Bankers from East Africa recently convened at the Kenya School of Monetary Studies and engrossed in conversations on the changing landscape of financial services in the region under the auspices of the 17th East African Banking School. Such was the depth that industry leaders were at the helm of these discussions, bringing to the forefront pertinent manifestations of shifts in the financial services space. Candid discussions on risk management, trends in financial crime as well as client relationship management and people as a strategic asset in financial services, were all thought provoking. However, as stretching as these conversations were, there remained one dominant thread as the driver shaping the new normal of financial services, and that is technology or more commonly-fintech (financial technology).
If there’s anything participants walked away with, it is that tech is creating the future for financial services & that future is already with us. To appreciate the rise of technology as the key driver, it is important to first understand the context and then simply follow the mobile phone story as one example. According to a study by Demirguc-Kunt et al (2015), between 2011 and 2014, the number of account holders globally increased by 700 million and this was largely on the back of technological innovations particularly mobile money, which has rapidly increased access to financial services in Sub-Saharan Africa. In a space of 20 years, mobile has evolved in leaps and bounds from being an exclusive almost mysterious gadget to pretty much an accessory to the average millennial, from predominantly voice to the now more popular data and mobile financial services-notably mobile money. Furthermore, it is easy to argue that the hard work is behind given how rapidly innovations take place today.
Respondents in a study of 5 Sub-Saharan African Countries by Ericsson ConsumerLab, cite lower entry barriers for mobile money as compared to traditional banking coupled with the value derived from being able to transact financially outside traditional office hours (Ericsson Consumer Insight Report, 2016). So essentially, beyond the upgrades and trends in handsets and software is the real life changing impact of the mobile phone being a conduit for the delivery of real solutions to real needs. Notable here is the mobile phone emerging as the single most important driver for financial inclusion.
Just to paint a picture, up till the mobile phone, it was not uncommon for urban to rural money transfers to involve a physical courier who needed to be trusted relative or friend. While there were options like bank transfers & postal transfers, many used a travelling family member or friend as well as bus courier services. This definitely came with its associated risks. Think about it, trust had to be built over time so the initial transactions were real high risk, and then there was the snag of timing. It was nothing short of divine coincidence if the need in the village coincided with this trusted relative’s travel to the same village.
So you can appreciate how the bulk of this transfer process was out of one’s control. The mobile phone changed this narrative and now by the click of buttons, money transfers are effected instantly and withdrawals made effortlessly across great distances. For the unbanked, mobile money can offer formalised services and of the 5 countries under study, Uganda and Ghana led the pack in the use of mobile money agents for the transfer of money in-country. This has gone on to evolve and facilitate diaspora remittances so much so that Western Union and MoneyGram no longer command the international remittances space since the advent of the likes of World Remit. All this is happening at fractions of the costs involved in traditional banking, which has no wonder necessitated the kinds of collaborations we see now between Banks and Telcos. However from the same study, 63% of consumers interviewed were unbanked and that this went up to 72% among lower socioeconomic groups in rural areas (Ericsson Consumer Insight Report, 2016). This lends credence to the reality that the journey is far from over. For example there is still a great need to rollout cheaper smart phones and greatly lower the cost of data to facilitate an upsurge in a shift from feature to smart phones, which are more dynamic. This is off course largely premised on the mobile phone as an economic enabler and as such if rural households can derive more out of the mobile platform, then it feeds directly into their journey to escape the poverty trap. Klapper, L and Dorothe, S (2014) assert the importance of leveraging new technologies such as mobile phones to make digital payments cost effective and sustainable for low income and rural populations.
Another interesting use case worth celebrating is how much the loan cycle has changed. Mobile has increasingly become the channel of choice for delivery of credit. A case in point is Equity Bank Kenya which in December 2016 alone had 85% of its loans disbursed through the mobile channel and only 15% via through the physical branch network (Karobia, 2017).To think that the current experience is that a high percentage of loan drawdowns take place outside the traditional banking hours and in fact long before branch doors open, is almost laughable because that alone describes how the idea of conventional banking hours is a thing of the past. The time between an application for credit and final disbursement is now under a minute compared to days for the traditional banking model. This level of dynamism is a perfect example of market relevance.
