Effects of Payment Cards on Financial Performance of Commercial Banks in Kenya

Abstract

Since 2009, Kenya's financial system has experienced remarkable financial innovation with possible implications on financial performance of commercial banks in Kenya. Increase in financial literacy in Kenya has increased the use of payment cards and also infrastructural expansion of commercial banks led to increase in the number of points of sales. However, later with the adverse effect of financial crisis since 2008, most banks were forced to close down some of their branches and points of sales as a cost cutting measure, some became victims of mergers and acquisitions. This led to decrease in the number of payment card transactions. Though ATMs have contributed a lot in improving the efficiency of banking to customers, they have a high fixed and maintenance cost. The study sort to establish the relationship between payment cards and financial performance of commercial banks in Kenya. Cross-sectional descriptive survey research design was used. The population of this study was 42 commercial banks licensed by the Central bank of Kenya from 2011 to 2020. The study used secondary data obtained from the 42 banks’ annual financial reports for a ten years’ time period from 2011 to 2020. The study was guided by Coase Theorem, Constraint Induced Financial Innovation Theory, Circumvention Innovation Theory and Innovation Diffusion Theory. Data was analysed using descriptive statistics and panel model. The results indicate that Debit card on ATM had a positive significant relationship with ROA at 5% significance level. The Credit Cards on ATM and POS Machines were also positively related to ROA but were not statistically significant while Prepaid Cards ATM was negatively related to ROA and non-significant. The study recommends that commercial banks should continue investing in innovation delivery channels because they are able to control their costs much better as compared to investment on physical branches. The findings contributed to new knowledge to literature and theory.