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Regulators flag financial institutions’ reliance on few technology providers
While other regulators have not published similar surveys, reports from individual companies suggest they are equally reliant on outsourced technology.
Kenya’s financial regulators have raised concern over the heavy reliance on a small number of third-party technology service providers by many institutions in the sector, warning that it poses a major financial stability risk.
Banks, insurers, pension schemes, cooperatives, and capital market firms increasingly depend on external providers for services such as mobile applications, artificial intelligence (AI) automation, and fraud detection and prevention.
However, the Joint Financial Sector Regulators Forum cautions that with too many firms relying on the same few providers, the industry is overly exposed, threatening consumer protection and operational resilience.
“The Forum identified reliance on third-party technology service providers as a major source of risk, especially if a single service provider serves many institutions,” the group of regulators said in a joint communiqué following a meeting last week.
The forum brings together the Central Bank of Kenya (CBK), Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority , Sacco Societies Regulatory Authority, Policyholders Compensation Fun, and Kenya Deposit Insurance Corporation.
“In the event of failure, the operations of many institutions are likely to be compromised, impacting their ability to deliver optimal services,” the regulators added, noting that they are now prioritising efforts to map concentration risks among third-party providers in the financial sector.
This warning comes amid increased adoption of emerging technologies such as AI and mobile banking, as financial institutions seek to improve customer experience and curb risks like fraud and cybercrime.
Since many of the companies in the industry lack the technical or financial capacity to develop such systems in-house, they often outsource these functions to external providers.
A recent CBK survey revealed that all commercial and microfinance banks in Kenya engage third-party technology service providers, with a majority (42 percent) working with at least 10 different providers at once – an indicator of the sector’s deep dependence on outsourced tech services.
The survey also found that 26 percent of banks have more than half of their services supported by external tech firms, while another 26 percent have between 21 and 50 percent of their operations anchored on third-party providers.
Payment aggregation is the most outsourced function, cited by 82 percent of commercial banks, followed by cybersecurity tools (76 percent), anti-money laundering compliance (58 percent), funds transfers (55 percent), credit scoring (37 percent), and lending (24 percent).
While other regulators have not published similar surveys, reports from individual companies suggest they are equally reliant on outsourced technology.
For example, insurers such as APA and Jubilee have already deployed AI systems to mitigate risk and enhance underwriting processes.
