinson (2000:105) the cost of making electronic transaction is lower than the cost of making branch transaction. Mobile banking strengthens the relationship between the banks and the customers because it brings banking service directly to the people which eventually leads to customers loyalty. 14

2.7.2 Benefits for customers Mobile banking provides more benefits to its s and has been a more secure means of accessing banking services compared to other forms of online banking (Herzberg 2003). Its services could be used anywhere and it could be used without a desktop or PC and at a reduced price, which makes it convenient for s compared to the traditional banking method (ibid). M-banking usually s time critical situation that requires prompt response from the customer due to its immediate feature (Kemper & wolf 2000). It also provides self-service and digital access which is more cost effective (Ahonen 2002).

2.8 Critical success factors for M-banking Critical success factors (CSFs) has been defined in various ways, and this depends on the purpose for which they are been used for. If well understood, critical success factor (CSF) approach shows an accepted top-down methodology for corporate strategic planning in an organisation, and has it identifies key success factors, it can show the key relevant information that is required by top management. When the key success factors are identified and they are controllable, the management of an organisation should take the necessary step in ameliorate its potential for success

Mobile banking has a lot of impact it can make on its provider (Banks). These are regarded as critical success factor and if well studied and implemented it can bring positive impact to the provider. There are several suggestions in the literature as to what constitute to the critical success factor of mobile commerce (inclusive of M-banking). According to the findings of Buellingen and Woerter (2002) from interview expert, they see data security, -friendliness, personalization, and transmission rate as concern of people. And also the research survey carried in UK by Strong and Old (2000) it reveals that convenient and easiness to use internet facilities at any time and in any way is more paramount and will serve as a motivating factor to customers to use mobile banking services. On the contrary, Green (2000) believes that friendliness is a key factor for consumers and that; high complexity phones and the size of the screen can be a serious threat to the .

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It is also argued that psychological issues such as security and privacy can serve as a serious drawback when compared with technological issues which is believed to have a lesser impact. It is also argued from a different view, Shuster (2001 cited by Shaw 2006) believes that, pricing will be a crucial issue to customers and that price must be reasonably adjusted and affordable to subscribers of mobile s.

2.9 Challenges for a mobile banking solution Handset operability There are a large number of different mobile phone devices and it is a big challenge for banks to offer mobile banking solution on any type of device. Some of these devices Java ME and others SIM Application Toolkit, a WAP browser, or only SMS. Initial interoperability issues however have been localized, with countries like India using portals like R-World to enable the limitations of low end java based phones, while focus on areas such as South Africa have defaulted to the USSD as a basis of communication achievable with any phone. The desire for interoperability is largely dependent on the banks themselves, where installed applications (Java based or native) provide better security, are easier to use and allow development of more complex capabilities similar to those of internet banking while SMS can provide the basics but becomes difficult to operate with more complex transactions. There is a myth that there is a challenge of interoperability between mobile banking applications due to perceived lack of common technology standards for mobile banking. In practice it is too early in the service lifecycle for interoperability to be addressed within an individual country, as very few countries have more than one mobile banking service provider. (Tiwari et al, 2007). Security Security of financial transactions, being executed from some remote location and transmission of financial information over the air, are the most complicated challenges that need to be addressed tly by mobile application developers, wireless network service providers and the banks' IT departments. The following aspects need to be addressed to offer a secure infrastructure for financial transaction over wireless network: (i) Physical part of the hand-held device. If the bank is offering smart-card based security, the physical security of the device is more important. 16

