Ellen Metzger is a consultant focusing on business in East Africa.

Ellen Metzger

Blog Post

With stories of fintech success and excitement showing up everywhere, it’s hard not to wonder about the place of banks in the financial landscape of the future. Are fintech providers here to stay or are they the buzz of the day?

The chief officer of finance, innovation and payments at Equity Bank in Kenya, John Staley, strongly stands in favor of banks. He <a href="http://www.howwemadeitinafrica.com/future-banking-africa-lies-banks-not-fintech/">recently argued</a> that banks are in it for the long-term and that fintech companies will come and go – or get absorbed by the banking industry.

Where does Staley’s confidence come from? He points to business models and access to capital. According to Staley, payments services are not a sustainable business model. He believes the race to eliminate fees from payments that is taking place among large players will drive out any profitability for the small-scale fintech enterprises whose profit streams rely on them. He envisions more and more banks and larger companies like Google and Amazon eliminating transaction costs for customers altogether, creating a general unwillingness among customers to pay fees. Secondly, successful loan schemes require large sums of money for the long-term. John questions fintech companies’ abilities to maintain the required amount of liquidity for their loan portfolios.

With John’s views as a backdrop, we wanted to know what other players think about this critical, even existential, question. We asked our alumni and current fellows of the <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf">Africa Board Fellowship</a> program, a group of banking professionals across Africa with more than a century of cumulative banking experience, to answer the question: Are banks the future of banking?

The shortage of support for Mr. Staley’s convictions was surprising. The fellows poked holes in his view using specific examples of policy or innovations that undermine his two main arguments.
<h4>Pace and Increments of Change</h4>
First of all, they doubted that traditional banks can keep up with changes in technology, and instead praised the ability of smaller technology startups to change and adapt to different market gaps and demands. Lloyd Borerwe, Acting Director of Microcred Zimbabwe, commented, “In my view, everything will depend on who embraces new innovations to achieve first mover advantage and scale. As someone <a href="http://startupquotes.startupvitamins.com/post/153633981362/the-electric-light-did-not-come-from-the">said</a>, the light bulb was not made from continuous improvement of the candle. If fintechs can bring something radically different they will definitely not be redundant.”
<h4>Sources of Capital</h4>
Secondly, the fellows critiqued the financing models of banking institutions and compared them to those of fintech companies. If fintech companies are able to mobilize cheaper capital in the future, their interest rates will compete with those of traditional banks. ABF advisor, Samuel Ssenyimba, put it simply, “The fact of the matter is just as mainstream funders saw the opportunity in microfinance 10 - 12 years ago, following initial success, they are now keenly observing the fintech space and a number are already beginning to back big players in the Americas, Europe and Asia. Additionally it would be foolhardy to believe Africa will resist this push.”
<h4>Enabling Regulations</h4>
Finally, the largest discussion from the group related to regulations, with a debate about the level of support it offered to the future of banks. Currently, regulations in most countries limit the growth of fintech companies, causing them to partner with banks or mobile carriers in order to expand their services.  But most fellows do not see this as a long-term barrier as more and more regulators adapt to the need for new technology in areas of financial services. Arguably the biggest example of this is the <a href="http://www.firstpost.com/business/ril-aditya-birla-et-al-getting-payment-bank-licences-what-it-means-for-the-indias-banking-sector-2399840.html">creation of payment banks in India</a>. Jacqueline Musiitwa, Managing Partner of Hoja Law Group, said, “Many regulators are slow to fully understand new technologies, but there is the acceptance that the world and even financial services is becoming more digitized and so they too are adapting.”

However, all comments weren’t completely contradictory of Mr. Staley’s view. Most fellows believed in the continued existence of banks and confidently referenced the <a href="https://responsiblefinanceforum.org/wp-content/uploads/2016/12/Micro-SME-Finance-Market-Outlook-2017-EN.pdf">continued demand</a> for traditional banking services by African consumers, mentioning that for many first-time formal banking users, doing business with an in-person banking agent might be preferable to an all-digital solution. They took the united stance of the answer may not be one or the other but continued collaboration and existence tangentially.

