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Rethinking Banking: The Future of Financial Services is Digital

3rd Feb, 2017

East Africa’s financial sector is on the brink of yet another sweeping revolution that will define the playing field in the next decades to come: financial technology. Fintech, as it is increasingly being referred to is taking the industry by storm, causing a major disruption becoming a trailblazer and redefining the financial sector in the region and globally.

In this day of fast paced technological innovations, disruption is the new norm: Uber, Instagram and MPESA are all good examples of what technology can do to reconfigure the way we live.

Digital disruption and especially mobile technology in and around Africa, is significantly accelerating towards a revived fintech  industry: It began as a form of disruption, a wave, but is now quickly getting organised through consistent support/funding and proposition evolution to an entire new industry, fintech, that is currently transforming how financial services are being offered.

Unfortunately or rather coincidentally this is happening right outside the normal operations of existing and established financial institutions; right outside their high barriers of regulation and in the heart of exceedingly high customer expectation. For instance barriers that previously existed to manage risk in lending for Banks are now our greatest disadvantage.

One of the fundamental things that we need to take cognizant of is that banking globally has undergone dramatic changes over the past 10 years. In most Africa, the most notable development has been the fact that most majority of indigenous banks have now overtaken the traditional global financial institutions in what has been attributed to financial liberalization, institutional and regulatory upgrades and technology that have greatly transformed the face of financial systems across the region.

Today, most countries have deeper and more stable financial systems, thanks to innovations that have helped Africa leapfrog more traditional banking models. The banking sector in particular has benefited from the rapid penetration of mobile technology across the continent with Kenya being a frontrunner in this space. Such technological advancements are not just shaping how people interact with one another; they are also changing the behavior and expectations of customers who are increasingly becoming used to the immediacy offered by technology.

This technology is fueling our growth, creating new opportunities and disrupting the way business has traditionally been conducted. Indeed, the burgeoning middle class and abundance of SMEs in East Africa present great opportunities for financial services companies to provide retail banking services to individuals, as well as trade finance to SMEs.

In Kenya, the introduction of the mobile money transaction platform, M-PESA in 2005 has been globally acclaimed as one of the most disruptive technologies ever put to good use, having moved monetary transactions into the digital age.

The rate of adoption of digital financing in Kenya is considered among the highest in Africa. Kenya is now recognized as the home of mobile money, reaping the benefits that come along with it.

According to a report by McKinsey Global Institute (MGI) on ‘Digital Finance for all; powering inclusive growth in emerging economies’, focus is on the implications and benefits of digital financial adoption to a continent that is populated by 1.2 billion people and 200 million micro, small and midsize (MSME) businesses that today lack access to savings and credit. Having this widespread adoption of digital finance could increase the continent’s GDP by six percent, or a total of USD 3.7 trillion by 2025.

Such growth is the equivalent of adding to the world an economy the size of Germany, or one that’s larger than all African economies, consequently creating 95 million new jobs across various sectors of the economy.

In Kenya, out of a population of approximately 44 million people, the Communication Authority of Kenya’s (CAK) latest report indicates that the country has 37.8 million active mobile phone numbers with the 21.6 million registered users.

With the recent capping of interest rates, in line with the Banking (Amendment) Act 2016, with rates now more favorable for the borrowers, a more dignified approach has been made available for people to access credit facilities from the mobile money platforms – a better option than relying on shylock’s who are notorious for demanding more than their fair share of flesh.

In fact, borrowing and saving on these mobile platforms is an added advantage since it gives mobile-based lenders a tool for quick decision making in assessing and approving of loans. The use of algorithms re-imagines the traditional decision making process while reducing instances of default.

Today, many companies have digitized their operations.

They are now making and receiving payments digitally, from bookings, payment of salaries, settling their bills etc, making paperless money transactions the new normal.

A good example is the KCB – M-PESA platform, where we have approved and disbursed at least Kshs 16 billion in loans by November last year to over 8 million customers since its inception last year.

The real question to ponder on is how prepared we are, as a nation, to make the permanent shift to a digital economy.

There is a need to map out and understand the implications this shift will have on our daily lives and the daily operations of the businesses.

Over the years, the growth our country has experienced through the revolution of mobile money technology is an affirmation of our need to strategically utilize the potential of the space that digital money innovation has made available.

The lessons learned in the process are worth holding on to as we forge forward in driving the expansion and validation of mobile money across the region and beyond.

At the 2015 Global Entrepreneurship Summit held in Nairobi, the President of America, Barack Obama, in support of the spirit of innovation and mobile money, said the technological innovation had positioned the country as a leader in technology in the region. He praised the high-speed broadband and mobile connectivity in the country, which he said unleashed the entrepreneurial spirit of Kenyans.

We need to harness these gains. With the popularity of M-PESA, which simplifies day to day life and enables the deepening of financial inclusion to the largely unbanked masses in rural areas.

As a nation, the time is nigh to fully leverage on these opportunities and to live up to the title of mobile money pioneers, a title that the world now rightfully acknowledges us to be.

As the speed of technological innovation increases, banks are facing a new challenge as to where to focus their investment and what technology to use. The evolving competitive environment, coupled with the external developments will require banks to continually rethink their strategies. The future is in digital.

By: Joshua Oigara

The writer is KCB Group CEO and MD

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