Why banks must focus on innovation

The Bank of Tanzania Twin Towers in Dar es Salaam. Innovation for commercial banks is the best way to go. PHOTO|FILE 

By Vincent Onjala

In Summary

The future of the banking industry in Tanzania lies in innovation. This will enhance financial deepening and inclusion in the country that remains largely unbanked

In the 2015 budget speech by Finance Minister, Ms Saada Mkuya, there was no mention of banking sector measures to help growth and stability of the sector other than the exemption of income from the realization of bonds issued by the East African Development Bank.

On the contrary, the Kenyan Cabinet Secretary for Finance did propose to increase the core capital of banks from the current Ksh1 billion (Tsh20 billion) to Ksh5 billion (Tsh100 billion) progressively by December 2018.

The capital requirement for banks in Tanzania remain at TZS 15 billion. The measures by the Kenyan government are meant to promote financial stability within the banking sector in line with the global trends. Is Tanzania ready for such drastic measures? Tanzania has more than 50 banks regulated by Bank of Tanzania. Do we need so many banks in Tanzania?

The future of the banking industry in Tanzania lies in innovation. This will enhance financial deepening and inclusion in the country that remains largely unbanked. With innovation most banks are likely to grow and be able to increase their capital base to enhance stability. In a report by Financial Sector Deepening Trust (FSDT) Tanzania, the use of mobile money has positively changed the landscape of access to financial services. However, there is need for the government to continue putting in place measures that are going to encourage financial sector deepening through innovation. Some of the key trends in the African banking sector that are fueling the call for innovation include factors such as growing middle class, development of infrastructure, discovery of oil and gas reserves and increased levels of education among other factors. The growing population of middle class does want to feel being taken care of. This is a group that wants to bank with institutions that provide convenience as opposed to the traditional old styled banking halls with long queues.

The chief executives of banks must start creating the bank for the year 2020. How would this look like? What would customers want? How would technology look like? Would there be need for brick and mortar branches? What opportunities would be there in data analytics for the huge bank’s data? Will customers want one account number that can be switched from one bank to another without stepping into the banking hall armed with tens of filled up pages? This is already happening in the mobile telephone space in some of the East African countries. How will social media impact banking? How will the role of a bank as a financial intermediary change with the likelihood of investors proving funds directly to borrowers after online vetting? Will our banks be relevant without innovation in year 2020?

With the growth of the mobile telephony banking, the bank of the future will be based on mobile phones. The mobile phone is likely to replace the traditional bank branches. I do expect that mobile phones will have applications that will analyse different investment opportunities for the owners and provide real time update on where they should invest their funds. For example, the mobile phone applications might advise the owner to move funds from current account to fixed deposit or a bond if the returns are better. I foresee mobile phones applications that will understand the spending patterns of the owner of the phone and be able to discourage the user of impulse buying of commodities if the decision is unwise financially. I also foresee mobile phones being able to automatically determine how much of your salary you should save monthly for your future pension.

Data analytics is going to be a major thing in the banking sector in the coming years. Banks have massive amounts of data on each of their customers. This data include age, sex, race, citizenship, spending patterns, residential address, number of children, marital status, holiday destinations one has travelled to, based on the history of payments, average income levels based on salary remittances, business turnover, credit history, instances of non-compliance with laws and regulations including financial crimes among others. Banks will have to invest heavily in data analytics in order to analyse this data and make it of use to customers and other players in the financial sector space. This will be very useful in product development. The outcome of the data analytics will also be useful in identifying things such as credit worthiness and any fraud indicators. We have seen some mobile phone companies already issuing loans to customers based on online vetting which uses analytics to determine a customer’s credit worthiness and how much the customer qualifies for a loan through the mobile phone.

Social media will be a big player in the financial sector space in future. How many hours do youths spend on social media per day? Banks have to integrate social media into their day to day banking activities. Create applications that can interact with social media and provide solutions to people who want to stay on social media while conducting their banking business. I foresee shares, bonds and other securities being sold and purchased on social media. There will have to be applications that are linked to platforms like Facebook where a ‘like’ translates into an investment by the profile owner i.e. if I click ‘like’ for a certain investment on Facebook, my mobile app should automatically invest on my behalf based on my preset investment rules.

Banks must rethink their financial intermediary role. Banks that are primarily taking deposits and lending may be out of business by year 2020. People with funds may want to eliminate middlemen (read – Banks) and lend directly to borrowers after online vetting. Technology will be the key driver for decision making and risk management in future. I can see information technology system applications playing a big role in decision making by financial institutions and customers. Banks must start investing in technology for the future.

Banks should start having candid discussions on how the future of banking looks like and what processes need to be put in place. Banks needs to move away from a reactive approach to regulations and start being proactive in creating products that force the regulators to be on their toes in creating regulations for the new products. It is important for banks to invest in skilled human resources that can specifically study trends in the global and local markets and front different innovative ideas for implementation. Innovation that creates more value for customers will be the differentiator in banking business in the coming years.

Mr Onjala is a senior manager, Financial Services, KPMG East Africa (vonjala@kpmg.com). The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.