As if on cue, The New York Times published <a href="http://www.nytimes.com/2016/12/02/business/dealbook/technology-start-ups-to-get-a-license-to-bank.html?ref=business&amp;_r=2">an article</a> a few days after Mr. Staley’s statements noting that the U.S. Office of the Comptroller of the Currency is contemplating a new form of bank charter to enable fintech banking solutions. If it proceeds (though there are questions about the fate of the initiative in the new administration), the world will certainly take notice of such developments.

Overall, we all can agree that banking will continue long into the future… But will banks? Let us know your thoughts.

Have you read?

<a href="https://cfi-blog.org/2017/01/25/join-the-africa-board-fellowship-program/">Join the Africa Board Fellowship Program</a>

<a href="https://cfi-blog.org/2015/07/23/lessons-learned-from-abfs-convening-of-microfinance-leaders-in-cape-town/">Lessons Learned from ABF’s Convening of Microfinance Leaders in Cape Town</a>

<a href="https://cfi-blog.org/2017/01/10/calling-all-financial-inclusion-leaders-in-mena-registration-is-open-for-the-mena-governance-and-strategic-leadership-seminar/">Calling All Financial Inclusion Leaders in MENA! Registration Is Open for the MENA Governance and Strategic Leadership Seminar</a>

Are Banks the Future of Banking? Africa Board Fellows Deliberate

[caption id="attachment_22382" align="alignright" width="330"]<img class="wp-image-22382" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/11/savings-groups.jpg" width="330" height="254" /> Community savings groups are at the heart of successful rural banking[/caption]

Before joining the Center for Financial Inclusion at Accion, I spent four years in rural East Africa managing an ultra-poor graduation program. At <a href="http://villageenterprise.org/">Village Enterprise</a>, we focused on savings group creation and distributed conditional cash transfers rather than livestock (as is customary with graduation programs) in order to empower choice and facilitate ownership among our participants. Over years of traveling the bumpy back roads of Uganda and Western Kenya meeting with hundreds of savings group members, I met very few participants who went beyond their local savings groups to take loans from financial institutions such as MFIs. Those few who did created great success stories. In light of the recent article <a href="http://www.economist.com/news/international/21708258-microlending-booming-once-again-if-it-help-people-out-poverty-though-it?frsc=dg%7Cc">“Your Inflexible Friend”</a> in The Economist, which offers a review of microlending’s history, I reflect on why we don’t see microlending in the rural areas of Uganda and Western Kenya and how that can change.

A good reputation is critical. In these areas, tragic stories of delinquencies and defaults travel faster and are remembered longer than stories of success. In Kenya especially, where there is more competition in rural areas among financial institutions than in Uganda, reputation precedes the products and services. These reputations can vary dramatically every 5 kilometers you travel. When groups are asked about being linked to a particular financial institution, one community will trust the organization, the next community a few kilometers away will cringe at the name. Microfinance institutions are extremely sensitive to fluctuations in trust, so it’s imperative for them to design trustworthy products and ensure adequate follow-through on their services every time.

Trust is king. Once trust between members is lost, it is difficult to reclaim. We often saw this amongst the savings group members. Certain members of the community were reluctant to join groups where they didn’t trust existing members because of a past conflict. In certain cases, trust could be regained through hours of mitigation meetings and mentoring.

 It’s a vanilla product. Currently, products are typically one-dimensional and not tailored to the fluctuating incomes of the rural poor or the unique needs of different client segments. This is changing, however, as companies and organizations are doing more research and consulting with banking institutions to create innovative offerings for these customers, including loans with flexible repayment structures like <a href="https://cfi-blog.org/2016/10/20/financial-inclusion-week-round-up-day-3/">VisionFund’s new digital financial loan product</a>.

