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Data Makes For Big Innovation

Earlier this month, this newspaper led with a headline that Safaricom’s Fuliza product lent Kshs 6.2 billion in its first month after launch. In case you’re one of those laggards that hasn’t entered the mpesa universe yet, Fuliza was launched by Safaricom in January 2019. Its objective is to help the mpesa user avoid that embarrassing “oh-no” moment when goods or services that she wishes to purchase are literally in hand but the funds to pay are not. I signed up for the product following an SMS blitz by Safaricom as soon as it was launched for no other reason than to just stop the confounded messages coming through. Two weeks later I stood at the supermarket till purchasing items via Mpesa. Lord help me because I came up short, Kshs 434.74 to be precise. Usually I would give a sheepish grin to both the cashier and to the visibly irritated customers behind me and mumble something about “please let me withdraw from my bank” and have to wait several nail biting, interminable minutes as my bank’s mobile app chooses to be slow on that day at that moment. But the Mpesa app immediately prompted me to Fuliza – which, by the way, means “continue” in Swahili. In seconds I had been allowed to overdraw my Mpesa by that amount, the transaction was completed, I got an update that I was charged the princely amount of Kshs 4.35 for the overdraft facility and I now owed Kshs 439.09 due in 30 days. Most importantly, the fellows standing in line behind me never knew that I had run out of funds. At all. The next day I withdrew funds from my bank into Mpesa. Again I got a message in a split second, the outstanding amount had been automatically deducted from my funds. And my available limit was back to the Kshs 12,000 that I had automatically been awarded when I signed up.

 

Fuliza is a testimony to those two words you see being bandied about miscellaneously: “big data”. Big data are extremely large data sets that may be analysed to reveal patters, trends and associations relating to human behavior and interactions. CBA Bank, the creators of the first Mpesa based lending product Mshwari, used mpesa usage data to feed into their credit algorithm that calculated how credit worthy the loan applicants were. It soon became apparent that about 58% of mpesa transactions failed where the user was sending money to another beneficiary. But about 85% of the same transactions would be repeated within two days, that is, payment to the same beneficiary because funds were now available. It doesn’t take a rocket scientist to see that the data was speaking to a funding gap that would be eliminated within 48 hours as cash came in. In banking-speak this is what an overdraft does: provide a short term cash bridge pending arrival of funds. In the example above, my overdraft interest rate was 1% for a 30 day facility.

 

If you were to ask the over 400,000 customers that are using Fuliza daily as to what the annualized interest rate (12%) is, they’d tell you that they didn’t care. I certainly didn’t at the point where I was standing at the till with a basket of goods already packed and carefully perched on the counter ready for my hasty exit. Actually neither do the millions of Mshwari customers who are ready to pay a flat fee of 7.5% for a 30 day loan (again, if you annualized that you would get 90%). The Fuliza product currently endures a default rate of less than 1%. So for every 100 shillings that are lent out, less than 1 shilling is lost. The automatic limit that I received of Kshs 12,000 was done without my asking and without my knowledge. The bank just used my data to generate a very important product for me.

 

 

To the Kenyan legislature, the lesson here is this: a little bit of research would have led you to see how you could force banks to use the reams of data that they have about their customers to provide a better and differentiated pricing which would have achieved the goal of lowering the cost of loans. Instead, the largely uninformed interest cap route taken has ended up drying credit supply. What these mobile loan applications are telling parliamentarians is that at the end of the day, the retail client is indifferent to the price. He just wants to “fuliza” his life!

 

[email protected]

Twitter: @carolmusyoka

 

 

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Strategy is not business as usual

[vc_row][vc_column width=”2/3″][vc_column_text]I recently sat with a group of senior managers from multiple organizations talking about the difference between strategy and business-as-usual. It never ceases to amaze me how many managers believe that their strategic initiatives as defined by the organization are actually business as usual objectives dressed in ball gowns and glass slippers. An example was thrown into the discussion of one of the participant’s employer’s strategic pillars: customer centricity. How is that a strategic objective, I asked? Well, we know look at the customer as special and we focus on them to deliver a good service, was the earnest response. Wait, what? But isn’t the customer the very reason every single person in the organization comes to work, from the cleaner on the shop floor to the CEO? Yes, I was told, but by having customer centricity as a strategic objective we will now get the appropriate focus etcetera, etcetera. The reason for doing any kind of business is to get money from a customer and convert it as efficiently as possible into a profit from the shareholder. So claiming customer centricity as a strategic objective is as good as saying getting staff to come to work is a strategic objective: they are both matters in the ordinary course of doing business.

