Digitizing Govt Payments Kenya Study_FINAL

8/9/2019 Digitizing Govt Payments Kenya Study_FINAL

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Accenture Development Partnerships

Digitizing GovernmentPayments, Kenya StudyApril 2013


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Contents


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Executive Summary 3

Glossary 4

Figures And Tables 4

Introduction 5

1. Kenya’s Payment Ecosystem 7

The Current Landscape 8

Digital Payment Service Providers 9

Payment Instruments 10

Infrastructure 11

2. Effective Digital Payments 12

Security 13

Distribution 15

Devices 17

Payment Processing 18

Integration 19

3. Driving Change Through Digitization 20

The Case For Digitizing 21 Increased Revenue 22

Missed Opportunities 23

Leakage 23

Efficiency Savings Through Process Improvements 24

Adding ‘Loose Change Back Into The Economy 25

The Economic Value Of The Informal Sector 26

Supporting Early Adopters 27

Incentivizing Change 29

Full List Of Sources 30


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The Digitizing Government Payments, KenyaStudy maps the payment ecosystem in Kenya,examines the gaps, and identifies the challengesand the potential benefits of strengthening thedigital payment system in this country. Thisreport presents the findings of the study and theopportunities for the Government of Kenya inrespect to digital payments.

Governments play a powerful role instrengthening a country’s paymentslandscape. They have the ability toinfluence the behavior of citizens andthe private sector, acting as an enabler in the evolution and development ofdigital payment systems. This reportdemonstrates that there are significantgaps in Kenya’s current paymentslandscape and that the government hasan important role to play in addressing

these gaps.

Digital payment solutions can havegreat positive social impact, loweringthe cost of transactions to expandaccess to, and uptake of digitally-basedfinancial tools and services. Digitizingpayments also presents an opportunityfor governments to realize significantfinancial rewards, boosting growth,increasing revenues and loweringincidences of fraud, and increasingefficiencies.

The growth of digital payments in Kenyahas been impressive; however, thebenefits of modern electronic payments(excluding M-Pesa) are yet to reach allsections of society. Kenya’s paymentsystem may be more advanced thanother countries in the region but theoptions available to Kenyans to makepayments electronically remain limitedby partial interoperability due to a lackof implementation of a comprehensive

policy and regulatory frameworkfor digital payments, low Internetpenetration, low credit card acceptanceand low trust levels among citizens andwithin the business community.

While detailed recommendations werebeyond the scope of the study thisreport outlines two avenues for change:a top-down leadership approach and amore tactical approach whereby earlyadopters are provided with the supportthey require to achieve success. Thebenefits available to government fromdigitization of payments in terms ofeconomic growth, increased governmentrevenues and efficiency savings, serveas a call to action to senior governmentdecision makers to drive development ofelectronic payment systems. In parallel,a discussion of early-adopters showsthat there are clear opportunities todayto support current initiatives to realizingthe full benefits of digitizing payments.

In Kenya, government collections

are inefficient. Over a third of thegovernment payments examined in thecourse of this study were cash-based,presenting a high opportunity forleakage and abuse of the system. In onecase, 60 percent of revenues were spenton making collections. That said currentdigitization initiatives have alreadyincreased revenue collections for somegovernment organizations by upwardsof 200 percent. In fact, in the caseof the Ministry of Lands, a complete

overhaul of the front office collectionssaw revenue rise from KES 800 millionto KES 9 billion in 2012; a 1,125 percentincrease.

There should be no doubt that anypath to digitization will requireinvestment. If the government isserious about taking advantageof the potential that digitalpayments present, then effortsshould be focused on developinga clear strategy for digitizingwhich takes a holistic view ofthe changes required across theorganization, including paymentprocesses, the supportingtechnology and the activities andresources required to achievethis. Moreover, realizing thedirect impact these changes canhave on all parties involved is

a critical lesson learned fromprevious unsuccessful digitizationinitiatives, particularly onadoption and behavior towardsthese payments.

This report is based on research funded by the Bill & Melinda Gates Foundation. The findings and conclusions contained within are those of the authors and do

not necessarily reflect positions or policies of the Bill & Melinda Gates Foundation.

Executive Summary


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Glossary

Figures and Tables

ACH Automated Clearing House

AEPS Aadhaar Enabled Payment System

AMFI Association of MicrofinanceInstitutions of Kenya

ATM Automatic Teller Machine

B2G Business to Government

BMGF Bill & Melinda Gates Foundation

CaLP Cash Learning Partnership

CBK Central Bank of Kenya

CCN City Council of Nairobi

CCK Communications Commission of KenyaCCRS Common Cash Receiving System

CPA Canadian Payments Association

EFT Electronic Funds Transfer

EIU Economist Intelligence Unit

FOSA Front Office Savings Activities

FSDK Financial Sector Deepening Kenya

G2B Government to Business

G2G Government to Government

G2P Government to PersonGDP Gross Domestic Product

GEAR Government ePayments Adoption Rankings

ICT Information & Communication Technology

IFMIS Integrated Financial Managementand Information System

IPRS Integrated Population Registration System

KBA Kenya Bankers Association

KEPSS Kenya Electronic Paymentsand Settlement System

KICTB Kenya Information & CommunicationTechnology Board

KRA Kenya Revenue Authority

KYC Know Your Customer

LAIFOMS Local Authorities Integrated Financialand Operations Management System

MDAs Ministries, Departments and Agencies

NHIF National Health Insurance Fund

MNO Mobile Network Operator

NETS Network for Electronic Transfers

NFC Near Field Communication

NPS National Payment System

NREGA National Rural Employment Guarantee Act

P2G Person to Government

POS Point of Sale

RTGS Real Time Gross Settlement

SACCO Savings and Credit Cooperatives

SASRA SACCO Societies Regulatory Authority

SLO State Law office

Figure 1: Payment System Groups in Kenya 11

Figure 2: Modes of payments currently available in Kenya 12

Figure 3: Five key pillars to facilitate driving effective 14

digital payment

Figure 4: ATMs Comparison 18

Figure 5: The case for digitizing payments; Indicative 22

estimates of benefit to government

Table 2: Commercial Banking Sector 17

Table 1: Growth of ATMs, POS and Cards 18


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Introduction

In recent years, governments and multilateralinstitutions such as the World Bank have paidincreasing attention to national payment systemsas an integral part of a country’s financial sectorstability and development. Secure and efficientpayment systems are essential for the properfunctioning of a financial system.

They connect government, businessesand consumers; support broad-basedeconomic activity, opportunities andgrowth; increase consumer confidence;and reduce transaction costs. Paymentsystem modernization has become aprominent feature of financial sectorreform in many countries. However, theSub-Saharan Africa region lags the restof the world when it comes to electronictransactions or “e-payments”. It has thelowest e-payment rate worldwide: at0.2 non-cash retail payments per capita,

cash remains the predominant retailpayment mode used in Kenya for 98percent of transactions.1

The high cost and risk of cashtransactions represents one of themain barriers to affordable financialservices for the poor. Shifting fromcash to mobile or other modes of digitalpayment is an effective way to removethis barrier. Digital payment also offersopportunities to tailor financial products

and services to better meet the needsof poor households and businesses inthe informal sector. In addition, there isthe social benefit of improved securityfor individuals and communities wheredependence on cash is reduced.

For governments, digital paymentsand automated record keeping offersa means to increase transparency andaccountability, and with the greaterreach that digital payment facilitates,there is improved consistency in

collecting payments from citizens.

This translates into an ability to offermore equitably distributed services,especially in a devolved politicallandscape where local service provisionis linked to the capacity to collecttaxation from the same area.

A digitized payment architecture that isaccessible throughout a country shouldgenerate economy-wide efficienciesby connecting large numbers of peopleto one another at low cost. Financialservices providers, government agencies,

businesses and citizens should realizeproductivity gains that accelerategrowth when unburdened of the needfor paper- and cash-based transactionsthat require more time and energy tocomplete.

Kenya Vision 2030 (The Vision) is thecountry’s development blueprint for2008 to 2030. It aims to transformKenya into a newly industrializing,“middle-income country providing ahigh quality of life to all its citizensby the year 2030”. The Vision is basedon three “pillars”: the economic, thesocial and the political. The economicpillar aims to improve the prosperityof all Kenyans through an economicdevelopment program that covers allregions and aims to achieve an averageGross Domestic Product (GDP) growthrate of 10 percent per annum, beginningin 2012. Addressing the currentinefficiency of government paymentsis an important step towards achieving

The Vision.

