The relationship between electronic payments and operating costs of commercial Banks in Kenya

Abstract

This study was a research whose objective was to determine the relationship between electronic payments and commercial banks operating costs in Kenya. Secondary data on commercial banks operational costs, assets and transactions processed through the three key payment systems in Kenya including the Real Time Gross Settlement (RTGS) System, the payment card system, and the Automated Clearing House was obtained from the Central Bank of Kenya’s Bank Supervision Department and the National Payments System Division. The study was conducted using census survey. The population of interest for the study comprised the 43 banks in Kenya as at end of December 31st, 2011. Data on commercial banks operating costs, number of transactions through the three payment systems studied, and commercial banks assets was obtained from the Central Bank of Kenya’s Bank Supervision Department using the data capture form in appendix IV. Data was analyzed using e-views to generate the necessary descriptive statistics used to interpret the relationship between operating costs and electronic payments for commercial banks in Kenya. From the findings, the study found that commercial banks operational costs increased at a decreasing rate with increased volume of transactions through the RTGS System which is wholly owned by the Central Bank of Kenya. This reflected increased efficiency associated with the adoption of secure and faster mode of payments. The study also revealed that ownership of a payment system had an impact on operational costs in the sense that where the system is owned wholly by the central bank, commercial banks can use that system to minimize on operational costs. The study therefore recommends use of outsourced payment systems by commercial banks as opposed to proprietary systems which do not help minimize costs. Outsourced payment systems refers to third party payment systems like Kenswitch, PesaPoint or even KEPSS whose ownership is somehow delinked from commercial banks. On the other hand, proprietary systems are those payment networks (systems) whose ownership is that of a particular commercial bank. For example, most big banks in Kenya have their own ATM networks for which they spent a lot of resources to maintain.