Targeting a hitherto untargeted customer segment using a differentiated delivery framework is a strategy. Serving existing clients is business as usual. Creating new service delivery mechanisms such as digital is a strategy; focusing on giving existing clients a wow experience is and should be business as usual. Looking out into the Kenyan business horizon, Safaricom makes an interesting case study on what strategy in motion looks like. Following its 2008 IPO, Safaricom entered the realm of publicly publishing its results. In the results for the financial year ending March 2009 which was the financial year during with the IPO took place, its revenue from voice was 83.4% while data which represented SMS, mpesa and other data revenue generated 12.9% to the bottom line.

By financial year 2013, Safaricom reported that voice now contributed 64% of service revenues.Five short years later the upward trajectory of non-voice data continued with voice contributing only 45% of service revenues by March 2017 compared with mpesa at 27% of service revenue and fixed and mobile data revenue at 16.8% of service revenue. Combined, mpesa and data revenue add up to 43.8%, which is slightly below what the voice data brings in. That’s a telling number right there.

You may not have noticed it, but Safaricom has stealthily crept into your life at multiple touch points during the course of your daily routine. From the way 72% of Kenyan market share communicates by voice, to the way Kshs 6.9 trillion in value goes through the mpesa payment system in the form of money transfers, business to business payments as well as customer to business payments. Somewhere along that chain are the funds you sent to your family, farm workers, payment at the supermarket till, barber bill, bar bill, church or funeral harambee contribution or fuel payment. 83,000 Kenyans now use Safaricom’s fibre for their internet connections at home, with 1,500 buildings fully wired for Safaricom internet. Those fibre numbers are only projected to grow. This strategy to ensure multiple touch points in the dawn to dusk cycle of a consumer’s life is very similar to global giant Procter and Gamble’s strategy to be immersed in the lives of their customers throughout the day which is the bedrock of their innovation strategy. From Crest toothpaste and Oral B toothbrushes, to Gillette razors and Head and Shoulders shampoo will carry the consumer through their morning routines. Pampers diapers, Vicks vaporub, Olay lotions and Always feminine products feature through that brand base as well as various dishwashing liquids and household detergents such as Ariel and Tide.

Speaking about consumers on their website, they say: “We gain insights into their everyday lives so we can combine “what’s needed” with “what’s possible.” Our goal is to offer them product options at all pricing tiers to drive preference for our brands and provide meaningful value.” That mind set ends up deriving $65 billion of annual revenue by the end of financial year 2016.

The numbers never lie. It’s fairly evident that Safaricom is headed on the same trajectory of impacting its customers from dawn to dusk as it strategically morphs itself from being a mobile phone company to the primary financial and data services provider for the Kenyan individual.

[email protected]: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Pesalink Can Change Our Economy

[vc_row][vc_column width=”2/3″][vc_column_text]I recently ran a survey in Kenya’s 48th county, “Kenyans-on-Twitter” to see what people know about Pesalink and came to find out that most of them have heard of, but have never used the product. So I did some research and found that Pesalink is an initiative of the Kenya Bankers Association (KBA) to help Kenyans move funds from bank X to bank Y in a safe and convenient manner using their mobile phones. Assuming your bank operates in the 21st century, your phone number should be linked to your bank account. With that alone, you can use the Pesalink portal on your banking app to send money to buy your Toyota Probox (assuming it’s below Kes 999,999) to the car seller as you quaff a few drinks late Saturday night. Or send Kes 600,000 to Pastor Juma who’s selling that 100 by 50 plot in Kitengela, while you prepare your morning devotions at 4 a.m. on Sunday morning. Pesalink is also available on your internet banking app, ATM machine, banking agent and bank branch.