This study focused on two key areas: an

evaluation of the payments landscapein Kenya in 2013; and an analysis ofgovernment payment processes toidentify current opportunities andchallenges. Over the course of thisstudy, more than 30 interviews wereconducted with a sub-set of governmentministries, departments and agencies(MDAs) to quantify current paymentvolumes and their monetary value bymechanism (bank transfers, checks,mobile money, other digital mechanisms,

and cash), and to estimate the currentcosts of payments based on thetransaction, administrative and leakagecosts for the government, its partners,and citizens.2 In addition, informationon the government’s current digitizationinitiatives was gathered to capturelessons learned by early-adopters.This research included a stakeholderworkshop with key government entitiesto review and discuss the study findings,and an online citizen pulse surveyfacilitated by the Kenya ICT Board.

The payments ecosystem in Kenya wasmapped in order to understand the gapsin the current landscape. This includeda high level review of the currentregulatory framework in Kenya. Primaryresearch included meetings with theMinistry of Finance, Central Bank ofKenya, Directorate of e-Government,Kenya ICT Board, selected MDAs,3 Tangaza, Equity Bank, Commercial bankof Africa, Postal Corporation of Kenya,

The Cash Learning Partnership (CaLP),and Financial Sector Deepening Kenya(FSDK). Secondary research leveragedpublished reports, magazine andnewspaper articles, online discussionsand user blogs, review articles,press releases, and general businesspublications. In parallel, the AccentureDevelopment Partnerships teamcollaborated with Accenture’s globalpayments research teams and sub-contracted subject matter experts toreview case studies and global leading

practices for payments.


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Chapter 1 – Kenya’s Payment

Ecosystem introduces the key paymentgroups in Kenya, identifying thepayment service providers, paymentinstruments and underlying paymentinfrastructure.

Chapter 2 – Effective Digital Paymentsexamines gaps in the current paymentslandscape. Through global examplesand examples from within Kenya, thischapter demonstrates the ways inwhich government has the ability toaddress these gaps, whether directlyor indirectly, through its power as an“enabler” of private sector investmentor changes in public attitudes to digitalpayments. In this chapter we look atfive key topics important for effectivedigital payments: security in terms ofauthentication, consumer and dataprotection; distribution in terms ofgeographical coverage and points ofaccess; devices with card and onlinepayments lagging well behind mobilepayments; the back-end systems to

support efficient payment processing;and integration. Interoperability,for example, has improved in recentyears, allowing users of all Kenswitch,PesaPoint or Visa/MasterCard cards touse any automatic teller machine (ATMs)or point of sale (POS) device. However,the current ATM and POS networkaverages only 10 ATMs per 100,000people and about 88 POS devices per100,000 people, respectively. Thisis extremely low compared to the

number of ATMs and POS devices inmany developed nations. Of course,the success of mobile as a paymentschannel in Kenya should not beoverlooked: M-Pesa, with more than 16million active users and 1.8 million dailytransactions, has set an example thathas put Kenya on the world map. ThisChapter outlines what is already in placein Kenya and highlights some key gapsor areas of opportunity.

Chapter 3 – The Potential in Digitizing

looks at what can be done to supportthe government in its important roleas an enabler of digital paymentsto strengthen the digital paymentslandscape and enable Kenya to realizethe associated social benefits. Thischapter takes a two pronged approach:a top-down leadership approach tochange, and a more tactical approachwhereby early adopters are providedwith the support they require to achievesuccess.

Recognizing the importance of top-down leadership in modernizinggovernment payments, we providea “case for digitizing” which can beused to stimulate policy discussionsand encourage political support forchange. In Kenya today, particularly inthe context of a new administrationand the devolution of power to thecountry’s 474 county governments,there is a real opportunity to affectchange if a compelling case can be

made. The first part of this chapterprovides a macro-economic argumentfor digitizing. We identify a number oftransmission mechanisms through whichincreased usage of digital paymentsserves to drive economic growth witha particular focus on the potential toincrease government revenues. This is byno means a detailed economic analysisbut rather an indicator of the potentialbenefits to government (increased GDP,increased revenues, and efficiency

savings) presented as a persuasiveargument for “going digital”.

The second part of this chapter

focuses on potential ways in whichgovernment may choose to digitizepayments. Over the course of this studyseveral examples of early adopters ofdigital payments within the KenyanGovernment were identified. Thesuccesses of some of these initiativesare impressive, ranging from increasesin revenues by over 200 percent toreduction in payment times by up to80 percent. This section highlightsopportunities to sustain, increase and

extend these benefits with and beyondindividual MDAs. The focus is on specificinitiatives currently underway in Kenyato support a discussion around thebenefits of a more holistic approachto digitizing. This includes businessprocess re-engineering; a clear changemanagement strategy and considerationfor the appropriate support structure(e.g., properly trained staff, aninformation technology helpdesk, andimplementation support).

Importantly, manyof these changescould be affectedin the near termsimply by providingthe right support

to early adopters.


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Chapter 1

Kenya’s Payment Ecosystem

A key success factor for Vision 2030 is theestablishment of a strong economic system.The fast-evolving payments landscape anduser interest calls for a strong, modern andefficient digital financial services system

in Kenya that is capable of supporting andadapting to fast-paced change.

Countries such as Singapore, one of theworld’s fastest growing economies, havepayment systems which have evolvedover the years, driven by technologicalprogress, changing consumer needs,and the development of new digitalfinancial systems. The move from paper

and cash transactions to a diverse rangeof cashless payment instruments, aswell as efficient and reliable clearingand settlement systems, has been a keyfactor in Singapore’s economic success.It is vital for Kenya to develop a suitablepayments system that is not only safeand secure but also simple, fast, costeffective and easy to use.

Over the last decade, Kenya has made agreat deal of progress in modernizing itsretail payments and financial servicessystem. It has introduced mobile moneyservices and agency banking,5 and theenactment of the National PaymentSystems Act. Furthermore, Kenya

has taken steps towards developinga national payments infrastructure,especially with respect to wholesalepayments systems such as the realtime gross settlement system, KenyaElectronic Payments & SettlementSystem (KEPSS);6 the AutomatedClearing House (ACH);7 and domesticswitching systems.

Despite these developments, significantprogress is yet to be made in Kenya.The Economist Intelligence Unit (EIU)recently highlighted this in theirGovernment ePayments AdoptionRankings (GEAR) for 2011. Kenya wasranked 588 out of the 62 countriesreviewed, putting it ahead of onlyIran, Ukraine, Uganda and Nigeria. The

areas where Kenya scored particularlypoorly were in payments infrastructure(except for mobile) – i.e., the technologyinfrastructure and connectivity betweengovernments, citizens and businesses.The vast majority of Kenya’s physicalpayment system infrastructure is inurban areas, particularly Nairobi andthe Rift Valley, with rural infrastructurepredominantly inadequate to servethe population in these areas. Aspolicymakers increasingly recognizethe importance of a safe and reliable

payment system to the country’seconomic growth and development,there needs to be greater emphasison increasing the accessibilityand reliability of payment systemsthroughout the country. This will assistto realize the full benefits of digitalpayments in terms of financial inclusion.


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The Current Landscape

This section provides an overview of digital payments in Kenya,identifying payment service providers, payment instruments and thesupporting payments infrastructure.

Payment Service Providers

Payments Instruments

Infrastructure

Figure 1: Payment System Groups in KenyaSource: Communications Commission of Kenya, Quarterly Sector Statistics Report, Sept 2012Central Bank of Kenya, Retail Payment Statistics, Feb 2013

Mobile

Network

OperatorsCommercial Banks Service Integrators SACCOs

3,200

MFIs50

30.4Million

Mobile

Users

19.3Million

Mobile

MoneyUsers

8.5Million

Internet

SubscriptionsCards

10.8Million

18,422POS 1,045

Bank

BranchesATMs

2,390 54,409MobileMoney

Agents

14,045Bank

Agents


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Digital Payment Service Providers

Digital PaymentService Providersare typicallycommercial banks,mobile networkoperators, serviceintegrators, and

microfinanceinstitutions.

