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NewsDay

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Impact of interaction costs in banking

Opinion & Analysis
The term “interaction costs” is considered more accurate than the more familiar “transaction costs”, because the former includes not only the costs related to the formal exchange of goods and services, but also the costs associated with exchanging ideas and information.

I RECENTLY came across an article by John Hagel III and Marc Singer titled Unbundling the Corporation, which I found interesting.

FINANCIAL SECTOR SPOTLIGHT BY OMEN MUZA

One of the things they talk about is interaction costs — the money and time expended whenever people and companies exchange goods, services or ideas.

The term “interaction costs” is considered more accurate than the more familiar “transaction costs”, because the former includes not only the costs related to the formal exchange of goods and services, but also the costs associated with exchanging ideas and information.

The exchanges can occur within a company, among companies, or between a company and a customer, and they can take many everyday forms.

Interaction costs are the friction in the economy. Hagel and Singer contend that all else being equal, a company should organise in whatever way that minimises overall interaction costs.

This got me thinking — by the same token customers should organise themselves in ways that reduce interaction costs — or do they?

Typically, members of the banking public encounter different types of costs in their quest to access banking services.

In this instalment, I outline some of these costs and ongoing efforts from both ends of the bargain to manage them. How are the customers coping and how are banks helping them?

Transport costs

With an average cost per trip of $0,50 on public transport, customers typically have to pay at least $1 in transport costs to and from the bank branch. For motorists, the cost is certainly much more since a litre of petrol costs around $1,35 and parking fees in the city centre are pegged at a minimum of $1 even if you park for only five minutes.

For those who travel from the rural areas or have to make multiple trips to the bank, the costs can be much higher.

Opportunity costs

Whether one works in the informal sector or in an office somewhere, a trip to the bank can come with significant opportunity costs. Instead of travelling to the bank where the possibility of ending up stuck in Kuwait (queue and wait) are very high, one could have been using that time to work and make more money or create future value.

For those in the small and medium enterprises sector who are typically self-employed, one hour stuck in a bank queue could amount to loss of an order or actual productivity, setting them back considerably in terms of earnings.

Miscellaneous costs (food, airtime etc)

In Zimbabwe, it’s not unheard of for bank customers to sleep in queues, especially in times of cash shortages such as the festive season.

During such times, customers may need to buy food and something to drink.

Also, vendors are typically attracted to the queues that are a permanent feature at some banks, so customers end up buying things they never intented to buy in the first place, either out of boredom or sheer need.

Medical costs

Given the typical levels of poor service in most bank branches, a trip to the bank can raise one’s blood pressure or cause a serious headache, among other medical complications, which could necessitate the purchase of medication, some of which are of a long-term nature. Bank charges

Bank charges are another source of interaction costs between a bank and its client, sometimes even when there is no physical interaction between the two. Over time, bank charges eat into money left in an account, posing a serious threat to savers’ ambitions — especially at a time when interest rates for savings deposits are quite low.

“It’s only in (Zimbabwean) banks where time reduces deposited savings, instead of growing them. One gets punished for depositing savings with banks, it seems. One gets less for one’s deposits, but pays more for borrowing”. President Robert Mugabe recently lamented this sad state of affairs.

What to do?

All of these costs and other incidental ones not mentioned here combine to make life difficult for the banking public.

Unfortunately, customers can’t do much by themselves because the culture of consumer activism just hasn’t caught on in Zimbabwe yet.

Besides, banks are seen as largely the same by customers who resign themselves to fate and end up just saying “better the devil you know”.

Resultantly, they do not switch banking partners considering they may incur switching costs.

So, other than mobile banking, the only other real option customers have, is to keep their money at home, which some of them increasingly do.

However, banks are feeling the pinch of the resultant disintermediation, which leaves them without sufficient business volumes to sustain operations.

This, together with higher levels of competition, is forcing banks to explore ways of reducing interaction costs and enhancing customer convenience. How are they doing it?

Mobile banking Almost everyone who has a bank account has a mobile handset through which banking services can now easily be accessed anytime anywhere without having to travel to the bank. All this is at a fraction of the cost that customers are accustomed at the bank.

Almost every bank now has a mobile money offering or is contemplating introducing one, although the majority of users are on the mobile money offerings of telcos. Agent banking

A number of banks are vigorously pursuing the agent banking model which, in addition to reducing transaction costs, enhances customer convenience by taking banking closer to the people.

Internet banking

Given the relative ease of deployment of Internet banking, this is one of the first channels to be deployed by most banks in Zimbabwe.

However, security concerns, and the cost of Internet connectivity, which is thought to be still beyond the reach of many Zimbabweans at the bottom of the pyramid, prevents extensive use of this channel beyond simple transactions such as balance enquiries and internal funds tranfers.

Feedback: [email protected]. You can view Omen’s LinkedIn profile and initiate contact at zw.linkedin.com/pub/omen-n-muza/30/641/3b8