Equity seeks to halve transaction costs with mobile licence

Money Markets

Equity chief executive James Mwangi says newly acquired licence will reduce transaction costs to Sh7 from Sh14. Photo/FILE  

By John Gachiri

In Summary

• Equity Bank's newly acquired Mobile Virtual Network Operating (MVNO) licence will reduce transaction costs to Sh7 from Sh14 charged by the bank’s agents.
• The Sh14 is still the lowest transaction cost at the moment.
• Transactions done at the bank are the most expensive at Sh96, followed by ATM transactions that cost Sh33.

Equity Bank expects its new mobile banking licence to cut transaction costs by at least a half, analysts at London-based brokerage firm Exotix have reported.

A coverage note on Kenya’s second most profitable bank by Exotix says this is the main reason the bank sought the Mobile Virtual Network Operating (MVNO) licence.

In a meeting held in London last week, Equity chief executive James Mwangi told the analysts that the newly acquired licence would reduce transaction costs to Sh7 from Sh14 charged by the bank’s agents.

The Sh14 is still the lowest transaction cost at the moment. Transactions done at the bank are the most expensive at Sh96, followed by ATM transactions that cost Sh33.

“The estimated cost of a mobile transaction is Sh7 and (Equity) should reduce its cost to income ratio to 47 per cent by year end (from 49.5 per cent in 2013), 42 per cent in five years’ time and 38 per cent in 10 years’ time,” said the research note released on Monday.

Other analysts said success of this strategy will depend on how many customers the bank can get on its network, which will require heavy spending on infrastructure.

“They still have to set up a network and get subscribers,” said Eric Musau, a research analyst at the Standard Investment Bank.

Mr Musau said the challenge will be for the bank to convince customers to use its SIM cards, which will not be a walk in the park given the dominance of Safaricom’s M-Pesa service.

Exotix also said Safaricom could make counter moves to protect its M-Pesa customer base.

“In this respect, successful execution of the mobile strategy becomes a key risk for Equity Bank (especially since we would expect a competitive reaction from Safaricom),” said the note.

The bank expects three million of its mobile banking customers to move to its network, said the note. Expectation of migration is based on the cost advantage the service has over M-Pesa.

The bank has already said it will begin distributing 300,000 smartphones to retailers beginning next month for transactional purposes.

Equity is the largest bank by customer numbers with 8.7 million customers as at the end of the first quarter year while its agency network stands at 11,009 from 875 in 2011.

The bank’s net profit stood at Sh3.88 billion in the three months ending March, compared to Sh3.21 billion for a similar period the year before, a 21 per cent increase.