Commercial banks

There are 43 commercial banks in Kenyaoffering financial services throughbranches, smaller agencies, ATMs,electronic POS machines, telephone callcenters, and websites.

Mobile networkoperators (MNOs)

There are four MNOs in Kenya:Safaricom, Airtel, Orange, and Yu. Alloffer mobile money services. With54,4099 agents and 19.3 M10 customers,mobile money services have been aphenomenal success over the last sixyears. However, M-Pesa continues todominate the market in Kenya.

Payment service integrators

The growth of mobile money servicesin Kenya has led to the emergence of abroad set of payment service ecosystemplayers. These integrators largely serve

merchants who intend to accept anyform of payment they can, such asmobile money, cards or online paymentmethods, but who opt to leverage theexisting payments infrastructure ratherthan set up their own infrastructure.Some of the key players in this spaceinclude KopoKopo, iPay, JamboPay,PesaPal, M-Payer, Lipuka, Moca, Paysureand KrossPay .

Micro-financeinstitutions (MFIs)

While there are over 50 microfinanceinstitutions registered with theAssociation of Microfinance Institutionsof Kenya (AMFI), it is estimated thatthere are 36 active MFIs in Kenya,servicing about seven million depositorsand almost 1.5 million borrowers.

Savings and creditcooperatives (SACCOs)

Provide basic savings and creditfacilities to their members, and havebeen integrating IT solutions into theiroperations over the last few years. Anestimated 3,280 SACCOs are active inKenya, with 215 taking deposits via theirFront Office Savings Activities (FOSA).A significant number of SACCOs providefinancial services to semi-urban andrural Kenya (about 2 million customers).


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Infrastructure

Payment infrastructure refers to the system ofbank branches, ATMs and point of sale (POS)systems, along with bank and non-bank agentsproviding banking or payment or mobile moneyservices to customers in areas which are oftennot served by branches or ATMs.

The branch network and many of the ATMs

and POS systems are provided by the bankingsector, although many ATMs and POS devices areserviced by third-parties. Additionally, the strongnetwork of 14,168 banking agents and 54,409mobile money agents extend their support to thepayment infrastructure in Kenya.

There are three switch providers in

Kenya:

PesaPoint is a commercial network ofover 450 ATMs and 1200 POS devicesacross Kenya providing cash withdrawal,bill payment, airtime top-up, balanceinquiry and prepaid card wage services.Set up in 2005, PesaPoint providesservices to commercial banks, SACCOs,the Kenya Postbank and microfinanceinstitutions. PesaPoint also allows forcash withdrawal from the M-Pesa andAirtel mobile money services. PesaPointis part of Kenya’s Paynet Group, aprovider of payment solutions to thefinancial sectors in Kenya, Uganda,Tanzania and Rwanda.

Kenswitch is a registered limitedcompany that was set up in late 2002by a consortium of small and medium-sized banks under the Central Bank ofKenya’s National Payments Systemsmodernization and reform process,which was done with the support of

the Kenya Bankers Association. LikePesaPoint, it provides a shared networkof 650 ATMs to financial institutions,offering ATM, POS, online, mobile andagency banking. There are currentlyover 30 financial institutions linked tothe Kenswitch platform, in addition tocollaboration along with PesaPoint andits partners.

VisaNet is the world’s largest retailelectronic payments processingnetwork. Visa was established in Kenya

in 1991, and has witnessed year-on-yeargrowth. The only banks in Kenya whichprovide Visa are Barclays, Equity, KenyaCommercial Bank (KCB) and I&M.


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This chapter examines five elements or “pillars” which need to beaddressed in order to ensure effective payments. These elementsare critical to enabling fast and secure payment but other clearopportunities for improvement are also discussed.

Figure 3 depicts the five pillars along with an assessment of theextent to which each pillar is currently addressed in Kenya.

Chapter 2

Effective Digital Payments

Figure 3: Five key pillars to facilitate driving effective digital payment

There is room for improvement across the five pillars and all sectorshave an important role to play. Using global and local examples, thissection looks at the extent to which government can, directly andindirectly, play a role in addressing opportunities across these pillars toenable safe and effective digital payments.

Key Pillars

Digital PaymentSystems

Security

Relates to the abilityto confirm useridentity for data andconsumer protection.

Geographical reachof financial servicesin terms of pointsof access. Alsoincludes convenienceof access.

The range of front-endoptions available tocitizens to accessfinancial services.

Refers to the back-endsupport systems andtheir capability toprocess payments.

The extent to whichpayment systems areinterlinked.

Distribution IntegrationPaymentProcessing(Back End)

Devices(Front End)

HighLevel of Development Low


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Security

AuthenticationToday in Kenya, there are multiplecitizen registries (national ID, birthcertificate, driving license, marriagecertificate) which may be used tovalidate user identity. Their technologieshave been layered on top of eachother over several years. There is,however, currently no trusted andcomplete single source that providesauthentication to fully supports theconfirmation of user identity andallow payments to be made based onprior authorization. “Ghost” recordsare a common problem given anincomplete register of deaths and alack of integration between this andother systems. This compromises thesafety and security of payments and, inthe context of government paymentsin particular, leads to increasedopportunity for fraud and leakage.

In terms of government systems, theImmigration and Registrar of Persons

(IPRS) System is used as the nationalpopulation data registry to provideauthentication. Today, the IPRS isinterlinked with relevant systems ofthe Kenya Revenue Authority (KRA),the Teachers’ Service Commission(TSC), the National Social SecurityFund (NSSF), the Public ServiceCommission (PSC), and the NationalHealth Insurance Fund (NHIF), as wellas with telecommunication companiesand other government agencies.Certain commercial sector banks andgovernment sector organizations havealso linked their systems to the IPRSfor authentication. The extent to whichthe IPRS is functioning effectivelytoday was beyond the scope of thisstudy. However, discussions with theCommercial Bank of Africa (CBA),Central Bank of Kenya and Kenya ICTBoard have revealed issues with theintegration with IPRS, although it is notclear whether these are related to theIPRS system or to the integration. In

the longer term, complete integration

across the multiple entities involved in

the payment process would significantlyreduce security risks. And with improvedrecord management, the opportunitiesfor “double dipping” will also bereduced.

Currently, over 50 percent of populationdata has been entered into the systemwith the rest expected once the newelections register and the birth anddeath registry are verified and putinto the system. While the national IDcard is currently the most widespreadidentification document used today, itis envisioned that the IPRS will providea single point of truth for registeredindividuals residing in Kenya. Goingforward, the IPRS will provide a centralrepository for financial institutions,law and order agencies, and employers,as well as other institutions andestablishments, to store relevant datafor all citizens.

International Standards:EMV ComplianceIn terms of safe and secure payments,the Europay, MasterCard and Visa(EMV) standards offer a global seriesof specifications for inter-operationof integrated circuit cards (IC or chipcards), IC card-capable POS terminalsand automated teller machines(ATMs), for authentication of creditand debit card transactions. The EMVstandards support interoperability

between EMV-compliant IC cards andEMV-compliant credit card paymentterminals throughout the world,improving security (with associatedfraud reduction), and making possiblefiner control of “offline” credit cardtransaction approvals. EMV chip cardtransactions offer better securityagainst fraud than magnetic stripe cardtransactions that rely on the holder’ssignature and visual inspection of thecard to check for features such as a

hologram. Virtually all cards in Kenyatoday are magnetic stripe (“magstripe”)

cards, which provide access to account

information via the magnetic stripe onthe back of the card.

Kenya currently lacks EMV compliance,leaving it open to credit and debitcard fraud. Citizen confidence in thesepayment methods therefore remainslow. The government is working closelywith Kenswitch and the Kenya BankersAssociation to roll out chip based cardsby 2014. Government’s ability to workeither directly or indirectly on paymentsector reforms make it an extremelyimportant player in the paymentecosystem.

Consumer and DataProtectionSafeguarding personal data and strongconsumer protection are criticalelements of a secure and effectivepayments landscape. It typicallyinvolves putting in place policies andmechanisms for securing data andsafeguarding consumer interests.Existing consumer protection policiesunder the Banking Act, Capital MarketAct, Insurance Act, and SASRA (SACCOSocieties Regulatory Authority) providesectorial coverage but fail to provide aholistic solution for financial services.For instance, the Banking Act providesconsumer protection for bankingservices, including services offeredthough banking agents, but fails toaddress consumer grievances related to

mobile money transactions made fromand to the bank account. In particular,there is currently no regulation thatspecifically addresses the activities ofnon-bank companies that offer mobilefinancial services.


