In the kingdom of technology, venture-backed challenger banks and Platform as a Service (PaaS) have earned placeholder titles in many conversations, challenging those that have been slow to adopt and afraid to innovate.
On the financial front however, the foretold marriage of technology to finance elicits excitement and vitriol in equal measure. Banks wield the advantage of incumbency, with fintechs upending everything, thanks to their intuitive, easy to access and use services.
Welcome to the good and bad in this union.
The good - use and adoption of technology has enabled more people access financial services with ease, whetted appetites of commercial banks' research and development, pushing them to roll out products that match consumers' shifting digital needs and changed the way we handle money.
The Bad - fintech platforms are seen as a common enemy, entities aflush with investor funds to risk, without accompanying regulatory oversight and legacy systems, granting them a free-hand to challenge traditional models of credit underwriting.
To say that the Covid-19 pandemic has rebirthed financial services, accelerating years of digital growth in just months, is not enough. It has also heightened consumer expectations that financial services can only get better. Welcome to the money games during and after the Covid-19 times.
In this new future, both banks and their customers have become more digitised, resulting in adoption of new ways in money management. In observance of the set public health protocols, banks have prioritised digital channels, encouraged contactless payments, added digital onboarding processes and automation of client data is now essential.
Thick in the pandemic, my bank relationship manager reached out, seeking to understand how they could alleviate its vagaries on my business. That I had completed servicing my loan a year earlier with no running credit facility, “We are looking to enable you carry on with business in these hard times,” she quipped.
As a financial intermediary to small and micro-enterprises, I was not looking for any form of credit at the time, and possibly not in the short-term. I was, instead, seeking an enabler to boost collections owed to the business by our customers, while ensuring continuity of their businesses.
We were at pains reviewing repayments and instituting moratoriums to shield them from penalties and even higher interest rates in the recessed economy. With long running relationships with some of the affected customers, for almost a decade, with stellar credit history, it was unthinkable that we would lose each other.
While the call was comforting, it was not rewarding and was out of touch with my situation. This is likely the same challenge that many Kenyans face today. Though banked, we are still a long way from financial inclusion with the reality that micro-lending and financial intermediation each have a place in money games. However, none has comprehensively addressed their segment, owing to the siloed nature of our operations and intent.
This got me thinking that at the edge of this pandemic-induced revolution is a financial upside, an opportunity for banks to recreate financial services in collaboration with technological innovators. See, fintechs come armed with a loyal customer base, thanks to incorporation of alternative lending data, but still lack an ecosystem big enough to attract profitable customers drawn from longer-term loans or working capital financing, which are essential for growing businesses.
In that case then, why not allow financial intermediaries to focus on gathering and decoding customer data, collecting alternative data and building a more comprehensive credit portfolio? This would match the excess cash in our banks to demand for credit where it is needed most?
If we are to borrow on the commercial bank’s regulatory status, capitalising on what they have built over the years, fintechs with their algorithms, impeccable customer touchpoints and sound consumer data would greatly boost analysis, driving a more comprehensive credit portfolio. Investing in data for all means dedicated effort in filling information gaps that have hampered competition in the larger financial services sector. All we have is replication of services across multiple banks under different brand names.
For a sector that is highly competitive such as banking, consumer are hunting for favourable interest rates, which can only come if banks address shortcomings and restrictive growth for more insightful financial appraisal and lending. Remember, while the incumbent is looking at existential risks of not wanting to change, the challenger is seeking to gain credibility.
The most explosive evolution in financial services yet will be an ecosystem that brings in new lending models and boosts financial literacy. One that looks at banking as a commodity where consumers buy, based on credit insights that the bank brings to the table.
Kimeu is CEO of Stawika Capital, an enterprise financial intermediary.