CHAPTER ONE INTRODUCTION

1.1 Background of the Study

Mobile banking in Sub-Sahara Africa offers millions of people a potential solution to financial inclusion solely through access to a cell phone, this has been truly experienced in Kenya but majority still remain outside the financial mainstream. The adoption of mobile banking has made the basic financial services more accessible and convenient to millions of customers.

The term mobile banking is used to refer to the access of banking services and facilities that use an electronic device such as Personal Digital Assistants (PDAs) and cell phone (Porteous, 2006). However, this term has competing labels and definitions when it comes to the discussion of financial services through mobile phone networks. This study uses the term “mobile money” to refer to the convergence of mobile telephone and financial services.

According to Tiwari, Buse, and Herstatt (2006), mobile banking is any form of transaction that entails the transfer of ownership of rights to use a good or service, and is initiated or completed by using a mobile device through an electronic device via computer-mediated network. Furthermore, mobile banking is the delivery of bank-related financial services with the help of a mobile telecommunication device(s). The usage of mobile telecommunication devices to offer banking services is what encompasses mobile banking. For example, instances of customers using their mobile phone or a PDA to withdraw money from their bank’s (Saleem & Rashid, 2011)

In the developed and developing countries, the cell phones have become the primary form of telecommunication (Bhavnani, Janakiram, Chiu, & Silarszky, 2008). There has been an unprecedented financial revolution in progress witnessed in the last decade. It is not happening on the streets of London or under the skyscrapers of New York. It is not taking place in Frankfurt or Shanghai but rather in Nairobi and the markets of Kisumu (Mas, 2010). In the process it’s creating considerable uncertainties and ripples in the financial sector as well as in the telecommunication since it exists in-between the two industries; it’s, therefore, imperative that a company finds a balance on how to handle this scenario.

Kenya has experienced dramatic changes in the financial sector over the last decade. These changes in the financial sector have been facilitated by factors including; policy and regulatory reforms, development in the wider economy, increased competition and new technology. The country currently has a mobile penetration level of 87.3% down from the previous rate in the 2015/2016 FY of 90%, a decrease of 2.7% percent recorded in the preceding quarter. However, compared to the last financial year, there was a growth of 6.1% increase in mobile penetration which is good news to mobile money penetration as there is a positive correlation between the two.

Figure 1.1: Illustrates the trends in mobile subscriptions and penetration levels.

Source: CA, Operators’ Returns, Penetration has been computed using the latest population figure of 44.2 million as per Economic Survey 2016.

As witnessed in the financial quarter under review, mobile subscriptions stood at 38.5 million down from 39.7 million subscriptions registered in the previous period, indicating a decline of 3.0 percent. The change was as a result of the revision of mobile subscriptions data by Telkom Kenya Limited. The figures however when compared to the similar period of the previous financial year, a growth of 1.9 percent was realized.

This exponential growth in the industry requires that a firm should design coordinated relationships with other actors in the business environment so as to access the much-needed resources. According to Hakansson and Snehota (2007), they argued that a business is not an island and thus there is an imperative need for companies to be involved in a long-term relationship, keeping in mind how they relate within and without the enterprise. A company ought to understand how the business environment ultimately affects the internal operations of the enterprise and be able to act amicably in response to barriers and opportunities presented (Aaker, 2006).

Companies are formed to either produce a product or deliver services that meet demands of customers. In the production of goods and services companies perform different functions. These include production, marketing, financial activities, and the management of human resources.

Organizational characteristic is an open question with few studies using consistent definitions and measures (Kirby, 2005). The usage of the word organizational characteristics refers to the factors that have an impact on a firm’s performance. Such factors include the age of the firm, size of the firm, organizational culture, the board of directors and ownership form of the company.

Performance is also another type of effectiveness indicator; this goes without saying that it has its advantages and disadvantages. Therefore, it is imperative to distinguishing between organizational performance, and the general construct of organizational effectiveness is paramount (Venkatraman & Ramanujam, 1986).

Organizational effectiveness is a broader construct that encompasses corporate performance, but with footing in organizational theory that entertains other performance goals (Cameron & Whetten 1983). The term performance itself is likely to be somewhat firm-specific: this is because performance measure employed will be dictated by the strategic choices a firm adopts geared towards reflecting the underlying performance constructs (Steers, 1975). The correlation between performance and actions is significantly influenced by the initiatives the firms adopts within and how these are incorporated into incentives and control systems with the particular company. In simple terms, the internal measurement systems used by a business will influence performance at the individual and organizational level (Levenson et al., 2006).

Market segmentation is part of the traditional 4Ps of place, product, promotion, and price that have been used over time to position a firm in a strategic point in a market. The aspect of market segmentation has been written by several scholars (Johnson 1971, Cohen 1988, and Kimandi 2002). Smith (1956), states that market segmentation is the ability to view a heterogeneous market as some smaller homogeneous markets in response to differing customers preferences, attributes to the desires of customers for a more precise satisfaction of their different wants. Wedel & Kamakura (1988) points out that even if a market can be partitioned into homogeneous segments, market segmentation will be useful only if the effectiveness and manageability of marketing activities are influenced substantially while discerning separate homogenous groups of customers.