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Financial services in Kenya are growing

at an impressive rate, yet consumerconfidence is still compromised by lackof comprehensive consumer and dataprotection policies and inadequatedispute resolution mechanisms.Unfortunately, there is no formalmechanism for money reversal in caseof payment errors to an undesiredrecipient, and there is no guaranteethat this money will be returned tothe owner. Importantly, mobile moneyproviders do not, and are not required

to use systems that support effectivedispute resolution. Although agents arerequired to enter every transaction intothe daily logbook, this is a cumbersomeprocedure that is open to potentialerror.

The Kenyan Parliament is reviewingthe Data Protection Bill which willgovern the processing, storing, use anddisclosure of information relating toindividuals, whether it is automaticallyor manually processed. Payment and

payee data is not only important tothe persons or entities involved; itconstitutes a valuable informationasset. With suitable legislation in place,multiple government agencies can sharerelevant information, which can deliverreal eff iciencies, removing duplicationand improving the citizen experience ofgovernment. The Central Bank of Kenyaset up the National Payment SystemAct of 2011 to ensure compliance withthe Bank for International Settlement

core principles and give the centralbank enhanced legal and regulatorypowers over payment systems. Itcovers all electronic payment systemsand instruments, including the RTGS,online and mobile money paymentservices, and aims to tighten consumerprotection.

The government can also play

a role in addressing challengesaround consumer security bydeveloping a strong mechanismto safeguard consumer interests.This is critical for the successof the digital payment sectorin Kenya as it will encourageconsumers to embrace electronicpayment channels. The Treasury,as part of the second Medium

Term Plan, is working to developa Consumer Protection Act whichis expected to establish a legalframework for the achievementand maintenance of a financialservices consumers market thatis fair, accessible, efficient,sustainable and responsible forthe benefit of financial servicesconsumers. Many countries

(UK, Ireland, Australia, SouthAfrica, and Sri Lanka) have setup a Financial Ombudsman15 toindependently settle complaintsbetween consumers andbusinesses providing financialservices but this is not present inKenya today.


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Distribution

Distribution indicates the geographical reachof financial services in terms of points of access.This includes the extent to which physical reachis providing citizens with convenient access.

Effective coverage allows citizens andbusinesses to conveniently accessfinancial services at any time. A criticalpoint in the role of government inthe context of payments and socialimpact is that government mandaterequires it to operate with differentinterests to that of the private sector.Typically, commercial banks havebuilt their branch networks to servehigher value businesses and individualcustomers who are located in urbanareas. Government, however, has avested interest in ensuring equal access,particularly as its new constitutionaims to guarantee equality of servicesregardless of county.

Over the last decade, Kenya has made agreat deal of progress in modernizing itsretail payments and financial servicessystem, particularly through theintroduction of mobile money services,agency banking and the updating ofits payment system oversight throughthe National Payment Systems Act.The government has also facilitatedincreased access to financial services totraditionally underserved communities.In 2009, the Central Bank of Kenya

worked to amend the Banking Act toinclude provisions for agent banking.

The agency model enables CBK-approved entities to be contracted by afinancial institution to provide financialservices on their behalf. Agency Bankingwas commissioned in Kenya in April2010 with the CBK granting approval to10 banks16 to roll out agency networks.Although bank branch coverage at2.5417 branches per 100,000 people isrelatively low according to internationalstandards, there is a strong networkof 14,168 banking agents and 54,409mobile money agents in Kenya. Fourof the 43 banks in Kenya - EquityBank, Kenya Commercial Bank (KCB),The Co-operative Bank of Kenya andChase bank - have also been licensedto offer banking services through the

agency banking model. The agencymodel has been effective in providingthe additional geographical coveragerequired for users to access financialservices. The agency model enablesentities to be contracted by a financialinstitution to provide financial serviceson their behalf. Fifty micro financeinstitutions and an estimated 3000+SACCOs also offer users additionalpoints of access.


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Table 1: Commercial Banking SectorSource: KBA, CBK websites, World Bank

Banks Branches Agents

Kenya Commercial Bank 165 3,767

Equity Bank Ltd. 123 5,300

Barclays 103 Not Applicable

Co-Operative Bank of Kenya Ltd. 87 4,100

Stanchart (K) Ltd. 33 Not Applicable

CFC Stanbic Bank Ltd. 20 Not Applicable

I&M Bank Ltd. 19 Not Applicable

Commercial Bank of Africa 20 45,54018

Jamii Bora Bank Ltd. 10 Not Applicable

National Bank of Kenya Ltd. 54 Not Applicable

Other Banks 411 Not Applicable

Total 1045 14,168

(Does not includeM-Pesa agents)


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Devices

Devices refers to the modes of payments available,namely payment cards, including debit, credit andprepaid cards; online payments via Web portal; andmobile payments via mobile money wallet accounts,which may or may not be linked to a bank account.

Figure 4: ATMs Comparison19

Population MN

4138

47

5.7

53

153

No of ATMs/100,000

Kenya Poland Spain

Table 1: Growth of ATMs, POS and CardsSource: Central Bank of Kenya, Payment Statistics, Feb 201320

2010 2011 2012

ATMs 2,091 2,205 2,390

POS 18,179 16,604 18,422

Cards 7,672,695 10,132,799 10,864,937

A low uptake of cards and low Internet

penetration presents a clear opportunityfor improvement. Kenya is serviced by anATM and POS network that averages 5.7ATMs21 per 100,000 people, and about4422 POS terminals per 100,000 people,respectively. While the ATM and POSnetworks in Kenya have grown steadilyin recent years, the overall volume of useof the networks as a proportion of allpayments remains low compared to thatin developed economies and also to otherdeveloping regions.

This directly correlates tothe number of availableATMs (see Figure 4) toservice the population.


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Payment Processing

Payment processing refers to payment supportsystems and their capability to process paymentsthat support the day to day operations ofgovernment payment programs. This refers tothe government’s own support systems as wellas those offered by the private sector and usedby the government.

A key concern for governments is thesafety and surety of payments (the safeand timely transferral of funds to theintended recipient), and the ability toproperly record transactions in line withinternational finance and accountingstandards. Ensuring this can be complexand costly. However, the inability toguarantee proper safety and integrityis likely to result in a lack of trust ingovernments by taxpayers, recipientsand beneficiaries. As such, nationaltreasuries look for ways to effectively

manage finances while minimizing thecost of this activity, typically through arobust financial management system.

Singapore, one of the world’s fastestgrowing economies, has paymentsystems which have evolved overthe years, driven by technologicalprogress, changing consumer needs anddevelopment of new digital financialsystems. The move from paper andcash transactions to a diverse range

of cashless payment instruments, aswell as efficient and reliable clearingand settlement systems, has been a keyfactor in Singapore’s economic success.Network for Electronic Transfers (NETS)is a nation-wide electronic paymentplatform founded in 1985 to establishSingapore’s national PIN Debit scheme,NETS Electronic Funds Transfer at Point-of-Sale (NETS EFTPOS) which propelledSingapore into the age of electronicpayments. NETS is owned by Singapore’slargest banks (DBS (The Development

Bank of Singapore), OCBC (Oversea-Chinese Banking Corporation) and UOB(United Overseas Bank)) and providesinfrastructure, support systems andservices to facilitate electronic banking,services and financial payments. Thecompany commenced operations byoffering a nationwide EFTPOS network,an online debit payment service. Overthe years, NETS has evolved into amulti-service organization, providinga comprehensive range of electronicpayment services such as EFTPOS,

CashBack, Shared ATM service,CashCard, NETSCash and Trade Financeservice.

While it’s too early to say whetherit will be a complete success, India’sAadhaar Enabled Payment System(AEPS) initiative demonstrates itsgovernment’s ambitions to use a singlesource of identification to facilitatepayments. AEPS is a real time paymentsystem based on a unique identification

number. The system allows a personholding an Aadhaar number to carryout financial transactions, includingreceipt of wages, through a Micro-ATMprovided by the Banking correspondentand supported by biometricidentification.

In Kenya, the development of anIntegrated Financial Management andInformation System (IFMIS) began in1998 whilst deployment of the systemto line ministries commenced in 2003.