Straight through processing is what Pesalink is all about. It’s big brother RTGS – or real time gross settlement as it’s called – is also an initiative of KBA, and was created to allow faster settlement of large value transactions through a same day processing mechanism. Today you can’t issue a cheque for amounts over Kes 1 million as such a transaction has to go via RTGS. The direct beneficiary is the customer as the bank can no longer sit on the “float” as it waits to give the customer value for the cheque that has already cleared. The difference between RTGS and Pesalink is that the former requires you to walk into your bank branch and fill out a tedious form. The latter, however, is a few keystrokes from the comfort of your bar stool or Slumberland mattress 24-7. Both are KBA initiatives, which, when working optimally, should significantly reduce footfall as well as cash holding requirements in branches, the latter of which creates a trading opportunity cost for bank treasuries as it’s idle cash sitting in a vault.

I spoke to the team at the KBA-owned Integrated Payments Services Limited (IPSL), who operate the switch that runs Pesalink. The process is supposed to take at most 7 seconds for the transaction to go through. Since its launch in March 2017 until June 1st, the system has processed about Kes 2 billion between the 26 banks that have signed up to the system. Client ignorance on the one part and bank reluctance on the other are some of the reasons for the slow take up of the product. The bank reluctance, some say, comes from wanting to see stability in the system before launching big bang. My cheeky side wants to provoke and say the potential loss of float that banks will endure, as funds move real time, 24 hours a day, is something that would make any bank drag its feet to market this product. It also adds a new, but manageable challenge, for bank treasuries in squaring their cash positions once overnight fund movements become frequent.

Why should you consider moving funds this way? First it beats the exasperating Kes 70,000 transaction limit and Kes 140,000 daily limit on Mpesa. (Although it’s said that some banks have,counter intuitively, put in transaction limits. Why for the love of God?)Secondly, the fees have been capped at Kes 200/- no matter what amount is being sent. Thirdly, in case you missed it, the banks are running a no-Pesalink-charges campaign for the next two months to get customers onto the product. Fourthly, you can do it 24 hours a day 7 days a week. Finally there are no limits on the number of times you can send funds in a day.

The product is being launched in phases, primarily to get system stability and knock out the kinks before going full throttle. Today it’s serving Peer-to-Peer clients but the ultimate aim is for Business-to-Peer and vice versa, which would include government payments such as taxes and rates, or utility payments from businesses and individuals to KPLC and Nairobi Water. Pesalink provides one less reason to go to the bank physically and will be a key cog in the 24-hour economy wheel that we all wax lyrical about.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Kenyans are savers not gamblers

Last week, my General Manager Domestic Affairs(aka GMDA) decided to change her bank provider. GMDA came home that evening gushing praises about how the new Bank X had told her that she could set aside Kshs 1,000 every month to save for school fees and it would be automatically deducted from her salary account. No bank had ever taken an interest in her life, or in providing her with an automated way of saving for this critical aspect of her children’s security

As GMDA was talking, a news item appeared on the television about the uptake of the M-Akiba bond. I turned up the volume, as this could potentially be an option I could provide to my the-savings-scales-have-fallen-from-my-eyes GMDA.

The product is beautiful in its simplicity. Dial a number, register, place Kshs 3,000 for 3 years and earn tax -free interest twice a year. In my view, someone in Serikal is finally using data the way it’s supposed to be done: not to gather dust in shelves at the bureau of statistics but to drive behavior and economic growth. And nowhere is there more rich data than in the Financial Access Household Survey issued February 2016 by FSD Kenya working in collaboration with the Central Bank of Kenya and the Kenya National Bureau of Statistics.

The report finds that 75.3% of Kenyans are now formally included, with the giant leap being taken by women where formal inclusion leapt between 2009 and 2013 driven by the spread of mobile financial services.Formally inclusion is defined as use of banks, mobile financial services, SACCOs and microfinance institutions. Why would there be such a quantum leap in the growth of women users? I daresay that the convenience and the absolute privacy that mobile financial services provide make it a key attraction for the women. Not having to make a trip into a commercial centre to deposit or withdraw from a bank and not having a debit card or statement lying around that can generate heated arguments as to “hidden resources” is a major draw.