Kenya’s mobile banking industry is poised for increased changes as a result of competition in the market and the volatility that exists in the market. The industry is services oriented, and hence the customer is the pivot between the company and the other players. Firms having realized the need for value derived from their services, have had to focus on market segmentation practices with the purpose of helping to determine a target market, the preferences and needs of users when developing products, and understating how to deliver the said products to the end users.

The study will be relevant in various ways. Management and policy makers of mobile banking firms in Kenya may use the findings in designing strategies that will assist in identifying customer needs and market opportunities that will help them remain competitive in the industry. It is anticipated that this study will also help management and leaders of mobile banking firms to become aware of the market segmentation practices and their effect on a company’s performance. Importantly, it is expected that when these suggestions are made and applied in the organization, they will enhance improvement in performance.

Besides, it is hoped that the research findings will help the government in formulating strategic policies for effective management and shaping of the industry. This study will contribute to policies formulation that will help promote local mobile banking sector.

The study is also expected to be of importance to academicians in that the knowledge generated will enable other researchers to improve and develop a better understanding of market segmentation in the mobile banking industry and its effect on performance.

1.1.1 Concept of Organizational Characteristics

Organizational characteristics refer to those aspects of the firm that have a negative or positive effect on the performance of a company. They range from the size of the company, the age of the firm, ownership, organizational culture and board of director characteristics, all of which have an impact on the overall performance of the company. According to Kirby (2005), the definition of organizational performance is an open question with few studies using consistent measures and definitions. In management research, performance is quite common as its structure is rarely justified; rather its appropriateness is no matter what form, is unquestionably assumed (Sutton & March, 1997).

1.1.2 Organizational Performance

Organizational performance refers to the degree of achievement of the mission at a workplace that builds up an employee job (Cascio, 2006). Organizational performance comprises three specific categories of firm outcomes; market performance, financial performance and shareholders returns on investment. Therefore organizational performance has become a vital aspect of empirical research in the field of business policy. Researchers often take into account organizational performance when investigating organizational phenomena such as structure, strategy, and planning. Ford and Schellenberg (1982) examined three major frameworks that are frequently used to conceptualize organizational performance. The goal approach seeks a definition based upon explicit goals which can be implied from the behavior of organizational members. The system resource method (Yuchtman and Seashore, 1967) provides a framework to assess organizational performance regarding key internal and external factors upon which organizations depends on survival. The constituency approach perceives the organization as being in existence to benefit both the inner and external constituencies, with organization performance assessment focused on fulfillment of constituent needs (Thompson, 1967).

1.1.3 Concept of Market Segmentation

Kotler, (2001) states that there is a three-step procedure for identifying markets, namely: survey, analysis, and profiling. On the other hand, Mc. Donald (2001) contents the same number of stages for identifying market segments.

Market segmentation states that a company should segment or divide the market in such a way as to achieve a set/niche of users (Howard & Sheth, 1969). This set(s) of users, or sub-segments of the market, would then become targets for the company’s marketing plans. Some have perceived this idea as the process that a company adopts so as to divide the market into distinct groups by wants, needs, taste or behavior for its different services or products (Day, 1984). Instead of providing the same marketing mixes to a wide array of customers, market segmentation enables a firm to design product/service for a particular target market and thus will substantially satisfy customers’ needs better.

Kotler et al. (1999) defined market segmentation as dividing a market into distinct groups of buyers/users with different characteristics, needs or behaviors, who might require separate products/services or marketing mixes. According to Dibbet al. (2001), this is the process of grouping customers in markets with some heterogeneity into smaller, similar or homogeneous segments; the identification of target customer groups in which customers are clustered into groups with similar requirements and buying habits.

The principle aim of market segmentation is to group customers with similar needs and buying/spending behavior into segments hence facilitating each segment being targeted by a unique product and the desired marketing offerings to be developed so as to suit the requirements of different customer segments (Wind, 1978). There is also a primary aim of segmenting, which is to focus on a niche/subset that is most likely to be attracted to the offering. According to Salami and Adewoyi (2008), market segmentation when done properly will maximize returns for the desired marketing expenditure. In essence, a business’ need for segmentation is often determined by the need to match the benefits offered by the product/service and requirements of the customers.

1.2 Mobile Banking Firms in Kenya

The Kenyan government liberalized the telecommunications sector in 1998. At the time the government owned the monopoly firm, Telkom Kenya which was split into various entities to boost competition in the sector. There was a drastic effect as four players were attracted into the market by 2016 namely, Airtel Kenya, Safaricom, Essar Telecom (also referred to as Yu Mobile) and Telkom Kenya/Orange Mobile. The intense competition in the market saw Yu Mobile exit the market leaving three players to compete.

