“Banks have to get comfortable with the fact that they are good at some things and bad at others,” said Nadeem Shaikh, founder and CEO of Anthemis, an investment and advisory firm focused on digital financial services. For example, he noted that banks might be practised in compliance and mitigating risk, but are not generally at the forefront of product innovation.
“They are not good at products. Every current account and mortgage account is exactly the same. There is no differentiation.”
He was speaking during a panel discussion yesterday at the Mastercard Foundation’s 2017 Symposium on Financial Inclusion – held in Accra, Ghana. The event brings together industry stakeholders from around the world who are looking to close the gap on the two billion people that remain unbanked and excluded from any type of formal financial services.
Africa remains home to the largest proportion of unbanked people (estimated to be over 60% in sub-Saharan Africa at last count). As a result, the region has seen the emergence of many entrepreneurs and companies that are using technology to better address the needs of underserved groups.
The most cited (and praised) example is the mobile money platform M-Pesa in Kenya. However there are many other success stories. MicroEnsure, which is in five African countries, provides various insurance products to the mass market by partnering with mobile operators and allowing cover to be bought via airtime. Consumer finance company M-Kopa has managed to sell solar energy systems to hundreds of thousands of low-income customers by introducing its own credit and repayment operation. And Zoona, in Zambia and Malawi, allows unbanked consumers to digitally send cash cross-country via mobile phone.
New models for assessing credit risk
With some of the highest interest rates in the world found in Africa, bank loans are often unaffordable for many individuals and small businesses. One reason why the cost of financing is so high is because banks struggle to adequately assess the credit risk of consumers who do not have traditional forms of collateral, or have never used formal financial services before. But in recent years there have been a growing number of fintech companies that are proposing alternative ways to determining this risk.
Tala is a good example of this. The company has introduced an Android app that uses an algorithm to analyse the data on an individual’s smartphone (such as how often they call their mother and their daily travel routine) to determine credit risk profiles. The method is also being utilised by a microfinance company, Musoni Kenya, in an environment where the country’s recent interest rate caps on bank loans has meant traditional lenders are imposing even more rigid guidelines for granting loans.
Jumia, a network of ecommerce marketplaces spanning 23 African markets, is now also using its data to analyse risk profiles. To ensure availability of stock for the merchants that sell on its platform, the company is analysing years of data collected on its vendors (such as turnover and sales history) to connect them to credit providers. And FarmDrive in Kenya is analysing know-your-customer (KYC) databases (such as those belonging to mobile network operators and government entities) – as well as M-Pesa accounts, geographic locations and mobile phone usage – to determine the creditworthiness of smallholder farmers.
But are we likely to see African banks adopt these alternative strategies in order to address a greater consumer base? Ann Miles, the director of financial inclusion at Mastercard Foundation, is optimistic.
“Yes, we know there are a lot of issues related to this in terms of data privacy, security, and whether these algorithms always get things right,” she told How we made it in Africa. “I think the whole industry, with all the different players, will have to work harder on some of these things – but I think it is inevitable.
“Just looking at the rate of change and the pace of innovation and opportunity that we are seeing… If you had asked me five years ago if we would be where we are now with digital financial services, I couldn’t have imagined it.”
She added that banks are also encumbered by huge regulatory constraints – a leading reason why they have been so slow adopt innovative models.
“Even just in our work with helping some micro-finance institutions build and extend agent networks – in some countries this is a very slow process. In some cases there are regulators who want to be engaged in approving every single agent. That is hugely constraining,” noted Miles.
“Madagascar is a case in point… where we have seen [regulators] constrain the growth of agent networks.”
There are some examples of banks embracing technology to remain relevant in an environment of rising fintech competition – one being Equity Bank in Kenya, according to Miles.
“They see the competitive threat from M-Pesa in their own country. They have developed their own mobile virtual network operator to try and bring down the [mobile banking transaction] costs – so they are trying to launch some alternatives.”
However, both Miles and Shaikh warn that if more African banks don’t start partnering with fintechs, they could potentially become redundant.
“They have to rethink their business model from the ground up… Between 2010-2014 we had a lot of young people coming in and disrupting businesses… Now [they] are a part of financial services,” commented Shaikh, adding that banks have an opportunity to work with fintechs to create a new paradigm that addresses the mass market.
“It is not a sprint – it’s a 10- to 20-year play. But if they don’t start thinking about it now, it’s the end.”