While the FSD report doesn’t go into the abominable aspects of betting, it does delve into it’s divine counterparty: savings. The FSD report finds that the number of Kenyans using at least one savings or deposit instrument continues to rise and at least 66.4% of the adults sampled have a savings instrument. Almost half of those adults use savings for meeting ordinary day-to-day needs, a third save for education and 40% also save for medical emergencies and burial expenses.

One more critical finding: 42.6% of business owners and 87.7% of farmers rely heavily on their savings to finance their livelihoods.

It is on the back of this data that we should critically look at the potential of M-Akiba to provide a viable savings platform. M-Akiba has the potential to pull funds sitting tied in a knot in the corner of a leso or under the cooking hearth into the formal economy especially since the FSD report finds that the top two most valued storage places for Kenyans are their mobile financial services accounts and saving in a secret place!

Meanwhile, I tried registering for M-Akiba, so that I could sell it to GMDA. After jumping through several hoops, I ended up feeling like a hamster on a wheel so I jumped off. I called the number provided online and a lovely lady called Brenda answered on the third ring, telling me the system was experience downtime. By the time of submitting this piece it wasn’t yet up. I trust that the developers of M-Akiba will make this an iterative product, tweaking it as they get more and more customer usage data to determine how and why Kenyans are using it. Just like how M-Pesa was launched as a money transfer system but ended up being a virtual repository of cash, M-Akiba might not be used for what its creators envisaged it for. Customers use your product to do a job. Time will tell what the true job of M-Akiba will be, but the ultimate winner will be the government with a new, and far less interest rate demanding investor in its securities.

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Mpesa is a key economic engine

I have a little farm on the sweeping eastern Laikipia plains that has me visiting at least once a month. The singular cause of blinding migraines for the many telephone farmers is farm worker fraud. Those fellows will find a way to skim money, farm inputs or farm outputs at any given opportunity and trust me, as soon as you plug one leak they’re ten steps ahead of you preparing for the next scam. So one has to, as a telephone farmer, accept a certain level of pilferage as part of the business-as-usual operations, or opting to move and reside permanently in the farm. Irritated and exhausted by one certain input request, I set up a system that didn’t require the farm worker’s intervention. I got a trustworthy boda boda operator in Nanyuki (where trustworthy is a fairly fluid virtue) to be purchasing the input on my behalf. But I don’t send him the cash. He goes to the outlet, sends me the “Lipa Na Mpesa” till number where I pay and he takes the goods together with an electronic receipt to the farm. I specifically chose the outlet for those two reasons: they have an mpesa till number and they issue electronic receipts. I then pay him, using mpesa, for delivery of the goods and have peace of mind, knowing full well that another scheme is likely being hatched at the farm since I blocked what had been a lucrative cash cow for the workers before.

Two things that are critical to the urban telephone farmer: a local boda boda “guy” and mpesa. While I don’t have any data on the impact that boda bodas have had on the transport economy – which must be undeniably high – more data on mpesa is readily available. In the latest published Safaricom financials for the half year ended 30th September 2016, the company had 26.6 million registered customers out of which 24.8 million or 93% were mpesa customers. However, a more accurate number is yielded by looking at the 30-day active customers which registered as 23 million, with 17.6 million active mpesa customers or 76.5% of total active customers. Safaricom made more money from mpesa at Kshs 25.9 billion than it did from mobile data, which generated Kshs 13.4 billion. Mpesa revenue was equivalent to 43.3% of the voice revenue data of Kshs 45.7 billion. In simple words, mobile money is no bread and butter; it’s the cream with a cherry on top!

