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E-money threatening banks

Banks are increasingly facing the risk of losing deposits to digital money providers, as electronic money gets entrenched in the financial system.

E-money is designed to promote financial inclusion and is deemed relatively safer, convenient to store and carry around and cheaper to make payments.

Its growth therefore adds to the setbacks banks are facing in their efforts to realise growth, including bad loans, slow credit uptake and the international financial reporting standard IFRS9, which requires higher provisioning for loans, thereby affecting profitability.

All banks in East Africa, save for Uganda, are not generating enough cash to compensate shareholders for their equity investments and justify the massive assets deployed.

A financial stability report compiled by the Bank of Tanzania for the 2017/2018 financial year shows that the return on equity (ROE) for banks in Kenya, Tanzania, Rwanda and Burundi has been on a downward trend over the past four years.

According to the report, the ROE for Kenya’s banking sector declined to 20.8 per cent in 2017, from 26.6 per cent in 2014, while in Tanzania it declined to 8.5 per cent from 22.8 per cent in the same period.

In Rwanda, it fell to 6.2 per cent from 15.4 per cent while that of Burundi declined to 4.6 per cent from 7.8 per cent. However, the ROE for Ugandan banks increased marginally to 16.4 per cent from 16.1 per cent.

The International Monetary Fund has acknowledged that cash and bank deposits worldwide are facing a fierce challenge from the electronically stored monetary value denominated in, and pegged to a common unit of account such as the euro, dollar or renminbi.

IMF, through a research paper titled The Rise of Digital Money released this past week, shows that financial institutions face limited options to survive the assault by e-money that is sweeping across the global banking system, with customers preferring to keep their money in digital platforms.

“E-money is emerging as a prominent new player in the payments landscape,” said the IMF. “Its single-most important innovation relative to cryptocurrencies is to issue claims that can be redeemed in currency at face value upon demand.”

The leading global e-money platforms include Alipay and WeChat Pay in China, Paytm in India and Safaricom’s money payment platform M-Pesa in East Africa.

E-money already rules in Kenya and China with 90 per cent of Kenyans over the age of 14 transacting through M-Pesa.

In China, the value of e-money transactions such as with WeChat Pay and Alipay have surpassed those worldwide of Visa and MasterCard combined.

“Cross-border transfers of e-money would be faster and cheaper than of cash and bank deposits,” the IMF report says.

“Transfers in e-money are nearly costless and immediate, and thus are often more attractive than card payments or bank-to-bank transfers especially across borders. As a result, people might even agree to sell their car for an e-money payment as the funds would immediately show up in their account, without any settlement lag and corresponding risks.”

Analysts say that as economies become digitalised, big banks in the region are facing increasing challenges from fintech firms, especially in daily transactions and commercial activity.

Kenya, for example, has 51 million active mobile subscribers who transacted 564.8 million mobile money transactions valued at Ksh2.1 trillion ($21 billion) in the three months to March this year, and 571.5 million transactions valued at Ksh1.84 trillion ($18.4 billion) in mobile commerce, according to data from the Communications Authority of Kenya (CA).



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