The banking industry across east Africa is under pressure in today’s business climate. The macro-economic and regulatory environment for banks has been through big changes that have presented both opportunity and increasing competition. The changes have ushered out the era of “good enough”, and in the era of “unique value proposition”.
Kenya has faced recent developments with regulation that the banks have to comply with, calling for a change in how they look at their business model. That calls for a shift in the way your people have always done things: changing your customer experience and doing it all at a cheaper cost.
Banks are facing new pressures that can be categorised under macro-economic and regulatory changes, tougher competition, savvy customer demands and retaining talent.
The era of double digit record profits anchored on interest income for banks in Kenya is gone and unlikely to be back in the foreseeable future. Further, the failure of some banks has led to stricter regulations being imposed such as those on increased capital adequacy and reinforced liquidity requirements. With competition heating up, the overcapacity issue in the banking industry is more prevalent, and with increased regulation on the new interest cap law, interest spreads are decreasing. The industry is consolidating at a slower pace than anticipated albeit as smaller or failed banks are sought and bought up as recently witnessed in the acquisition of Fidelity Bank of Kenya by SBM Group of Mauritius.
The new normal challenges for banks across the region is to find a new balance between acceptable risk and return on equity. Each bank now needs to re-examine its strategy, its business model and identify ways to transform. Most banks are taking bold steps to bring down their cost-to-income ratios that have long been cushioned by high interest margins. With promising gains down the road, the transformations require cash and capital. While most of them have invested and now seek to leverage emerging technology, few have realised the intended benefits and many are faced with a big challenge to implement change in an industry culture that doesn’t easily embrace change.
Top-tier banks find themselves in a favourable position, with healthy balance sheets, strong domestic demand, and large client and operating footprint. For these banks, there are huge opportunities for emerging new markets as they seek to diversify their interests and expand operations into other markets.
However, to be competitive in the marketplace, all banks need to be driving more innovation in their service delivery offering. While the call for innovation in banking is not new, the urgency for faster delivery is. Historically, technology implementations have focused on compliance and efficient finance processing. In the advent of tougher competition and reduced growth from interest income, banks need to now seek more innovative ways to grow non-funded income and meet customer expectations.
The best technology cannot deliver success without its correlation and focus on business strategy. It is important to have a clear vision of the market dynamics, where the company is going and what experience customers demand. The customer experience strategy will define and set the context for the role innovation and technology will play in enabling profitable growth. It will help determine the type of innovation you want to drive and the way you need to organise your technology to effect change. Reviewing your business strategy and specifically the customer experience strategy will guide the technology strategy, not the other way round.
Innovation can manifest itself in multiple ways, so while technology change determines the products and services you deliver, it is the business model driven by people and process that defines the value you deliver. During times when companies must determine the radical speed and type of innovation they need, getting people on board is crucial to business success.
What has become clear is for a real competitive strategy to be delivered, a bank must either be a very efficient, low-cost provider offering convenience and scale, or must offer tailored premium products and services that are perceived by clients to be truly distinguished.
There is no place for middle-of-the-road players in the coming years. The large tier-one banks, with a collection of products and activities, are not spared and they do not necessarily stand out with a clear brand or customer value proposition. On the contrary, the middle-tier banks with unique propositions and client bases may find themselves in a better position to take advantage of customers seeking quality services tailored to their segments.
Regardless, a change has to be made and the key to success lies in successful implementation. This means change for the way the bank operates, the way its employees work and ultimately the customer experience it delivers. Change on this level requires strong leadership. It cannot be achieved with a simple directive or surface adjustment, it requires an innovative rethink of the entire business model and vision of strong leaders in partnership with their change agents.