The future of Kenyan banks

Central Bank of Kenya
The Central Bank of Kenya. FILE PHOTO | NMG 

With the future of the old-fashioned banking system seemingly bleak, Kenyan lenders are running against time to embrace new technologies to stay afloat.

The development has seen some of them fold up while others merge.

Some of the new technologies include financial technology (fintech), blockchain and artificial intelligence, customer experience machine learning and big data analytics.

Nendo Founder Mark Kaigwa says future banks will hinge on the ability to act proactively rather than engage in marketplace reactions and retaliations.

“Global lending apps prioritise their growth-at-all-costs business models popularised in Silicon Valley, sacrificing sustainability for scale. Where does this leave Kenyan banks and Saccos?” he poses.


In the 2017 Bank Supervision Report, the Central Bank of Kenya (CBK) argues that the integration of digital technology into the banking business will lead to fundamental changes in how the banking sector operates and delivers value to its customers.

“Banks that will embrace innovation and adopt new technologies will have unprecedented opportunities to change and improve how they provide financial services and products. At the same time, they must manage the risks created by the new digital economy,” CBK says in the report.

Equity Bank’s investor brief shows that 97 percent of its transactions are outside the branches, with more than 513 million over the mobile banking app, and 80 million transactions through agents.

On the other hand, Kenya Commercial Bank (KCB) transactions is now 90 percent digitally assisted.

The CBK report shows that the banking sector staff has also decreased by 2,790 (8.29 percent), from 33,693 in December 2016, to 30,903 in December 2017.

“This is an indicator of the consistent improvement in banks’ efficiency as a result of review of business models, automation of processes and shift from ‘brick and mortar’ to alternative digital channels,” the report continues.

Meanwhile, Infotrak's The Changing Face of Banking Report 2019 reveals that more than half of banked Kenyans with access to fintech use less of traditional banking products and services.

“The future of fintech is bright as 4 in every 5 of those currently using it are likely to continue using it while three quarters of those not currently using it are likely to start using it in future,” the reports show.

Delivery of financial services through the agent banking model continued to increase in 2017, the CBK report indicates.

“During this period, 18 commercial banks and 5 microfinance banks (MFBs) had contracted 61,290 and 2,191 bank agents respectively recording an increase from 53,833 and 2,068 agents reported in December 2016.

“The increase in number and value of transactions underlines Kenyans’ growing confidence and acceptability of the agency banking model by banks and the public,” it indicates.

The Credit Information Sharing (CIS) mechanism has evolved in scope and gained increasing acceptance as an integral component of the credit market in Kenya since rollout of the mechanism in July 2010.

“As per December 2017, subscribing banks requested for a total of 19.6 million credit reports from the licensed Credit Reference Bureaus (CRBs) which remain three (3) namely; Transunion CRB, Metropol CRB and Creditinfo CRB,” it states.

Furthermore, the report shows that Kenya’s payments arena particularly Mobile Phone Financial Services (MFS) is growing at an exponential rate.

State of the banking industry

“MFS platforms are increasingly connected to banks and it is equally critical to enhance their cyber resilience. This will in turn strengthen the overall cyber resilience of Kenya’s financial sector,” it reads.

According the Kenya Bankers Association’s State of the Banking Industry report 2019, the banking industry has embraced technology in a bid to enhance efficiency and complement the conventional channels of product delivery.

“One such response is seen in the extent to which banks are embracing technology both as a tool for managing operating expenses as well as a reaction to non-conventional competition. Financial technology is increasingly changing the shape of banking industry in the sense that competition in the provision of financial services is well beyond the formal regulated institutions. While there are regulatory differentials, customer expectations are not asymmetrical,” it shows.

It states that new entrants with digital prowess will gain prominence, while many incumbent lenders will be forced to alter their strategies to compete.

“As a result, there will be greater industry fragmentation and blurring of industry boundaries, with financial services increasingly offered by an emerging breed of nonbanks,” the report states.

Deloitte’s 2015 Banking Industry Outlook: Banking reimagined says that there will be greater efficiencies across the board as a result of greater automation.