What were these mpesa customers doing, you ask? Well telephone farmers like me were a piddly fraction of the mpesa volumes. Three quarters of the total Kshs 25.9 billion in revenue that Safaricom received from mpesa was from what they call “bread and butter” business, which are the person-to-person transfers and withdrawals: John sends Mary a thousand shillings, who promptly goes to an agent to withdraw the same in cash and purchase food items for the house. Telephone farmers like me are to be found in what Safaricom calls “new business” which accounts for 24% of their mpesa revenue or about Kshs 6.2 billion.
New business includes customer to business (individuals paying for services using mpesa), business to customer (businesses sending money to individuals for example Kenya Tea Development Agency paying farmers their tea bonuses), Business to Business (Distributors paying a manufacturer for goods delivered) and the rapidly expanding Lipa Na Mpesa that has saved many urban dwellers the pain of having to send cash to purchase items via fundis, rogue relatives and even more rogue workers. But mpesa revenue aside, it is the sheer transaction volumes that are simply eye watering. By September 2016, mpesa had transacted Kshs 3.2 trillion. Kenya’s Gross Domestic Product or GDP, according to World Bank figures is US $ 63.4 billion or Kshs 6.34 trillion. The mpesa volumes are virtually 50% of Kenya’s GDP. However, hang on to your hat please as there is some double counting in the mpesa transaction volumes since they include deposits, withdrawals, person-to-person transfers and the business volumes. The bigger question is whether mpesa then poses a systemic risk in the event it is out of commission for whatever reason.

Firstly, mpesa is a methodology of transferring cash virtually. The actual cash sits in various mpesa trust accounts in Kenyan commercial banks. The bigger concern is not whether one’s funds are safe if mpesa goes down, it’s how to access a system that will release those funds which are sitting safely in a bank. Central Bank data from 2014 demonstrates that while mobile money volumes are extremely high at 66.5% or two thirds of the national payment system, they only account for 6.6% of the throughput value. It’s definitely a case of more bark than bite where systemic risk proponents are concerned.

But having said that, the attraction to track the mpesa movements from a tax collection perspective goes without saying. Even though the values may be low, mpesa provides an excellent opportunity for the taxman to bring in smaller businesses into the taxpayer net as each transaction has an electronic signature and trail. Designing and applying resources to create that tracking framework may perhaps be where the challenge lies.

That mpesa has changed lives goes without saying. We live in a country where one can literally take a trip from Mombasa to Malaba carrying zero cash, zero plastic card and with just her phone be able to eat, drink and seek lodging for that entire trip. The growth of the Lipa Na Mpesa payment points was 73% year on year in the half-year 2016 Safaricom financials. This means that there is rapid uptake by commercial establishments of the mpesa payment option, which quite honestly presents a better cash flow option than credit cards as there is no lag time between customer transactions and when the funds are deposited into the business account (typically 2-3 days in the case of credit cards).

Mpesa’s metamorphosis is not inclined to stop here and a banking licence may end up being required at the rate mpesa is transforming.

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Uchumi Directors are not living happily ever after

[vc_row][vc_column width=”2/3″][vc_column_text]It’s one thing to see the law being created. It’s another to see it being applied. The outcome of the Uchumi Supermarkets Ltd (USL) enforcement action by the Board of the Capital Markets Authority (CMA) was one of the best precedents set by the regulator since John Hanning Speke discovered Lake Victoria as the source of the Nile. As a corporate governance educator, I am constantly asked for local case studies since our curriculum is replete with American and European examples, as those are more mature markets that have built up a significant jurisprudence of corporate scandals and enforcement actions thereafter. Kenya itself has a litany of white-collar scandals, but very little in the form of punishment for the perpetrators of corporate malfeasance.

The CMA has undoubtedly set the tone for board directors and key officers of listed and non-listed public companies in this town which tone is as clear as the waters in a baptismal font as evidenced by the allegorical language used. “The Chairman and the directors will be required to “disgorge” their director allowances.” A dictionary meaning of disgorge is to “yield or give up funds, especially funds that have been dishonestly acquired.” Another definition of the same word is “to eject food from the throat or mouth.” And therein lies the allegory, the hidden meaning. Directors who allow malfeasance to occur on their watch and are remunerated during such time are feeding from the wrong trough and will be asked to regurgitate those emoluments swiftly, unashamedly and unequivocally.

The former chairperson and two former non-executive directors of USL were disqualified from holding office as directors or key officers of a publicly listed company, a company that has issued securities, or a company that is licensed or approved by the CMA for a period of two years. They were also asked to return the director allowances paid to them for the financial years 2014 and 2015. Finally, they were instructed that if ever a listed company saw it fit to appoint them to a board after they had atoned for their sins and sat in director purgatory for two years, they would be required to attend corporate governance training before being eligible for appointment.