Unfortunately, the implementation of

IFMIS encountered challenges rangingfrom technology issues, proliferationof independent public financialmanagement initiatives, and lack ofpolitical will, to change managementchallenges, capacity constraints, theexistence of parallel manual systemsand a disjointed and often lessthan optimal internal and externalcommunication infrastructure. Then, inApril 2010, the Government of Kenyainitiated a project to develop a Master

Plan for IT Shared Services across the42 ministries and 175 local authoritiesin the Government of Kenya. This projectidentified eight key opportunity areas,one of which was to re-engineer theIFMIS as flagship for Shared Servicesapplication.

The Ministry of Finance is currentlyworking to re-engineer the IFMISto include the additional financialmodules required for effectivefinancial management; to create

interfaces with external systems suchas debt management, payroll, tax,and budgeting in line with industrystandards; and to plan for deploymentof the system across all ministriesand counties. Furthermore, the PublicFinancial Management Act 2012established a national Treasury SingleAccount (TSA). A TSA is a “unifiedstructure [which] allows the governmentto have a consolidated view of itsavailable cash resources”. The primary

objective of a TSA is to ensure tightercontrol over government finances byproviding clear end to end traceabilityof transactions and therefore ease ofreconciliation.

This increased control isimportant in the context ofidentifying and reducing leakage,and to increase efficiency andtherefore reduce the cost ofeffective financial management.


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Integration

Observations from the current-state processassessment indicate poor IT collaboration acrossgovernment, reflecting the lack of integrationbetween systems both within and across MDAs.

This lack of integration leads to delaysin the payment process and also makesthe process vulnerable to errors and

leakage. There is a clear opportunity toestablish a more coordinated IT strategywith some guiding principles to avoidsituations where new systems areprocured that do not or cannot easilyintegrate with existing systems. At thesame time, existing legacy systemscannot be neglected and there needs tobe a strategy for effective utilization ofthe existing systems in place.

Interoperable systemsenable us as consumersand merchants toconfront pressingchallenges such asrising electricity costs,demand for greaterreliability, and concerns

over security.

While there are a broad range ofbenefits tied to interoperability. Benefitsto the financial system include:

• Financial efficiencies and

savings for operations

• Lower investments for ecosystem

players and transaction coststo the customer

• More options that will provide

savings for users

• Greater financial security and

independence for the nation

• New product and service

innovation opportunities

• New product innovation

opportunities for devices

In Kenya today there is some integrationbetween the mobile money operatorsand the banks offering money transferfrom the bank to the mobile moneyaccount and vice versa. Likewise, themobile money and retail merchantsystems are integrated, offering utilitybill payments as well as payments for

retail transactions via mobile money.

Interoperability between the variousswitch networks has improved in recentyears, with the collaboration betweenthe two primary domestic switching

and ATM networks - Kenswitchand PesaPoint - allowing users ofall Kenswitch, PesaPoint or Visa/MasterCard cards to use any of theATMs or POSs on the two networks.However, only partial interoperabilityhas yet been achieved between switchproviders, POSs, ATMs and branches.The various elements of the paymentsystem are typically linked eitherthrough direct point-to-point links,

or via switches utilized by the bankseither individually or as part of a largerconsortium, such as a country’s bankers’association. In Kenya, there are manysystems that do not speak to each otherat all, or which lack interoperabilitysuch that customers of one systemcannot access a payment point ofanother network, thus limiting customerconvenience and preventing realizationof the full benefits of having largenetworks. There are also some limited

forms of bank connectivity with themobile money networks, although fullinteroperability has not been achievedhere either.

The Kenya Bankers Association (KBA),with the guidance and support of theCentral Bank of Kenya, is currentlyworking on an interoperabilityproject specifically focused on anational switch. Although there ispartial interoperability betweenswitch providers, POSs and ATMs, fullinteroperability hasn’t been achieved.The government today recognizes thisgap and does not want to see separatepublic and private national switchingsystems in Kenya.

In addition to the national IFMIS andthe new TSA, Kenya also has a separatefinancial management system – theLocal Authorities Integrated FinancialOperations and Management System(LAIFOMS) – which is currently used by

local authorities. It is understood thatwith the move to devolved governmentin 2013, the IFMIS will be deployed tocounty governments and is expectedto be integrated with the LAIFOMS,although this is far from confirmed.

The Government of Kenya, throughthe Directorate of e-Government,has built a Government Data Centre(GDC) for processing and storage ofgovernment applications and data.The Data Centre is connected to the

Government Common Core Network(GCCN) that links government ministries,departments and agencies (MDAs). TheGDC aims to provide solutions to meetthe growing storage and processingneeds within these MDAs’ silo data

centers; ensure security of governmentinformation and, at the same time,promote efficiency in the managementof servers across the government. Thisis an extremely critical element froma digital payment perspective, with

government’s ownership of the GDCmaking it even more important to lookto government as the key enabler ofdigitization.

Payment Processing (Cont)


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As outlined above, the government has theopportunity to increase the effectiveness ofdigital payments by: introducing measuresto increase citizen and consumer confidence;

encouraging interoperability to increaseease, and reduce cost of payments; and byexpanding access to, and uptake of digitally-based financial tools and services.

This chapter looks at some of thecritical long and short term needs inorder to facilitate digital governmentpayments in Kenya. Over the course of

this study and in meetings with variousdifferent stakeholders at different levelsof government, three clear themesemerged:

• Top-down leadership is critical

to drive the structural changesrequired to govern the digitalpayments landscape effectively.In particular, in the context of thecurrent political situation in Kenya,a new administration and the

moves to devolve power to countygovernments, there is a significantopportunity to build political supportfor a new approach which will drivethe effectiveness of digital payments.The first part of this chapter supportsthis strategic view by presentingselected estimates of the potentialeconomic benefits that could beachieved through digitizing.

• This study also identified that many

MDAs are already making movestowards digitized payments withvaried levels of success. In parallel

to the top-down approach, there isan opportunity for the governmentto support and guide these earlyadopters to ensure that the benefitsof digitizing can be fully realized.

• Lastly, we consider the importance

of incentives to ensure that differentstakeholders properly adapt tochange. Understanding that whatmotivates people’s behaviors in thecontext of government payments is

critical to design a future in whichcorruption and leakage is eliminated,allowing Kenyan society as a whole tobenefit from digitizing payments.

Chapter 3

Driving Change

through Digitization


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The Case for Digitizing

The case for digitizing is demonstrated throughthe associated economic benefits.

These benefits are corroborated by various datasources: publicly available reports, findingsfrom interviews with over 30 stakeholders inseven Kenya Government payment processareas, relevant MDAs and private sector

representatives, as well as global case studiesfrom developed, and developing countries.

This section outlines four ways in which

increased usage of digital paymentsdrives economic growth. The identifiedtransmission mechanisms are: increasedgovernment revenues, efficiency gainsthrough process improvements, putting‘loose change’ back into circulation,and providing a potential revenueopportunity for the informal sector.

This is not a detailed economicanalysis and it is important to notethat in order to realize these benefitssignificant investment is necessary toimplement the necessary process andorganizational changes, supportingtechnology and infrastructure.

Figure 5: The case for digitizing payments; Indicative estimates of benefit to government

Note: the above figures do not take into account the time, effort and investment required to achieve benefits. The figures givenare projectedannual estimates but do not take into account the lead time to arrive at these benefits. In the case of the informal sector, it is unrealistic toexpect that the entire informal sector could be formalized.

TransmissionMechanisms

Potential AnnualOutcomes

Value Estimate Methodology

Examples of only partialdigitization of payments showpotential for government cashrevenues (36%) to increase by182% (average of State Law

Office (SLO) and CCN processenhancements).

Estimate is low – electronicimprovement is minimal; a moreholistic optimization approachoffers greater potential.

Estimate is low – processoptimization savings for theCity Council of Nairobi (CCN)collections only, not for othergovernment departments.

imate is low – the calculation isbased on the impact of increasedcard usage only.

Estimate is low – it does nottake into account other revenuepotential from the informal sector,such as licenses and permits; thereis no access to real income figures.

KES 232 Billion($2.7 Billion)

KES 5.7 Billion($65 Million)

KES 1 Billion($11.7 Million)

KES 275 Billion($3.2 Billion)

Annual revenue afterformalization, which isunrealistic in year one

Increased governmentrevenues

Efficiency gainsthrough processimprovements

Adding ‘loose’ changeto the economy

Harnessing economicvalue of the informalsector

Potential for 80% savings throughdigital interactions. Sample CCNprocess spends 60% revenueson making collections; digitizingcreates potential to make 80%savings on this 60%.

