Why Online Banking Fails to Flourish in Ethiopia

In the past, technological progress in the banking industry was steady and slow. But beginning from the 21th century that trend has changed and we are looking at progress every now and then. Beginning from the core banking system which enables branches to be interconnected in their activity and exchange of information, to mobile and internet banking, technology is enabling clients to conduct financial transactions from anywhere. Technology also becomes the main means of gaining a comparative advantage and a source of efficiency for the banks. It also helped banks to increase the penetration of mobile and internet banking service, which is a plus for them to reach customer in a simplistic way.The ultimate goals of banking technologies are to make financial transactions easy and convenient for the customers while increasing the banks’ accessibility and profitability. To realize this, the banking industry is in a continuous wave of technological progress and adoption.

In Ethiopia too, most commercial banks are trying to break through by aligning technology to their customer service and becoming more accessible. Providing internet and mobile banking services is therefore becoming a common trend. Almost all banks serve their customers through Core banking system, which makes transaction among branches possible. ATM service is becoming common in most urban areas while many banks are placing point of sales (POS) terminals in many places. Agent banking is also gaining a foothold in urban and rural areas. All this shows that the banking sector in particular and the financial industry in general is in a state of continuous and steady progress.

But all of this technological advancement hasn’t broken the traditional banking practice of carrying cash and going to bank branches every day. So, the question is why have all these technologies failed to change the traditional banking system?

Online banking technologies have three main tasks: make payments, transfer money and control financial transactions.

Payment and transfer of money from one party to another is possible in Ethiopia when the two parties have an account with more than one of the banks operation in the country. Since there are seventeen commercial banks in the country, however, the probability of having an account in a particular bank is low. Therefore, payment and transfer of money is carried out mostly by carrying physical cash. The online banking in Ethiopia only allows transfer and payment of money within the same bank which is very rare.

What is left is controlling day to day transaction, which is the main function that online banking is serving currently.
It is unfortunate that with all the investment in online banking infrastructures the technology only allows monitoring one’s financial transaction as well as cash transfer and payment within the same bank. On the other hand, millions of transactions and payments continue to be conducted in a traditional manner with physical movement of cash and checks from one bank to another. This results in higher costs for the banks to manage the cash coming in and out, high risk for customers and slow transactions.

So the main reason why online banking service is underdeveloped in Ethiopia is mainly because of its limited applicability, which is the result of the banks’ fear of integrating their online banking activity. Banks in Ethiopia are revolving around their axis fearing liquidity problem and deposit outflow, which is unreasonable. In principle if the customer wants his money, he will withdraw it by any means, whether online bank to bank transfers are allowed or not. The difference is the transfer will not be swift. They can delay it for days for many reasons, creating an inefficient financial system and frustration for customers.

The traditional way of payment and cash transfer is a costly process for the banks too. Their cash management costs will be very high and they make their investment towards online banking technologies idle. For the government, physical cash movement results in high cash printing costs because the notes become obsolete within a short time.

All these costs should become a reason for the responsible institutions both from the government and banking industry as well as clients to push for online banking integration among banks. At least they can begin this with small daily transfer and transaction limit and progress with time.

6th Year . June 16 – July 15 2018 . No.63

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