There are currently five mobile network operators in the country, namely; Safaricom, Airtel, Finserve Africa Limited (Equitel), Telkom Kenya (Orange) and Sema Mobile Services. Market share of each company as of September 2016, Safaricom’s Limited market share stood at 69.0%, Airtel had a market share of 17.5%, Telkom Kenya (Orange) at 7.6% while Finserve Africa limited controls 5.9% of the market Sema Mobile, a new entrant during the financial year 2015/2016, recorded a market share below 0.0 percent.

Figure 1.2: Mobile Network Operators market share

During the FY 2015/2016 period, Safaricom Limited’s market share increased by 3.8 % to stand 69.0% from last quarter’s market share of 65.2%. Airtel Network Limited gained 0.9% to reach 17.5% of the market share. Similarly, Finserve Africa Limited (Equitel) marked increase in market share of 0.8% to stand at 5.9%. Telkom Kenya Limited recorded a drop of 5.6% in its market share presence to be at 7.6%. Sema Mobile Services’ market share continued to remain at below 0.0%.

Entrant of new firms into the industry is limited because the sector is highly regulated. A firm is required to make a significant investment with license fees in billions of dollars so as to participate. The Communications Authority of Kenya which is the industry regulated also sets wholesale prices (interconnection rates) and has imposed on the players the disclosure clause, that regulates market promotions by putting it that a company has get a written approval from the authority before launching a product(s).

Due to the hard economic conditions being experienced in the country at the moment mobile subscribers due to price sensitivity, lack loyalty to service providers by having more than one SIM card registered in their names for use depending on the nature of service the customer requires.

Macro-economic forces, coupled with competitive forces that exist in the telecommunications industry, were limited firms’ ability to grow and be profitable. Therefore the evolution of mobile banking in the industry was a big boost for the firm’s in the industry.

The genesis of this mobile banking was that Safaricom launched M-Pesa in Kenya in March 2007. From inception the growth has been tremendous and thus can be termed as the most successful implementation of mobile money to-date. There is no need for a new SIM card or handset because it uses Sim Toolkit (STK) technology, whereby with STK the user has an application on the SIM card which is accessed from the phone’s menu. M-Pesa is quite simple because to send money one hand over cash to a registered agent who in turn credits the recipient’s virtual account.

Initially, Safaricom rolled-out a minute sharing service for her prepaid mobile phone subscriber. The sole purpose of this was so as to enable users to share minutes with friends and family members in rural areas who couldn’t buy prepaid mobile phone scratch cards. However with time Kenyans saw an opportunity of converting the prepaid airtime into currency to pay small bills or settle debts, this, therefore, ended up being used as a ‘surrogate for currency.’

The use of prepaid airtime for surrogate currency created an opportunity space in which Safaricom maximized on by rolling out M-PESA. Safaricom’s executives were confident that growth would be strong in Kenya and later across Africa as a whole. Michael Joseph, chief executive officer of Safaricom, is quoted saying the adoption of M-PESA is like giving users ATM cards without them having to open an actual bank account. Safaricom became the biggest bank in East Africa (Kenya, Uganda, Tanzania, Rwanda and Burundi) within one year of being in operation. This tremendous growth has been phenomenal and has been dubbed as the “big thing” in the mobile banking industry.

After that other Telco’s followed suit. Mobile banking registration is free, same as making deposits into the system. Customers are charged based on the amount of money being transferred for person-to-person (P2P) transfers and bill payments, $0.27 for withdrawals (for transactions under $25) and $0.13 for balance inquiries.

Sema Mobile regards herself as ‘Kenya’s leading community network.’ It majorly focuses on ‘closed-user groups’ such as communities and churches. This platform has the potential of enabling communities to collaborate and connect around the things in which they care about through a customized mobile solution. The company is owned by Mobile Decisioning Africa Group (MODE) a FinTech company that operates in association with Chase Bank. The platform of MVNO is piggybacked by Airtel Kenya Network.

Individual customer accounts are maintained on a server that is owned and managed by the Telco Company, but Telco’s deposit the full value of its customers’ balances in the system in pooled accounts in regulated banks. Therefore while it is the Telco’s company that issues and manages the mobile banking accounts, the accounts are fully backed by commercial banks. However, the company doesn’t pay interest to her customers on their balance in their accounts; Safaricom sets aside a small percentage of the account balance in a not-for-profit trust fund.

Mobilcom German mobile operator acknowledges that mobile banking will be the killer application for the next generations of mobile technology.

1.2.1 Mobile Money Transfer in Kenya

The total number of mobile money transfer subscriptions stood at 31.0 million during the quarter of FY 2016/2017, while the number of mobile money agents stood at 169,698. A total of 400.6 million transactions (deposits and withdrawals) were made during the period valued at $10 Billion. Transactions of mobile commerce were recorded at 247.9 million valued at $4.473 Million. Person to person total value transfers were recorded at $4.745 Million during the quarter review.

Table 1.1: This shows the details of mobile money transfer and mobile commerce services

Table 1.1: Mobile Money Transfer Service