Increase consumption leads to0.035% annual increase in GDPfor every 1% increase in cardusage.

Informal sector has potentialto bring in KES 275 Billion inadditional government taxrevenue.

Increasingelectronicpaymentsdrives economicgrowth through


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Increased Revenue

Inefficient procurement, budgeting andrevenue reconciliation systems create a hugefinancial burden for governments worldwide,Kenya being no exception.

The Treasury estimates that theimplementation of a newly re-engineeredIFMIS, despite implementation androllout issues, will save the country

roughly KES 70 billion ($802 million)annually.26 In addition, better integratedfinancial management will meanthat monetary disputes or corruption

scandals, such as the KES 4.2 billion

($46 million) missing from the Ministryof Education in 2011, will be able to beidentified faster and those culpable moreeasily traced. Beyond these Governmentto Government (G2G) and Governmentto Person (G2P) transactions managedthrough the IFMIS, small changesin government collections, such asautomated receipting or limits on thevalue of cash payments, have led tosignificant increases in revenues.

State Law Office (SLO):

Organization

The Registrar of Companies,part of The State Law Office,is charged with registrationservices including businessnames, adoptions booksand newspapers, societies,companies, deeds, as wellas other agreements andorganizations.27

In 2007, SLO introduced arequirement for all receipts tobe scanned when issued. Thepaper receipt can be comparedto the scanned original later inthe process in order to confirmpayment and avoid fraudulentreceipts.

The SLO was facing seriousproblems with fraudulentreceipts being issued for BusinessRegistration payments.

The introduction of the newreceipting mandate led to a243% increase in revenues simplyby reducing the opportunity forcounterfeit receipts. Revenuesincreased from KES 35 million($401,000) to KES 85 million($974,000) from 2007.

The Situation The Intervention The Impact

City Council of Nairobi:

Organization

The City Council of Nairobi(CCN) is the local authoritygoverning the city of Nairobi,responsible for collecting avariety of municipal fees,including those related to

land rates, markets, parking,advertising, single businesspermits, and health and hygiene.

Introduction of digital receiptingfor seasonal parking, and pre-printed receipt booklets for dailyparking to avoid fraud.

The CCN recognized seriousleakage in the collections processfor daily parking, as fake receiptswere being issued.

Increased monthly revenues by121% for parking collectionsfrom KES 24 million ($275,000)in 2007 to KES 29 million($332,000) a year later.


The examples show that partialdigitizing of the collections processcan increase revenues by an average of182%; this equates to KES 232 billion($2.7 billion) based on Kenya’s cash-based payment collections for 2012.28 Based on the current interest rates of9.5 percent29 in Kenya, the opportunitycost of not collecting the additionalKES 232 billion ($2.7 billion) translatesyearly to KES 22 billion ($253 million)if properly invested. In summary, not

collecting additional revenues as aresult of a simple process changeamounts to a total potential loss of KES254 billion ($2.9 billion), or 32% of allgovernment revenues in Kenya.

There are other indications of theincreased revenues available as a resultof digitizing of payments. The City

Council of Nairobi’s ICT departmentclaims that only one third of the totalpotential revenue from advertisement

fees is currently being collected;other sources suggest that theimplementation a new Ad ManagementSystem which includes an electronicpayment component could increaserevenues from advertisement fees byup to five times.30 The following sub-sections take a closer look at sourcesof leakage and missed opportunitiesto demonstrate where these increasedrevenues will come from.


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Missed Opportunities

Leakage

These are cases where a person or business doesnot pay because the transaction fees are too high;the process is too complex; the points of sale arenot easily accessible (i.e., paying at a particulargovernment office); or the incentive is too low.

Examples include business registration,and licenses and permits where legalstanding may be perceived as lessconvenient than remaining ‘informal’.In the case of personal tax collections,while new initiatives have been put inplace by the Kenya Revenue Authority

(KRA), there are many citizens who stilldo not pay taxes due to the difficulty ofpayments in terms of effort, time andcost. The same applies to parking fees atthe City Council of Nairobi where longqueues reportedly often deter citizensfrom making payments – citizens would

rather take the chance of getting a fine.

Similarly, loss in advertising fees dueto the difficulty of payment leads tosignificant loss of revenues for a citycouncil – KES 2.6 billion ($45 million) inthe case of the City Council of Nairobi.

NOTE: These additional revenueopportunities are not called out as partof the larger KES 232 billion figure forincreased government revenues, sincethey are included as part of the 36percent of cash payments. However,these figures demonstrate that thepotential impact may in fact be higherthan estimated, making the increasedrevenues estimate low.

Leakage refers tofunds which shouldbe collected byGovernment but areinstead diverted atpoints along thepayment process.

Typically this occurs when people,businesses and government employeestake advantage of weaknesses in thesystem.

In the case of the State Law Office,tightening up the receipting system– requiring all receipts to be scannedin order to avoid fraud – led to a 243percent increase in revenues in justone year. At the Ministry of Agriculturesystems and programs were also abused,

with funds and materials providedto citizens used inappropriately – for

example, seeds and fertilizer were soldrather than planted. This led to greatersupervision by program coordinatorsand the introduction of strictereligibility requirements.

Considerable anecdotal evidence existsof government employees operatingmultiple receipt books in order to divertfunds. The City Council of Nairobireports fake receipts issued for landrates and parking fees, with a drop off

in the latter since a new receiptingprogram was put in place.


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Efficiency Savings throughProcess Improvements

Digital interactions save money, costing 80percent less than non-digital interactions.In 2012, the City Council of Nairobi collectedKES 45 million ($516,000) through parkingfees in Nairobi alone.

It estimates that 60 percent of itscollections are spent on administrationto collect those fees. Digitizing thispayment process could lead to savingsof up to KES 22 million ($248,000)for the CCN for parking alone. If this

figure were to be extrapolated to allCCN revenues of 11.8 billion ($135million), 80 percent savings on 60percent of revenues equates to KES5.7 billion ($65 million). With digitaltransactions, the additional cost of

cashiers, manual reconciliation of

payments, and transportation andtime, are greatly reduced or eliminated,allowing government to provide thesame services but at a reduced cost.

There are persuasive examples fromacross the globe of how government andprivate sector entities have achievedclear process efficiencies throughdigitization. The following are examplesof process optimization where the costof operating a particular process wasreduced, enabling the organization tofree up resources, and redeploy budgetand personnel.

Service Canada:

Organization

Service Canada was establishedin 2005 to serve as a gatewayfor government services andinformation, making theseavailable through multiple

channels, including mobileoutreach centers for hard-to-reach areas.

Canada implemented a “one-stop shop” for governmentinformation and services to savecosts and help redeploy resourcesto more ef fective government

posts.

Surveys indicated increasedcitizen demand for a single accesspoint to government informationand services as opposed to thetraditional approach in which

citizens had to deal individuallywith many departments, eachwith its own distinct programs,delivery channels and quality ofservice.

Cost savings of KES 25 billion($283 million) were achieved inthe first year by streamliningand automating processes, andreducing fraudulent benefit

payments. Government agencieswere able to focus on developingand improving policy andprograms, while Service Canadawas free to specialize in thedelivery of those initiatives.


Online Business Licensing Service (OBLS):

Organization

The Online Business LicensingService (OBLS) was createdin Singapore to increaseprocess improvement andinteroperability between theseveral government institutionsfrom which business licenses areissued. Singapore has 130,000SMEs and 40,000 start-upsannually.32

The Ministry of Trade andIndustry in Singapore created theOBLS as an innovative, business-friendly and comprehensiveservice meeting all the licensingneeds of businesses in Singapore.

Poor delivery of customer servicedue to existence of variouslicensing agencies with silostructures, processes and servicestandards.33

The process was a bureaucraticpuzzle for businessmen whodid not know which agency toapproach, resulting in wastedtime going to the wrong agencyand filling out manual forms ateach one.

Reduction from 21 daysto eight days for averagelicense processing time afterreengineering for removal ofbureaucracy. 34 License feeswere reduced significantly: forexample, company incorporationbecame a flat fee of S$300 frombetween S$1,200 and S$35,000depending on company size; aliquor license decreased to S$800from more than S$2,000.35 Time was reduced: employerregistration went from three daysto 15 minutes.



