Digital Evolution in Kenya’s Financial Sector Unstoppable – Cytonn

The Kenyan financial services industry is expected to advance its digital evolution as financial institutions learn and integrate with technology.

Data from the CBK indicates that the value of mobile transactions has grown at a CAGR of 66.3 percent since inception in 2007, from 14.8 billion shillings of transaction volume to 4.0 trillion shillings of transaction volume in 2017.

Online banking has also gained traction and the majority of banks are now aligning their business models to towards online channels as opposed to the traditional brick and mortar.

The most recent innovation to shake up the industry is digital lending, which has been, to some part, a response to the slow growth in private sector credit following the capping of interest rates on loans offered by banks. Globally, decentralization of currency has been a topic of interest, pegging the question of whether these emerging digital currencies have a place in the industry.

Recent Significant Technological Adoptions in the Kenyan Financial Services Industry

In Kenya, the financial services sector has undergone the following major technologically driven transformations:

1. Mobile Money:

According to September 2018 data from the Communications Authority of Kenya, Kenya’s mobile penetration rate (total number of active sim cards to total population) stood at 100.1 percent with the number of active mobile money subscribers being 64.5 percent of the population.

By transaction value, CBK reported a total of 4.0 trillion shillings exchanged through mobile money in the year 2018, equivalent to 45.3 percent of the country’s GDP.

2. Online Banking:

Online/internet banking is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the institution’s website or smartphone application. In Kenya, the online banking revolution has caused a restructuring of the traditional banking model, as highlighted below:

Among the Top 3 banks by market share, on average, mobile and internet banking is the most active transaction channel at 54.0 percent of the total number of transactions. This has resulted in low branch activity, which averages 8.5 percent of the total number of transactions.

Banks view technological innovation as a means of improving efficiency and reducing costs.

3. Digital Lending: 

The digital lending space has grown at an accelerating pace in recent years. Since the launch of the M-Shwari platform in 2012, a vast number of platforms offering these services have emerged.

Most recently, Safaricom launched Fuliza, an overdraft facility that enables M-Pesa customers to send or complete mobile payment transactions even if their M-Pesa balance is below the required amount. In the first week of its launch, more than one million customers signed up and borrowed 1.0 billion shillings, and after one month of operation had borrowed 6.2 billion shillings.

Emerging Technological Trends in the Industry and Their Expected Impact

1. Blockchain Technology

This is simply a computer technology that enables information to be shared within a group in such a manner that all records are permanent and visible to all stakeholders. Combining shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a constantly updated digital ledger that cannot be altered.

Although initially treated with skepticism, banks and other firms have begun to test this technology in various aspects.

Despite its misguided sole association to cryptocurrencies, blockchain has much more to offer and will play a key role in transforming the financial services sector.

1. Open Banking

Open banking, also known as open bank data, is a system that provides a user with a network of financial institutions’ data through the use of application programming interfaces (APIs).

The Open Banking Standard defines how financial data should be created, shared and accessed. By relying on networks instead of centralization, open banking helps financial services customers to securely share their financial data with other financial institutions.

Benefits include more easily transferring funds and comparing product offerings to create a banking experience that best meets each user’s needs in the most cost-effective way.

1. Fintech Regulation

Financial regulation is becoming increasingly complex and intrusive, with major financial institutions facing multiple regulatory jurisdictions, and regulators requesting increasing amounts of data from firms.

Rapid improvements in technology are enabling financial services’ business models that were simply not possible 15 to 20 years ago. However, these innovations in finance operate within a regulatory system that is struggling to keep pace.