The former chief executive officer and the former finance manager were also disqualified from holding office as a directors or key officers of companies that are regulated by the CMA. The regulator will also be filing a complaint at the Institute of Certified Public Accountants regarding the professional conduct of the two who are registered Certified Public Accountants.

In retrospect, what the named Uchumi directors and officers have gotten is a rap on the knuckles. They dodged a bullet provided by the current and newly operationalized Companies Act 2015 that allows a shareholder to bring a derivative action against a director for negligence, default, breach of duty or breach of trust. And the regulatory outcome would set enough of a precedence to warrant a shareholder to pursue this course of action in our highly litigious country. The new Companies Act 2015 has given a lot of teeth to stakeholders – including the company itself – to seek retribution for malfeasance or wrong doing on the part of the very parties supposed to maintain the best interests of the company. In light of the fact that a law cannot be applied retrospectively, and the fact that these breaches happened before 2015, the main worry for the named directors is how to mpesa those funds back to base and, for the officers, what color tie to wear to the disciplinary hearing at ICPAK.

The CMA itself issued a new corporate governance code in 2015 (CMA Code), and relied on its fairly modern tenets, that codified director fiduciary duties, in its conclusions about the creative accounting undertaken by the officers of Uchumi and overseen by the non executive directors. Quoting the CMA press release on the Uchumi decision: “The inquiry further established that in some instances the USL branch expansion program was undertaken without due regard to the Board’s fiduciary duty of care due to the absence of a proper risk management framework being in place. It was also established that in some instances, USL pre-financed landlords in addition to making payment of respective commitment fees, but nevertheless the branches were never opened or funds recovered.”

Under Chapter 6 of the CMA Code titled Accountability, Risk Management and Internal Control, boards of directors are required to put in place adequate structures to enable the generation of true and fair financial statements. The Code explains that the rigours of risk management by the board should seek to provide interventions that optimize the balance between risk and reward in the company. In layman’s language: Figure out what could possibly go wrong in the company whose board you sit on and ensure you put in place processes that recognize that risk and, where possible, mitigations for such an eventuality. Furthermore all times ensure the financial statements reflect- rather than conceal – those risks. In the Uchumi case, paying developers of buildings where you intended to open new branches in advance and not putting into place protection measures in case your advance funds were mis-directed to personal Christmas slush funds, was a big mistake. Those pre-payments that were not being recovered should have been provided for or written off entirely.

In light of all the recent corporate scandals, and our seeming inefficiency in prosecuting white-collar thugs dressed in oversized Bangkok knock off suits, the CMA enforcement action is a breath of fresh air. While the directors have all gotten off fairly lightly with a mild disgorgement, it is the social pariah status that will be the most effective deterrent for board directors in this market. I’m not sure that there is a self respecting board in this town, whether in the public or private sector that wants a “director formerly known as the Uchumi guy” serving on its board anytime soon.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

 

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That used to be a bank over there

[vc_row][vc_column width=”2/3″][vc_column_text]A woman visits a fortuneteller who tells her, “Prepare yourself to be a widow. Your husband will die a violent and horrible death this year.”

Visibly shaken, the woman takes a few deep breaths, steadies her voice and asks, “Will I be acquitted?”

