The banks of the future

“We need banking, but we don’t need banks anymore” was the prescient observation by Bill Gates in 1997.  It anticipated today’s reality of large tech companies and fintech startups disrupting  the banking space.

Yes, the new entrants have not been shackled by the same regulations, legal costs, culture and competencies as banks.  But equally, banks have perhaps not evolved in tandem with their customers’ needs in an era increasingly defined by the desire for personalized services. One challenge over the last decade (post the 2008 economic crisis) has been that banks and financial institutions were busy dealing with regulations and compliance while innovation became a distant priority.  And yet, but this period has seen some of the biggest game changing innovations (UBER,  WhatsApp, WeChat and many others). 

Originally seen purely as a threat to the micro-payments business, mobile money propositions (such as M-Pesa and Tigopesa) eventually out grew the banking systems in terms of reach, users and transactions. As at April 2019, the Bank of Tanzania reported 22.4 million active customers (compared to 1 million active customers in 2010). There are a lot of learning points and warning signals that banks can draw on from this experience.

For example, for banks to remain relevant (and emulate the success of the likes of M-Pesa) they should ensure sufficient focus on the average Tanzanian. A significant number of Tanzanians were unbanked and lacked access to financial services, and mobile platforms moved to fill much of this vacuum and force banks to react; in particular, by agent banking which has boomed recently with 10,070 agents in 2017 (compared to 5,676 reported in previous period). Fincope 2017 survey indicates a reduction in financial exclusion to 28 percent compared to 56 percent in 2009, attributes to mobile payment services.

The message is clear that the future of financial services is digital, as this is the approach to address challenges such as financial inclusion, customer experience, cost of banking and others. Such an approach also responds to the expectations of Tanzania’s tech savvy millennials.

Is it too late for banks? No, as they still have a big advantage by way of Trust and Data. “Trust isn’t given, it’s earned”, and certainly banks and financial institutions have made tremendous efforts to gain such trust by serving their customers for a very long time and with the aid of the solid regulatory infrastructure posed by central banks. However, the recent past has seen the Bank of Tanzania revoke bank licences, and young people do not necessarily have the same trust as previous generations - so their loyalty can not be taken for granted.

“Mteja ni Mfalme” is the Swahili equivalent of “the Customer is King”. With a need for personalized service an emphasis should be on how banks can read and interpret their customer data so as to convert it into meaningful opportunities.

Tanzanian customers are enthusiastic about getting digital, but will banks be able to respond to such a call?  A good starting point should be strategic realignment. Banks need to have “young digital sensitive” millennials in their decision making round tables, individuals who can visualize the future and inspire people to actually pursue such a path.

The choice of digital strategy is also key - in particular, the decision as to whether to walk alone or partner with tech companies and fintech startups. East Africa has seen hugely successful partnerships, for example “M-Shwari” (launched in 2012 between NCBA Bank Kenya Plc (formerly CBA Kenya) and mobile phone operator Safaricom). As at end of 2018. M-Shwari had 25 million mobile savings and loans customers in Kenya, with the bank at an NPL ratio of approximately 2 percent, 4 percent points lower than the banking industry average in Kenya.

In Tanzania we also have our own stories to tell on partnerships, such as Commercial Bank of Africa and Vodacom’s M-Pawa and “Songesha”, a partnership between Vodacom and TPB Bank.  However, such stories have not been as successful as our counter parties next door.

One constraint has been the lack of a national identification process and this ultimately impacts credit risk assessment. However change is underway thanks to the citizen’s identity card project under NIDA (which is running concurrently with the SIMCard re-registration through biometric process using the National IDs). This will transform financial services in the country - not least as it will  boost the abilities of our credit reference bureaus who have suffered with both the quality and quantity of data, but will now be able to more meaningfully assist banks in their credit assessments if such IDs are to be used as a mandatory reference in all transactions regardless of the platform used.

The Bank of Tanzania is also part of the digital journey with its recently launched Tanzania Instant Payment System (TIPS) project, one that will connect different payment systems providers. One thing is clear - the pace of financial sector digital transformation will not relent.

By Melkiory Anthony is a Manager with PwC London on secondment from PwC Tanzania, specializing in Banking and Capital Markets.