Banking remains the largest sub-sector by assets and the most systemically significant in Kenya’s financial services sector. Developments, especially those enabled by technology, have brought a sizeable number of new, mostly poorer and vulnerable first-time consumers into the market. Concerns such as the low-levels of financial literacy and the absence of effective recourse mechanisms have focused attention on whether such consumers are adequately protected. However, although, the sector is increasingly reaching lower-income households, it is yet to make a transformational impact.
Appropriate regulation should reduce the risk of harm
On 1 January 2013, new prudential guidelines issued by the Central Bank of Kenya (CBK) including those covering consumer protection came into effect. The provisions are comprehensive and far-reaching. Two key provisions stand out: one relates to fairness and the other to transparency. The guidelines require banks to act fairly and reasonably in all dealings with consumers. This includes a prohibition on unfair and deceptive practices such as using small print, complex languages or voluminous documents to disguise, diminish, obscure or conceal material facts. The guidelines also require banks to adopt standardised pre-contractual disclosure practices to allow comparisons among similar products and services. This includes developing specific disclosure mechanisms and providing consumers with a key facts document that highlights all fees, liabilities or obligations.
The introduction of the guidelines called for major changes in the way banks deal with customers. While some improvements have been made, FSD’s report reveals that banks are still holding all the cards.
It’s the letter rather than the spirit of the law that still holds
In 2015, FSD Kenya initiated the first round of a mystery shopping exercise to understand the cost of retail banking services in Kenya. The second round was conducted in 2016. While financial inclusion has traditionally been measured in terms of access, this exercise required us to understand usage. But rather than setting up a scientific study, this simple exercise gave us important insights into the cost of operating a bank account in Kenya.
Across all the bank branches visited during the two rounds of mystery shopping, three key observations were evident.
1. First, there was a great deal of confusion over the actual cost of different banking products and services. Our mystery shoppers had to make up 6 visits per bank to understand the actual cost of a transaction. Majority of the bank staff were only aware of the tariff structures for key transactions such as withdrawal and ledger fees but not for transactions such as the cost of inward transfers and mobile banking charges. This information is surprisingly difficult to get.
2. In most instances, this obscurity did not seem intentional; it seemed to stem from the lack of standardised tariff information and how this should be organised and presented. In several instances, staff of the same bank in different branches or even different staff in the same branch gave conflicting tariff information for the same transactions and the complex tariff structures in some banks only made matters even more confusing. For instance, some banks do not debit accounts with ledger fees if a certain minimum balance is maintained. Other times, the bank would deduct the fees but refund the customer later or waive some charges but retain others. This makes it difficult for a customer to know exactly what he or she is being charged for.
3. Lastly, we observed that bank staff were keen to quickly recommend certain accounts based on a customer’s income rather than the customer’s need. Most of the enquiries on the accounts available were immediately proceeded by a discussion of the mystery shopper’s income source and level. If the shopper indicated that he was salaried, then a salary account that attracts charges would be recommended even in cases where a tariff-free account was available. If the shopper asked for a specific tariff-free account, then the bank staff would make some effort to sell a charged account.
Focussing on consumer outcomes can lead to efficient markets
The significance of trust in finance cannot be diminished. When we deposit money in a bank, we trust that we can access it whenever we need to. We also trust banks to guide us towards the best options in our interests. Developing trust and confidence is critical for the relationship between banks and consumers.
Promoting competition is an important factor in enhancing efficiency. A common theme around discussions on competition in the banking sector is that consumers are not fully aware of the terms of their financial arrangements such as the interest rates charged to them. This makes pricing less useful as a means of competitive differentiation. For instance with loans, the lack of transparency on information and price may lead consumers to focus on the effort and success of obtaining the product or service rather than price or whether the product suits them.
While regulation may be a principal driver of compliance, banks should see transparency and consumer protection as strategic. A bank that engages actively with its customers, treats them fairly and provides them with services that meet their needs is effectively pursuing its competitive advantage. Banks should pursue this strategy not just because regulation requires it but because it is good business. What CBK may regard as regulation should from the perspective of a bank be a matter of delivering value to consumers. That is the win-win.
The price of being banked, FSD Kenya’s new report on transparency and the cost of leading banking services in Kenya will be published on 30th August 2017. For more details see: The price of being banked/.