(ii) Security of any thick-client application running on the device. In case the device is stolen, the hacker should require at least an ID/ to access the application. (iii)Authentication of the device with service provider before initiating a transaction. This would ensure that unauthorized devices are not connected to perform financial transactions. (iv) ID / authentication of bank’s customer. (v) Encryption of the data being transmitted over the air. (vi) Encryption of the data that will be stored in device for later / off-line analysis by the customer. One-time s (OTPs) are the latest tool used by financial and banking service providers in the fight against cyber fraud. Instead of relying on traditional memorized s, OTPs are requested by consumers each time they want to perform transactions using the online or mobile banking interface. When the request is received the is sent to the consumer’s phone via SMS. The is expired once it has been used or once its scheduled life-cycle has expired. Because of the concerns made explicit above, it is extremely important that SMS gateway providers can provide a decent quality of service for banks and financial institutions in regards to SMS services. Therefore, the provision of service level agreements (SLAs) is a requirement for this industry; it is necessary to give the bank customer delivery guarantees of all messages, as well as measurements on the speed of delivery, throughput, etc. SLAs give the service parameters in which a messaging solution is guaranteed to perform (Boyd, C, & Jacob, K, 2007). Scalability and reliability Another challenge for the Chief Information Officers (CIOs) and Chief Technical Officers (CTOs) of the banks is to scale-up the mobile banking infrastructure to handle exponential growth of the customer base. With mobile banking, the customer may be sitting in any part of the world (true anytime, anywhere banking) and hence banks need to ensure that the systems are up and running in a true 24-7 fashion.

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As customers will find mobile banking more and more useful, their expectations from the solution will increase. Banks unable to meet the performance and reliability expectations may lose customer confidence. There are systems such as Mobile Transaction Platform which allow quick and secure mobile enabling of various banking services. Recently in India there has been a phenomenal growth in the use of Mobile Banking applications, with leading banks adopting Mobile Transaction Platform and the Central Bank publishing guidelines for mobile banking operations (Boyd, C, & Jacob, K, 2007). Application distribution Due to the nature of the connectivity between bank and its customers, it would be impractical to expect customers to regularly visit banks or connect to a web site for regular upgrade of their mobile banking application. It will be expected that the mobile application itself check the upgrades and updates and necessary patches (so called "Over the Air" updates). However, there could be many issues to implement this approach such as upgrade / synchronization of other dependent components. Personalization It would be expected from the mobile application to personalization such as: Preferred Language, date /time format, amount format, default transactions, standard beneficiary list and alerts (Boyd, C, & Jacob, K, 2007).

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CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction This chapter sets out various stages and phases that will be followed in completing the study. It involves a blueprint for the collection, measurement and analysis of data. Specifically the following subsections are included; research design, target population, data collection instruments and procedures and data analysis.

Methodology is the overall approach which

underpins the research process (Blaxter et al 2006).

3.2 Research Design Research design refers to the methods used to carry out a research. It is important to highlight the two main methods when investigating and collecting data - quantitative and qualitative. This research problem can best be studied through the use of a descriptive survey design. This study will specifically try to establish the effects of mobile banking and the challenges encountered in implementing mobile banking in Kenya. A survey will be carried out in all the commercial banks in Kenya.

3.3 Study Population The population of this study will consist of all the commercial banks in Kenya. According to Central Bank of Kenya (CBK 2011), there are 43 licensed commercial banks and 1 mortgage finance company (see appendix 2 for full list). A census survey study is recommended so as to cover the entire population of commercial banks in Kenya.

3.4 Data Collection Primary data will be obtained through self-istered questionnaires with closed and openended questions. The questionnaires will include structured and unstructured questions and will be istered to the respondents. The closed - ended questions will enable the researcher to collect quantitative data while open-ended questions will enable the researcher to collect qualitative data. The respondents targeted will be Heads of department in charge of the mobile banking section. Only one respondent will be picked from each bank. 19

The questionnaire will be divided into three sections.

Section A will deal with general

information of the bank and respondents; section B will address effects of mobile banking and section C will address challenges encountered in implementing m-banking.

3.5 Data Analysis The data collected will be thoroughly examined and checked for completeness. The data will then be summarized, coded and tabulated. Descriptive statistics such as means, standard deviation and frequency distribution will be used to analyze the data through the Statistical Package for Social Sciences (SPSS). Data presentation will be done by the use of pie charts, bar charts and graphs, percentages and frequency tables. This will ensure that the gathered information is clearly understood.