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Adding ‘Loose Change BackInto the Economy

A recent report showed that globally, between2008 and 2012, increased usage of electronicpayments added $983 billion in economic growth.

In emerging markets, this increased use ofelectronic payments contributed to 0.8 percentgrowth in GDP.36

Digital payments transactions are a

means of putting ‘loose change’ backinto the economy, making sure everycent is accounted for. Globally, real GDPhas grown on average by 0.2 percent ayear beyond what it would have withoutcard usage. An increase in payment cardusage of just 1 percent drives a 0.035percent increase in GDP. For Kenya,0.035 percent of GDP amounts to KES1 billion ($11.7 million). With a greateruptake of card usage, and an increasein usage of other forms of electronicpayments, we may expect this figure to

be higher.

Electronic payments are cheaper and

more convenient as consumers do notnecessarily need to go to an ATM towithdraw cash or count cash at thepoint of transaction. For a merchant,cards often result in decreased labordue to ease-of-use, faster and easierreconciliation and through the useself-service payment points. For travel,electronic payments are safer thancarrying cash over long distances.Moreover, electronic paymentsare the primary means of globale-commerce payment. For tourism,

electronic payments provide increasedpurchasing power to tourists whencrossing boarders throughout the globe.Third highest after agriculture andmanufacturing, tourism amounts toroughly 10 percent of Kenya’s GDP.37

The cost of cash as a mode of payment

is also worth noting. The cost ofprinting money, cash movement andlogistics, cash processing equipmentand maintenance, cash storage, andemploying and managing the securityand personnel to deal with cash isconsiderable. With KES 283 billion ($3billion) of government payments madein cash per year, moving to digitalpayments could amount to a potentialsaving of KES 473 million ($5 million)by the government simply in terms of

printing less money.

38

This is based on the printcost of 1,000 shillingnotes so it does notfactor the reality thatmost payments are madein lower denominations.


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The Economic Value ofthe Informal Sector

The informal sector, in Kenya is currently valuedat KES 275 billion ($3.2 billion) in terms ofpotential tax revenues.39

With the right structural and processchanges, there is an opportunity toharness the economic value of thissector by removing some of the barrierswhich discourage formal businessactivity (bureaucratic processes andred tape; complexity and opacity of

fee which enables abuse by collectors).Removal of these barriers couldencourage businesses to formalize theiractivities and in turn obtain greateraccess financial services such as lines ofcredit to support expansion.

Kenya’s Vision 2030 has given priority tothe informal sector. It seeks to deal withthe informal sector through measuresaimed at raising productivity andincreasing jobs, owner’s incomes andpublic revenues.

The expected outcome would thencontribute to a rise of national savingsfrom 17 percent in 2006 to about 40percent in 2030. In order for the sectorto achieve this objective, it is crucialthat measures be taken to streamlinethe administrative barriers through

digitization of government processes.

The potential benefit outlined heredoes not take into account thechallenges associated with formalizingprocesses, particularly in the contextof digitization. This issue is by nomeans purely a question of payments;it requires a far more holistic approachto labor market reform. However,processes can be enhanced to providechecks and balances in the businesssector that could give the government

a more transparent view of monetarytransactions and the ability to identifythe parties involved.

Digitizing paymentprocesses is just one stepon the road to harnessingthe potential value ofdynamic, efficient andambitious entrepreneurswho are currentlyconstrained by lack of

access to information,financial services, landand infrastructure, skillsand technology, licensingand other trade, laborlaws, and forward andbackward linkages.


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Supporting Early Adopters

Over the course of thisstudy several examplesof early adopters ofdigital paymentswere identified.

The successes of some of these

initiatives are impressive, ranging fromincreases in revenues by almost 250percent to reduction in payment timesby up to 80 percent.

While specific recommendations werebeyond the scope of this final study,this section highlights opportunitiesto sustain, increase and extend thesebenefits with and beyond individualMDAs. This section highlights specific

initiatives currently underway in Kenya,

providing insight into lessons learned.In all cases, clearer guidance andsupport for the early adopters wouldhelp them to realize the full potentialbenefits of digitizing. This includesproper direction on business processre-engineering, change managementstrategy and implementation of anappropriate support structure (e.g.,properly trained staff, IT helpdesk;and a call center).

Faini Chap Chap (Judiciary of Kenya):

eConstruction Permits System (City Council of Nairobi):

Faini Chap Chap is an initiative to enable offenders to pay court fines via mobile money.Pilots are currently taking place in Milimani and Kibera Law Courts in Nairobi for traffic offenses.

The City Council of Nairobi implemented an eConstruction Permits System enablingapplication and issuing of receipts for construction permits.

The SituationNeed to decrease heavy timeburden on citizens – fromqueuing to time spent by familyor friends depositing funds in abank and returning with a depositslip as proof of payment for anoffender to be released. Thisapplies to all fines greater than

KES 500 ($6), which is about 98percent of fines.40

The SituationNeed to decrease the time andresources required for the manualprocessing of constructionpermits. Also needed to betterfacilitate businesses through costand time reduction.

The Impact

Eighty percent reduction inpayment wait time41 – theprocess is simplified from takinga couple of days, to hours andnow just minutes. Besidesincreasing revenues, this processchange allowed for a minimumof 83 percent of workers focused

on payment reconciliation to beredeployed to more effectivefunctions across the judiciary,a savings of at least KES 362million ($4 million) per year.

The ImpacteConstruction Permits are nowavailable via an online portal,which has decreased the time andeffort required for applicationand approval. Now only thepayment part of the processneeds to be done in person.Additionally, there is a HelpCenter to support the citizen.

The Intervention

Implementation of a mobilepayments platform wherebypayments can be madeimmediately after a fine isgiven, in person at the courts.If the offender does not haveenough funds in their mobilemoney account, they have the

ability to collect payments frommultiple parties. Transactionsare automatically recoded in thesystem, leading to reduced costsin reconciliation and decreasedmonetary leakages.

The InterventionOnline eConstruction PermitsSystem set up by CCN. Systementails a three-step process fora business: create an account,await verification and makeapplication.

The Opportunity

Unfortunately, the Faini ChapChap program has not beensustainable due to a lack ofsupport in terms of IT skillsand capabilities. There is nocentralized IT helpdesk or callcenter. The program lackssuitably qualified resources to

own and manage the end-to-endprocess.

The OpportunityLack of integration with theCCN’s financial managementsystem (LAIFOMS) mean thatpayments must be made inperson at CCN and paymentrecords transferred manuallybetween systems. Lack of in-house skills and IT knowledge toproperly define integration (andother) requirements could haveprevented this. In part this is alegacy issue from the fact thatLAIFOMS is custom-developed.However, similar mistakes may be

made with the implementation ofa new custom-developed parkingmanagement system.


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In the case of the CCN, interoperabilityissues surrounding the eConstructionPermit System stem from the LAIFOMSsystem, which was custom developedby a group from the Local Authoritieswhich has now disbanded, posing achallenge regarding development of thesystem. Even so, shortly after developingthe eConstruction Permits System,

the CCN began piloting an eParkingportal. eParking is another custom-developed system that, although stillunder development, is facing similarissues with integration and payments.Guidance and support from governmentleadership would help guide decisionmaking in terms of ICT procurementand implementation, especially withregard to interoperability, retention anddevelopment of in-house knowledgeand skills, and appropriate support

contracts.

