05/02/2019 by By David Cracknell 3 Comments
Is Your Bank Going to Survive
In his book Banks 3.0: Why Banking is no Longer Where You Go, but Something You Do, Brett King states that the rise of the millennial generation, the smartphone, mobile money, and financial technology are factors that ...
In his book Banks 3.0: Why Banking is no Longer Where You Go, but Something You Do, Brett King states that the rise of the millennial generation, the smartphone, mobile money, and financial technology are factors that drive the disintermediation of the banking sector. Most of the attention in this digital transition focuses on the financial technology hubs of London, Singapore, and the developers in India, China, and the USA – and this is where the big money finds investments.
However, Kenya deserves its fair share of credit. It is here that the Kenyan mobile money revolution began in 2007 with M-PESA, which the Central Bank of Kenya allowed to operate based on the ‘test and learn’ principle, in the spirit of the ‘financial inclusion for all’ agenda. Consequent digital revolutions in the country are much less reported. These include the remarkable growth of agent banking in the country, fuelled initially through Equity Bank, KCB Bank, and Co-operative Bank. Other revolutions include ones in payments, which has everyone paying bills directly through their mobile money wallets or through their conventional bank accounts, the surge in digital nano-credit, MShwari (a mobile lending platform from Safaricom and CBA Bank), Branch.co, Tala, among others. Then we have the start of interoperability through the PesaLink shared platform for inter-bank transfers, the opening of digital banking branches, and Kenya’s 'Silicon Savannah’.
It is clear that there is a digital finance revolution brewing. Financial technology has touched every aspect of banking – insuretech (or insurtech) for the insurance industry, regtech for regulators, wealthtech for investment management, remittances and payments, blockchain, and cryptocurrency. Many of these changes are driven by the application of artificial intelligence and machine learning, which is based on data analytics. Leading banks have been connecting with fintech providers through application programming interfaces (APIs) to provide highly tailored services to their customers.
In this revolution – there will be winners and losers, but it’s no longer an option for any financial institution to opt out. In the race for the digital future, it is easy to pick some of the winners. We see some of the international banks – Citi, Stanbic, and Standard Chartered touting their expertise gained across Africa or around the world and applying it locally. Yet we also see innovation in our local banks – KCB Bank and Equity Bank. Arguably, Equity Bank’s mobile platform is a best-in-class app. Whilst CBA Bank took an early lead in its adoption of MShwari – the question for CBA remains - what next?
Internet banking has advanced with quality platforms available from most banks, although much less obvious is the extent of the digital banking revolution. Banks have been quick to transform their user interfaces. However, real digital transformation touches every aspect of an institution to deliver the speed, convenience, and service that customers demand today. For example, Premier Credit, a microfinance institution that offers short-term loans, has integrated technology into the way it processes and delivers credit. This means that it can issue loans typically within two days – and these are not logbook-loans or nano-credit. Smaller banks, too, use technology to digitise and semi-automate their lending business processes and workflows.
Digital transformation happens at multiple levels. At the level of products and services, at the level of people – both staff and customers, at the level of processes and of course at the level of systems. Successful institutions are marrying the best that financial technology and banking to provide a better value proposition and experience to the customer. Equity Bank, for example, facilitates this through an open API. It is one of the very few African Banks to make this bold move – but its use of the open API is a factor that drives its pace of change. Banking will never be the same again!
So, who loses, who wins, and how? Financial institutions need to respond to the new digital banking revolution or risk business transitioning to the new neo-banks or the more digitally connected traditional banks. This would not be easy for many institutions.
At MicroSave, we have worked with financial institutions across Africa and Asia. When it comes to digital transformation outside the leading implementors, we see a pattern emerging. Directors and senior management are increasingly aware of the need to change – but find taking the next steps very difficult. Let us explore this.
The first step in any process of change – as John Kotter would argue – is a sense of urgency. However, many banks lack urgency. Brett King, and to a greater extent Chris Skinner, speak of the ‘death of banks’. Indeed, from an international perspective, it is the death of conventional banking as we know it now. Banks in the UK have been reducing their branch presence rapidly, to the extent that a Parliamentary Research Paper on the issue has been written (Briefing Paper Number 385, February 2018), the paper quotes sources that 423 bank and building society branches were axed or put on notice of closure in 2017 alone. Banking in this new digital age requires less physical infrastructure.
There are indications of this change in Kenya as well, although perhaps it is less noticeable due to Kenya being comparatively under-branched. For instance, since the launch of agent banking, Equity Bank has grown its customer numbers more than three-fold without expanding its own physical footprint.
Banks also have related serious structural issues in terms of how to manage and manipulate data. They have an ocean of data that they are not well-placed to use. Sometimes, this is because they sit on legacy banking platforms. In other cases, it is because they fail to view data as a key strategic asset. It is only recently that we have seen significant numbers of Kenyan banks create the C-suite role of Chief Information Officer. These factors mean that in most cases, banks have under-invested in their ability to harvest and use data for a strategic and competitive advantage.
There also exists an issue of mindset. Skinner explores this in his characterisation of ‘digital aliens’ (of which I am one) who have to learn technology and digitisation. He pits them against ‘digital natives’ – those who have grown up in the digital environment and assume a digital universe. As it happens, digital aliens populate almost all Kenyan bank boards!
These factors – urgency, structure, and mindset, combined with unavailable funds for change – create a significant transformation barrier for smaller established financial institutions, for example, Kenya’s SACCOs. This is a barrier that new digital banks – the so-called neo banks – which have started to appear worldwide do not have to address. Neither do such neo banks have to invest in building or maintaining extensive physical branch infrastructure.
Therefore, common platforms may be required for some institutions – effectively outsourcing aspects of processing or delivery. We currently see this in Uganda with the Uganda Bankers’ Association’s shared agents initiative – where participating banks are able to share agents between them.
As we move into a more digital environment, inevitably, people will win and lose too. We already see this in the Kenyan rush for bitcoin, though discouraged by the Central Bank of Kenya, only to see the value of bitcoin slump earlier in the year. We also see hundreds of thousands of Kenyans being negatively listed as a result of failing to repay a nano-loan. But more fundamentally, we see a new concern – digital financial exclusion.
People who struggle because of their circumstances fail to participate in this new digital environment. People who lack electricity, phones, literacy, and numeracy are rapidly in danger of becoming excluded in terms of digital finance. We see a need to invest in policy directed at consumer protection and data protection at the national level to develop enforceable digital consumer rights. There is also a need for continued investment at an industry level in fraud prevention and detection.
This is the most tumultuous time that Kenyan banking has ever experienced, its import goes far beyond the current pains of the interest rate cap that many in the financial sector complain about. However, now is the time when banking will be redefined, and mostly in a positive way. It is time to reimagine the potential of the financial sector in Kenya, and beyond.
And as for the financial institutions who have not yet responded – time for change is fast running out.