Lack of information. In rural areas, information often spreads through word of mouth. The majority of potential microlending customers in rural areas are illiterate and have limited access to radios, therefore they receive little to no “fresh” information. They receive information from their neighbors and community members. Given the potential of other community members defaulting or having negative experiences with an institution, this lack of information is a great risk for microfinance institutions trying to sell their products in these communities. This scenario also doesn’t bode well for building strong financial capabilities among community members that are less likely to be exposed to information pertaining to formal financial products and services.

Accessibility is still lacking. In the areas where Village Enterprise works, the closest town with a bank is typically 30 to 60 kilometers away, making banking expensive and unsafe. Most clients simply cannot pay the 60,000 Uganda shilling (~$20) round trip fee to town in order to make a $10 deposit on their microloan.

But as The Economist mentions, microlending is simply a “vital work in progress” and I’ve seen a few trends that will help expand financial inclusion to rural regions like those in Uganda and Kenya.

<img class="alignright size-full wp-image-22384" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/11/mobile.jpg" alt="" width="256" height="171" />Partnerships connect to the BOP. Financial institutions are starting to partner with organizations like Village Enterprise or community groups like SACCOs that have the trust of the communities. The partner can make introductions to these communities and work with banking agents to ensure quality service delivery. Additionally, with partnerships, banks can leverage insight from those working at the base or very bottom of the pyramid to create products that work better for their clients. In Northern Kenya, <a href="http://bomaproject.org/boma-adopts-mobile-banking/">BOMA Project and Kenya Commercial Bank (KCB)</a> teamed up to increase mobile banking access in extremely remote areas. This partnership is opening up opportunities for the communities living in isolated areas of Kenya as well as increasing banking clients for KCB.

Increasing access to information. With mobile programming increasing throughout emerging economies, communities are finding alternative ways to access information. Companies like <a href="https://www.votomobile.org/">Voto Mobile</a> and <a href="http://ttcmobile.com/">Text to Change</a> have created new channels for information dissemination, which will ideally create a more informed generation. However, as detailed in <a href="https://cfi-blog.org/2016/10/18/what-is-lost-in-a-digital-financial-world-and-how-to-get-it-back/">Elisabeth Rhyne’s recent CFI blog post</a> about what’s lost in a digital world, these technologies should not entirely replace person-to-person trainings or mentoring required for capacity building and increased usage. Increasing partnerships with local governments or institutions offer sustainable mechanisms for outreach to these communities.

[caption id="attachment_22387" align="alignright" width="330"]<img class="wp-image-22387" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/11/cap-building.jpg" width="330" height="221" /> Moving forward there remains a need for person-to-person capacity building for the positive financial behavior of clients[/caption]

Banking regulations are improving. Banking regulations in emerging economies are <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">helping</a> to support banks to reach end users in rural areas. In 2016, regulations were finally passed in Uganda to allow agent banking throughout the country, which will hopefully create increased access to financial institutions.

Increased focus on capacity building. Village Enterprise and other graduation programs spend three months training savings groups on business development and financial education. These trainings help lead to self-sustaining and healthy savings groups as well as more financial savvy clients. For illiterate clients in rural areas, these programs are critical for the successful introduction and uptake of banking products, which is why they are increasingly offered by the financial institutions themselves through dedicated field officers.

Have you read?

<a href="https://cfi-blog.org/2016/05/19/letter-from-mindanao-part-2-rural-banking-and-the-promise-of-cacao/">Letter from Mindanao, Part 2: Rural Banking and the Promise of Cacao</a>

<a href="https://cfi-blog.org/2014/11/07/investing-in-rural-sri-lanka/">Investing in Rural Sri Lanka</a>

<a href="https://cfi-blog.org/2014/10/27/gender-dynamics-in-rural-china-illuminate-the-need-for-financial-education/">Gender Dynamics in Rural China Illuminate the Need for Financial Education</a>

Ellen Metzger

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