“Customer experience overall will improve with each passing year, but traditional firms face the prospect of losing control as these digital experiences become the norm,” it states, adding that there is a greater competition between incumbent firms and the fintech disruptors.

“Institutions that develop expertise in collaborating with their extended network of suppliers, partners, external talent, and regulators will have more control over their destiny,” it states.

The advancement in technology, it says will influence new organisational paradigm, future of brands, the new world of payment, frictionless trading and evolution of marketplace lending.

The survey shows that many banks and capital markets firms, particularly the large, complex institutions, have been simplifying their business and operating models over the last few years both for economic reasons and to reduce organisational complexity.

“There is an increasing realisation that they do not or cannot excel at every activity, and that it may be easier and cheaper to outsource noncore activities,” it states.

The banking industry, the report says will be significantly transformed in the next five to 10 years. Digitisation, automation, and disintermediation will be the main drivers, and together with other disruptive forces, could alter how banking products are delivered and experienced.

Brand experience, the report notes will become increasingly fragmented and idiosyncratic, with customers in greater control of how and when they want to engage with banks.

“As consumer’s witness more on-demand services in other industries, they will expect the same in banking as well,” it states.

Moreover, the survey says conveying a consistent brand experience will become more challenging.

“Marketers will be forced to be more creative in the design of service experiences. While banks may have less control over how customers experience the brand, they will, however, have access to more detailed and real-time information at an individual customer level. These new data will vastly expand the ability to tailor offerings and experiences, “it states.

Payments spectrum

The research reveals that millennials, in particular, will continue to be far less influenced by banking brands. As a result, banks may have to expand and evolve their brand promise to meet these changing values.

Furthermore, it states that innovations have been unleashed across the payments spectrum: Online (such as PayPal), mobile (example, MPesa), contactless (Apple Pay® mobile payments solution, for one), peer-to- peer (P2P) (Square, Venmo, etc.), cross-border remittances (such as Ripple Labs), and cryptocurrencies (such as Bitcoin).

It states that blockchain innovations could be the most transformative, and we will likely see a number of real-life applications of blockchain applied to payments, beyond digital currencies, in the next five years.

It states that Bitcoin and other digital currencies will likely enter the mainstream, but only with adoption of standards and compliance with global regulatory frameworks.

“Many of the “coins” that exist today will vanish, for lack of any real demand. We will, however, see the vision of state-sponsored cryptocurrencies becoming a reality in five years,” it reads.

Perhaps the least surprising development in payments will be the continuing growth of mobile payments and wearables.

Internet of Things (IoT)-enabled mobile wallets may finally reach critical proportion before 2020, transforming customer experience further and making many forms of consumer payments seamless, nonintrusive, and hassle-free.

But the risk from these innovations is that financial institutions will lose control over the customer experience, as payments become more integrated into digital solutions controlled by technology firms. This will pose a particular challenge from a branding perspective.

In spite of these developments, incumbent payments firms, both processors and issuers, should remain dominant even though the threat of disintermediation is real. Banks are themselves driving a big part of the payments innovation agenda. The “credit” component of credit cards will most likely continue to remain central to payments, ensuring banks’ and issuers’ roles.

Digital platforms are expected to attract increased buy-in from the market, this is according to the Changing Face of Banking Survey 2019.

“When asked the likelihood of using different channels in future, 78 percent of the banked Kenyans would most likely use ATMs in future, supported by majority of Kenyans requiring a convenient and flexible channel to access funds,” the Changing Face of Banking Survey 2019 shows.

“Our forecast for future likelihood of using mobile banking is 67 percent for Apps and 71 percent for USSD. Usage of these channels is expected to be higher among the youth (18-34 years old) and university graduates. 66 percent of the banked Kenyans are more likely to use physical bank outlets in future with a skew to 35 and above years old and those with low levels of education giving a clear age and education divide,” the report adds. Higher proportion of university educated banked Kenyans and the youth (18-34 years old) are more likely to use Online/internet banking