By 2025, financial technology (fintech) penetration in Kenya is expected to reach 13 percent, one of the highest in the world. This signifies a revenue potential of more than $30 billion.
Given that Kenya is also one of only five countries in Africa that share 50 percent of the continent’s software developers, one cannot ignore the opportunities for fintech growth in a market traditionally dominated by cash-only transactions.
But for this to be realised, a comprehensive regulatory framework is needed while public and private sector stakeholders require access to data to make informed decisions on how best to capitalise on the potential of fintech.
Placing fintechs under regulations fundamentally drives open and ethical business practices. It creates an enabling environment that drives healthy competition, and the need for continued growth which results in innovation in the sector. In particular, the credit information sharing mandate for licensed entities adds important value to the financial inclusion agenda for people new to credit and the underserved banking population in Kenya.
Further adding to the need for innovation has been the volatile global macroeconomic environment of last year. Even though there are signs of recovery in Kenya, fintechs do face several barriers to growth and profitability.
These include the time taken to gain licensing approval. Reduced funding further adds to the complexity of the environment as fintechs must show exceptional discipline around costs and driving internal efficiencies. They must also ensure that they get maximum returns on their spending.
This means that access to robust internal and external data becomes a key component of being more innovative. Additionally, fraud and lack of cybersecurity remain key threats to sustained growth especially when it comes to consumer trust and building confidence in the digital ecosystem.
Fortunately, these are not insurmountable challenges. A pro-active, pragmatic policy and regulatory framework and facilitation become critical to unlocking the macro-operating and regulatory elements that may pose a barrier to the operating environment. This requires an open-door engagement between all stakeholders and regulatory bodies.
As such, feedback on corrective action is essential with fintechs needing to adopt business models that align with regulatory requirements. They must also consistently engage toward supporting and shaping the direction of policy in Kenya.
Credit reporting becomes a critical driver in this regard especially when it comes to aiding credit, and overall, financial inclusion. Getting more fintech players into the credit information sharing (CIS) ecosystem will aid in the growth and increasing profitability of companies in this space.
With this in place, fintechs will be able to apply robust and fair credit decisions and risk assessment, fraud mitigation, and improved customer experience to build more personalised offerings. They can also then more effectively manage their portfolios, conduct risk monitoring, and develop new products based on insights generated by access to the latest data.
There are several trends shaping the Fintech sector in Kenya that help push towards creating a more enabling environment. One of the key trends is consistent partnerships and merger and acquisition activity between traditional financial sector role players and Fintechs.
This helps increase agility and innovation while expanding on the existing customer base. Most traditional banks are also creating Fintech operations as separate entities within their businesses to become more agile.
Alternative data critical to growth
Fintechs have also expanded into new areas such as insurance and agriculture to meet the needs of a more diverse client base. Furthermore, Fintechs are also using alternative data when it comes to mobile money transactions, social media, phone usage data, and lifestyle data in conjunction with traditional credit data for enhanced visibility.
This is where data from TransUnion becomes invaluable, as well as partnerships to provide insights into alternative data that could further empower and improve decision-making capacities. For example, KYC verification, access to mobile reports, driving portfolio analytics for customer growth and improvement, and leveraging market benchmarking reports and fraud data to refine solution development.