Traders who seek capital to procure stock for the day’s business are able to conveniently and instantly secure that loan capital, procure stock for intra-day sales and repay at the end of the day while retaining the day’s profits. This level of funding certainty is critical for the growth of micro, small and medium enterprises. Imagine the implications for the capital growth alone. This financing model facilitates a small business as a going concern, as a business owner is able to build-up his/her own capital from retained earnings and overtime rely less on borrowed capital (atleast this is the ideal picture).
There is even a stronger case for women and the poor, women many of whom are single mothers are able to operate market and merchandise stalls with certainty of legitimate sources of financing as opposed to dependency or resorting to illegal, inhumane and undignified ways of getting by. This is consistent with the study that revealed that although banks are the most trusted for financial transactions, they command a much lower trust among the poorest, rural communities and females (Ericsson Consumer Insight Report, 2016) thus reinforcing the case for mobile. It is noteworthy that data from a study by Demirguc-Kunt et al (2015) measuring financial inclusion around the world revealed that there are huge opportunities to increase financial inclusion especially among the poor and women.
So what NEXT? The nature of tech has created a world that now constantly lives on the edge. Technological innovations now drive competition across industries and this is evidenced by ever increasing investments in R&D. Take the case of competition among the top mobile device manufacturers globally where annually, it is a matter of who launches on the market first. Financial services are not escaping this shift and this is evidenced by the integration with mobile and increasing collaborations with fintech companies. In addition, a more empowered consumer has translated into demand driven financial services. Players in this space can no longer afford to be irrelevant as consumers are empowered and have options. So into the future, we shall continue to see mobile evolve, what can be done with a handset will continue to be stretched as more and more features and functionalities are introduced to address growing consumer needs and trends. However, on the fringes but building up is the new disrupter called blockchain technology.
In the very basic sense, blockchain technology provides a decentralised database/digital ledger of transactions that are available to everyone on the network, the network being a chain of computers that must approve an exchange before it can be verified and recorded. Anyone currently following technology has interfaced with this new phenomenon. While still at a nascent stage, the tech world is abuzz with blockchain & the financial services industry is no exception as banks particularly large global brands like JP Morgan, HSBC, Deutsche Bank have jumped right in and this is because they understand the value of leading the pack. Banks have embraced collaborations among themselves to partner with technology companies like IBM in exploring the potential and use cases of blockchain in their business. Some have gone ahead to setup blockchain programmes to continuously engage with developments of this technology. Use cases in securitization, trade finance, KYC, legal are already being explored and tested. At maturity, potentially the results can be likened to digital verses analogue. Some have likened the potential of blockchain technology to that of the internet in the 90s. So one can only imagine the cost of being a laggard.
By Edgar Azairwe Rutaagi
The author is a Trade Finance Professional/Fintech & Blockchain Enthusiast and works with the Central Bank of Uganda
Demirguc-Kunt Asli, Leora Klapper, Dorothe Singer, and Peter Van Oudheusden. 2015. “The Global Findex Database 2014: Measuring Financial Inclusion around the World.” Policy Research Working Paper 7255, World Bank, Washington, DC. [Online]. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2594973 [Accessed 15 Aug. 2017].
Erick Gikonyo, K. (2017). The Impact of Technology on Bank-Customer Relationships.
Ericsson ConsumerLab (2016). FINANCIAL SERVICES FOR EVERYONE-Bridging the gap the banked and the unbanked in Sub-Saharan Africa. [Online] Available at: https://www.ericsson.com/assets/local/networked-society/reports/ericsson-consumerlab-financial-services-for-everyone-sub-saharan-africa.pdf [Accessed 15 Aug. 2017].
Leora Klapper; Singer, Dorothe. 2014. The opportunities of digitizing payments. Washington, DC: World Bank Group. [Online] Available at: http://documents.worldbank.org/curated/en/188451468336589650/The-opportunities-of-digitizing-payments [Accessed 15 Aug. 2017].