Channeling the right support to earlyadopters is critical. Allowing them to failis detrimental to the success of futureinitiatives whereas supporting themwill pave the way for future successes.The types of challenges faced by earlyadopters could be addressed early onwith the right government support. Inthe case of Kenya, there are institutionswhich, to some extent at least, aremandated to provide this kind of

support:

The Directorate of eGovernment42 aims to:

• Provide advice and policy frameworks

• Manage shared security

infrastructure, networks, serversand services

• Facilitate access to eGovernment

services (online, e-mail, Web services,data warehousing and domain nameadministration)

• Develop and enforce ICT standards

for interoperability and cost-effectiveICT infrastructure and services

• Manage ICT projects

(implementation; monitoringand evaluation)

• Monitor emerging technologies

and assess their potential value togovernment, and

• Design and implement Government

of Kenya ICT capacity building

initiatives

In addition, the Kenya ICT Board isfocused on rapidly and innovativelytransforming Kenya through promotionof ICT for socio-economic enrichment ofsociety. Its mandate is four-fold:

• Marketing: positioning and promoting

Kenya as an ICT destination (locallyand internationally), especiallypromoting Business ProcessOutsourcing (BPO) and Offshoring

• Advisory: advise the government on

all relevant matters pertaining to thedevelopment and promotion of ICTindustries in the country

• Capacity Building: providing

government and other stakeholderswith skills, capacity and fundingfor anchor implementation of ICT

projects for development, and

• Project Management: coordinating,

directing and implementing anchorICT projects in development

These organizations are already playingkey roles in modernizing government.However, there is an opportunity,particularly in the context of thecurrent political restructuring, tostrengthen the government’s abilityto provide the required IT support and

guidance to ministries, departmentsand agencies. A clearer strategy androadmap for digitizing governmentpayments is required to ensure that theorganization(s) guiding this have theresponsibility, authority and capacity tooptimally perform this role.

From a process perspective, a newBusiness Process Re-Engineering(BPR) Office has been created tosupport all other reform initiativesby focusing on redesigning processesbased on customer needs and globalcompetitiveness for better servicedelivery and sustainable results.

Currently, Kenya is ranked at position126 out of 138 in the World Bank DoingBusiness Index (WBDBI). This rankingis mainly due to the lengthy processesand procedures inherent in deliveryof services. A reduction in the time ittakes to set up a business of just 10days can lead a 0.3 percentage pointincrease in the investment rate and

a 0.36 percent increase in the GDPgrowth rate in relatively poor and well-governed economies. BPR is essentialgiven the potential for generation ofsignificant returns through sustainableimprovements – e.g., 20-50 percentreduction in turnaround time tocitizens, 10-45 percent increase incapacity, a 5-20 percent improvementin productivity, and 30-75 percentreduction in setup time and machinedowntime.

Simple automation of aninefficient process is more likelyto embed associated processinefficiencies further than toyield desired results. In theory,business decisions should driveIT decisions. However in this dayand age, business managers areoften unaware of the optionsavailable to them with new

technologies. As such, businessprocess reengineering and processautomation should go hand inhand. The government BPR systemand the ICT initiatives work inisolation today; a more holisticapproach would ensure that thegovernment is able to realize thebenefits of digitizing.


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Incentivizing Change

A review of digitalpayments would beincomplete withouta discussion of thebehavioral changesrequired to ensureuptake. One of the mainchallenges at present

is that citizens andbusinesses are oftenincentivized to by-passlengthy and inefficientprocesses while poorlypaid governmentemployees are happy to

take advantage of theholes in the system.

It is often the case that citizens prefer

paying these middlemen rather thanfollowing the official process as theyoften provide a quicker, cheaper option.Proper incentives must be identified toaddress this issue or governments riskfailure of costly digitization initiatives.The incentives will be different fordifferent stakeholders.

Moreover, government’s ability tointeract with the private sector andpromote behavioral change throughincentives makes it an extremelyimportant enabler for paymentdigitization. Leading practice examplesdemonstrate the potential forGovernment to take clear measuresto encourage changes in behavior andincrease adoption of digital payments.

In South Korea, the governmentinstituted incentive programs toencourage use and acceptance ofpayment cards through discounts on

VAT to merchants; in turn the merchants

would become champions of e-payment.This has made South Korea the secondmost active country in terms of cardusage per capita, after the UnitedStates. This is a good example of agovernment deliberately institutingan incentive program that saw allmerchants, even small one-man stores,speedily requesting banks to providethem with a PoS terminal. Anotherinteresting initiative to encourageadoption of digital payment instrumentsduring the Asian financial crises in the1990s was through a monthly lotteryfor around $1 million. People were

automatically entered simply by making

a Visa or MasterCard transaction. Anyfuture steps with regards to policiesmust recognize the importance ofoffering financial products thatencourage change in user behaviorand boost adoption of digital paymentservices.

A government also has the power to setmandates around the use of specificpayments methods. One such exampleis the Kenyan Judiciary. In 2005, theJudiciary mandated that all traffic finesgreater than KES 500 ($6) be paid atthe bank. For a fine that is less thanor equal to KES 500 ($6), the offendercan pay cash directly at the courts.Revenues for the Judiciary went up by160 percent from 2005 to 2009 becauseof this initiative.

Making processes easier, moreaccessible and affordable will help todeter the payers from taking advantageof loopholes. In parallel, more serious

consequences for those who continueto abuse the system, in addition toa restructuring of the performancemodel to better align with governmentobjectives, would help to ensuregovernment employees enforce theagreed processes.


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The research for this study was drawn

primarily from in-person interviewswith a range of government and non-government stakeholders. This hasbeen supplemented with input fromsecondary research materials rangingfrom published journals to newsarticles and blogs, and an online citizenquestionnaire facilitated by the KenyaICT Board.

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Central Bank of Kenya, Presentation atDigitizing Government payments workshop(Kenya School of Monetary Studies),February 2013.

Communications Commission of Kenya.“Quarterly Sector Statistics Report”. N.p.:July – September 2012. CCK: 11. Web..

Doing Business in a More TransparentWorld. Rep. The International Bank forReconstruction and Development / TheWorld Bank, 2012. Web.

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“Interview with Kibera Law Courts, Nairobi.”Personal interview with Paul Matundura(CEO), ICT and Accounts Officers.23 January 2013.

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Full List of Sources


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References

Copyright © 2013 Accenture

1. Karambu, Immaculate. “Kenyan Shoppers Slow toSwitch from Cash Transactions”. Business Daily, 26Oct. 2010. Web. 28 March 2013.

2. Accenture. “Kenya Payments Research: Findingsfrom a sub-set of seven government payment areas”.Findings presented at Digitizing Government PaymentsWorkshop (Kenya School of Monetary Studies). 20February 2013.

3. Accenture. ““Kenya Payments Research: Findings froma sub-set of seven government payment areas”.

4. “Implications of Devolution for the Health Sector.”World Bank Fiscal Decentralization Team, March 2012.Web.

5. Agency Banking: An agency model works througha banking agent. A Banking agent is a retail outletcontracted by a financial institution to processclients’ transactions. Rather than a branch teller, itis the owner or an employee of the retail outlet whoconducts the transaction and lets clients deposit,withdraw, and transfer funds, pay their bills, inquireabout an account balance, or receive governmentbenefits or a direct deposit from their employer.Banking agents can be pharmacies, supermarkets,convenience stores, lottery outlets, post offices, andmany more.

6. KEPSS: Kenya Electronic Payments & SettlementSystem; Very high value transfers, typically bank tobank, must be routed through Kenya’s real time grosssettlement system (RTGS) ; www.centralbank.go.ke/index.php/kepss

7. ACH: Automated Clearing House is an electronicnetwork for financial transactions that processes largevolumes of credit and debit transactions in batches.

8. Hurst, Lucy, and Hilary Ewing. “2011 GovernmentE-Payments Adoption Ranking.” EconomistIntelligence Unit (2012): 11.

9. Communications Commission of Kenya. “QuarterlySector Statistics Report”. N.p.: July – September 2012.CCK: 11. Web.

10. Communications Commission of Kenya. “QuarterlySector Statistics Report”: 11.

11. Kenya. Central Bank of Kenya. Rates and Statistics:

Forex Exchange Rates. N.p. Web. February 2013.12. Communications Commission of Kenya. “QuarterlySector Statistics Report”: 22.

13. Central Bank of Kenya, Presentation at DigitizingGovernment payments workshop (Kenya School ofMonetary Studies), February 2013.

14. Central Bank of Kenya, Presentation at DigitizingGovernment payments workshop (Kenya School ofMonetary Studies), February 2013.

15. Financial Ombudsman Service . N.p., 28 Feb. 2013.Web. / “Who Can the Ombudsman Help?” FinancialServices Ombudsman’s Bureau of Ireland. N.p. Web.

16. Kenya. Central Bank of Kenya. Development ofPayments System in Kenya. Presented by StephenMwaura at Digitizing Government PaymentsWorkshop (Kenya School of Monetary Studies). N.p.,20 February 2013. Print.

17. Kenya. Central Bank of Kenya. Development ofPayments System in Kenya. (1,04

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