$300 billion. Let me translate that into Kenya shillings. Roughly, Sh30 trillion. Now let me put that into perspective. The government budget for the current financial year is Sh2.1 trillion. So about 15 times that number. What is this $300 billion I’m going on and on about?
That is the size of penalties levied on global financial institutions from 2010 to June 2015 as reported by the Financial Times. These included fines, settlements and provisions for various levels of misconduct some of which is related to the global financial crisis of 2008.
The culprits read like the who’s who on the red carpet to punitive pain: Bank of America, JP Morgan Chase, Standard Chartered, Citigroup, Barclays, Deutsche Bank, HSBC, BNP Paribas and on and on.
And the natural reaction of the institutions was to tighten controls, seal loopholes, grow the compliance and generally create enough bottlenecks internally to ensure regulatory compliance.
The winners: audit and compliance teams who rule the roost over every single non-compliant new customer and product approval process. The losers: big, global banks which straddle continents like a financial ash cloud.
Compliance is expensive. Non-compliance is astronomically expensive. So it was with great interest that I listened to a talk by a renowned futurist called Neil Jacobson last week.
Mr Jacobson paints a bleak future for the traditional global bank citing six reasons why there is a perfect storm in the global financial industry.
First off, there is a trust crisis.
Even with pedigree board members, highly experienced (and paid) executives in management as well as world class operating systems and processes, many banks clearly can’t get the back end right.
The chase for profit trumped controls many times. Secondly, he cites the security and regulatory firestorm. Regulators are licking their chops at the highly lucrative knuckle-rapping that they have been undertaking. If nothing else, it’s a back alley way to raising more taxes.
Third is a technology tsunami. You don’t have to throw a stone very far today before it lands on a code writer, developing one app or the other as there are so many financial technology companies (fintechs) willing to throw money to anyone who comes up with the best app to help provide access to credit or money transfer.
The classic thing is this: with the Internet, it doesn’t matter if that developer is sitting in a bedsitter in Kayole or a one bedroom flat in Silicon Valley. The one with the best solution wins.
Visit iHub on Nairobi’s Ngong Road and see what I am talking about. Facebook, as a matter of fact, is already running app competitions in Kenya.
The demonetisation of transactions such as matatu fare, paying for food at a restaurant, receiving payment for supplying milk or vegetables is quickly democratising the role of money movement beyond the traditional banking space.
And banks are too clunky and heavily regulated to make the quick changes that fintechs are able to exploit. Which brings me to the fourth reason for the perfect storm: an explosion of new, different and rude competitors who are not members of the “old boys club” (which requires academic and professional pedigree) and are alternative thinkers.
At this point Mr Jacobson introduced the audience to the acronym GAFA — which derisively originates from French media — that stands for Google, Apple, Facebook and Amazon. None of which, with the exception of Apple, existed 25 years ago and together virtually own the technology space.
Three of these powerhouses got together in November 2015 under the auspices of “Financial Innovation Now”.
Together with Intuit and PayPal, the other three giants Amazon, Apple and Google put together the coalition to act as a lobby that would help policy makers in Washington DC to understand the role of financial innovation in creating a modern financial system that is more secure, accessible and affordable.
This is where it gets interesting as they twist the knife into the back of traditional banks, “Financial Innovation Now wants policymakers to understand how new technologies can help solve today’s policy challenges.”
In other words, we need lawmakers not to be bottlenecks as we help sort out critical voter issues like access to financial tools and services as well as helping voters to save money and lower costs. Win-win for everyone, except the banks.
Once lawmakers start to understand the benefits of low cost, secure financial solutions that do not require deposit taking mechanisms, it is likely that they will apply a much lower prism of regulatory restrictions that are currently straitjacketing the financial industry.
You don’t have to go far: look at the M-Pesa functionality and the strict segregation of M-Pesa funds from Safaricom deposits which was the regulatory compromise for accepting the service in the first place.
Neil’s fifth reason for the financial perfect storm is that pressure from customers, staff, regulators and other stakeholders is growing.
And his final reason is the ultimate challenge for all businesses beyond the financial industry: Customers are changing. A study presented at Europe’s Finovate 2015 showed that 30 per cent of today’s workforce is made up of millenials, 85 per cent of who want banking to be disrupted.
Have you seen those young people whose eyes are constantly glued to their phone devices and would rather starve than not have data bundles? The solution is hand-held and your solution had better dovetail into their solution.
Closer home, the impact may be less harsh. For now. But our homegrown financial institutions are morphing into regional powerhouses and it won’t be long before a few float to the top of the pan-African heap.
The successful ones will be the ones that grow their customer base on the back of technological innovation rather than bricks and mortar.
To quote Larry Page, one of the founders of Google: Companies fail because they miss the future.
[email protected] Twitter: @carolmusyoka