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APPENDICES APPENDIX 1: QUESTIONNAIRE SECTION A: GENERAL INFORMATION 1. Name of Bank: ………………………………………………………… 2. Position held at the Bank: ……………………………………………… 3. Number of years bank has operated in Kenya (Please tick as appropriate) 1 – 5 years 6 – 10 years 10 – 15 years Over 15 years

4. Number of branches in Kenya 1-5

11-20

6-10

Over 20

5. Ownership of the bank Local Foreign Both local & foreign

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SECTION B: EFFECTS OF MOBILE BANKING 6. Does the bank offer mobile banking services? Yes

No

7. If yes, for how long has your bank offered m-banking services? ………………………

8. Please indicate in the table below the extent to which the following m-banking services apply to your bank:(Tick as appropriate) Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No extent. 5 information service Mini-statements and checking of history Alerts on activity or ing of set thresholds Monitoring of term deposits Access to loan statements Access to card statements Mutual funds / equity statements Insurance policy management Pension plan management Status on cheque, stop payment on cheque Ordering cheque books Balance checking in the Recent transactions Due date of payment (functionality for stop, change and deleting of payments) PIN provision, Change of PIN and reminder over the Internet Blocking of (lost, stolen) cards

28

4

3

2

1

5

4

3

2

1

Payments, deposits, withdrawals, and transfers Cash-in, cash-out transactions on an ATM Domestic and international fund transfers Micro-payment handling Mobile recharging Commercial payment processing Bill payment processing Peer to Peer payments Withdrawal at banking agent Deposit at banking agent Cash-in, cash-out transactions on an ATM

9. How do you rate the following effects of m-banking to your bank? Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No extent. Statement

5

Has increased customer satisfaction Has reduced the cost of distribution Has improved trust and credibility Has reduced transaction costs Has strengthened the relationship between the bank and the customers Has increased revenues Has reduced the risk of fraud Has helped to promote and sell the bank’s products and services like credit cards, loans etc Has increased the customer network Has improved the bank’s competitiveness

29

4

3

2

1

SECTION C: CHALLENGES ENCOUNTERED IN IMPLEMENTING M-BANKING

10. To what extent do you agree that the following are challenges the bank has encountered in implementing m-banking? Key: 5 – Very large extent, 4- Large extent, 3- Moderate extent, 2 – Low extent, 1 – No extent. Statement

5

4

3

2

1

Inability to offer mobile banking solution on any type of device Security of financial transactions Inability to meet the performance and reliability expectations Application distribution Personalization of mobile phones Lack of consumers awareness of their ability to use their phones to bank Finding talented mobile developers for the bank Dependence on mobile phone operators

11. Kindly list some of the ways in which the bank uses to deal with the challenges encountered: ……………………………………………………………………………………………. ……………………………………………………………………………………………. ……………………………………………………………………………………………. ……………………………………………………………………………………………. ……………………………………………………………………………………………. ……………………………………………………………………………………………. …………………………………………………………………………………………….

Thank you for your co-operation.

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APPENDIX 2: LIST OF BANKS Commercial Banks 1. African Banking Corporation Bank 2. Bank of Africa 3. Bank of Baroda 4. Bank of India 5. Barclays Bank 6. CFC Stanbic Bank 7. Charterhouse bank (under statutory management) 8. Chase Bank (Kenya) 9. Citibank 10. Commercial Bank of Africa 11. Consolidated Bank of Kenya 12. Cooperative Bank of Kenya 13. Credit Bank 14. Development Bank of Kenya 15. Diamond Trust Bank 16. Dubai Bank Kenya 17. Ecobank 18. Equatorial Commercial Bank 19. Equity Bank 20. Family Bank 21. Fidelity Commercial Bank Limited 22. Fina Bank 23. First Community Bank 24. Giro Commercial Bank 25. Guardian Bank 26. Gulf African Bank 27. Habib Bank 28. Habib Bank AG Zurich 31

29. I&M Bank 30. Imperial Bank Kenya 31. Jamii Bora Bank 32. Kenya Commercial Bank 33. K-Rep Bank 34. Middle East Bank Kenya 35. National Bank of Kenya 36. NIC Bank 37. Oriental Commercial Bank 38. Paramount Universal Bank 39. Prime Bank (Kenya) 40. Standard Chartered Kenya 41. Trans National Bank Kenya 42. United Bank for Africa 43. Victoria Commercial Bank Mortgage Finance Companies 44. Housing Finance ltd

Source: Central Bank of Kenya - 2011

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