In the last couple of weeks, I’ve been focusing my column on disruption and its effect on society. This is for no other reason than I have been assailed with data, real and anecdotal, on the same. So it is with great interest that I continue to write about the death of banking, as we know it. This is not because I am a sadistic fortuneteller, but because of the fact that banks are caught between heavy financial regulation on the one side and nimble fintech innovation, bereft of legacy issues plus clunky physical infrastructure on the other. Charity (not her real name) is a specialist, providing specialized advice to a wide range of clients since 2013. Her clients pay her using cash or Mpesa. Due to the runaway success of her product, she began to consider expanding her business. Coincidentally, KopoKopo approached her early 2015 to advance her funds based on her Mpesa payment receipts. A little about KopoKopo first: This fintech acts as an intermediary to help streamline payment collection for businesses using the Mpesa platform. It works for SMEs that have got multiple sales points as it consolidates the payments and gives a platform to enable the business to bank their collections. It provides data analytics to help the business owner identify sale trends, peaks and troughs and average transaction sizes. It also provides the client a web based, secure interface that permits not only the monitoring of customer payment collections, but enables payments to suppliers using EFT or Mpesa as well. To quote Charity: “In mid 2014, KopoKopo launched “Grow Cash Advance” for their clients. When I clicked on it, it said I qualified for an advance of a certain amount. They had prequalified me based on my till turnover. Several clicks later and I had my first advance. You choose the amount you want and what percentage of till inflows then can take to pay themselves back – up to a maximum of 50% of inflows, which matches the highest amount you are eligible for. A commission is worked into the total amount payable.” By this time, Charity had my rapt attention as I mulled over the intelligent use of data analytics to anticipate and pre qualify client needs. She continued. “Terms and conditions are just one click and then a day later you receive the advance in your till and can then transfer the funds to your main bank account. No other requirements. This year, they introduced a new requirement for a board resolution and ID copies of the company directors.” Alright then, Know Your Customer documentation check as well as legal appropriateness for borrowing done. Tick! She went on. “Once you have drawn down you can choose to repay the loan from the balance in your till or repay faster by upping the percentage they retain from 50% all the way to 99%. Once you pay back, they refresh your new limit based on the turnover in your repayment period. And so on and so forth.” Charity has accessed Kshs 5 million since the product started, an amount she says that her bank “scoffed at” following her request. Charity’s needs have been met, without her ever asking. Someone (or something) analyzed her turnover and predicted her needs for borrowing and her capacity to repay, for a business that had been in existence for two years!

Which is why I was tickled pink when I received my weekly article that I subscribe to from the McKinsey & Company website. The article, dated February 2016, is titled “The Future of Bank Risk Management” and articulates 5 future proof initiatives for banks to build the essential components of a high performing risk function in the year 2025. I won’t highlight all of them, just the first two that say: “1. Digitize core processes. By 2025, the risk function will have minimized manual interventions. Modeling, simplification, standardization and automation will take their place, reducing non-financial risk and lowering operating expenses. To that end, the function should push to digitize core risk processes such as credit application and underwriting by approaching business lines with suggestions rather than waiting for the businesses to come to them.” Cough, cough. Charity’s example above is dated 2015. Not 2025. Just in case you missed it. The second McKinsey future proof initiative states thus: “2. Experiment with advanced analytics and machine learning. Risk functions should experiment more with analytics, and particularly machine learning to enhance the accuracy of their predictive models.” Again, Charity’s example above refers. Data analytics helped to provide the pre-qualification for her loan. In 2015, not 2025. Remember I did start by saying that banks do have legacy systems and clunky infrastructure. As do their advisers. If banks wait until 2025 to do this, they will be dead in the water and cremated in the kiln.

At the danger of repeating what I wrote last week, banking compliance is horrendously expensive. And the Basel 3 rules only seek to tighten capital and liquidity based ratios following the basket case of bank balance sheet inadequacies that surfaced after the global financial crisis of 2008. Granted that the implementation of Basel 3 has been pushed 3 times from 2013, to 2018 to 2019, it only gives rise to fintechs to increase their scope of lending beyond just small businesses to medium and large corporates. The cost and administration of borrowing will significantly grow globally in line with the increased capital and liquidity requirements that will accrue for banks once Basel 3 is implemented. Can banking truly survive this regulatory and fintech onslaught? Fintechs may be the black widow that kill it.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Banks are the new slaves of technology

[vc_row][vc_column width=”2/3″][vc_column_text]$300 billion. Let me translate that into Kenya Shillings. Roughly, Kshs 30 trillion. Now let me put that into perspective. The Kenyan Government budget for the current financial year 2015/2016 is Kshs 2.1 trillion. So about 15 times that number. What is this $300 billion I’m going on and on about? That is the size of penalties that had been levied since 2010 to global financial institutions by June 2015 as reported by the Financial Times. These included fines, settlements and provisions for various levels of misconduct some of which is related to the global financial crisis of 2008. The culprits read like a who’s who on the red carpet to punitive pain: Bank of America, JP Morgan Chase, Standard Chartered, Citigroup, Barclays, Deutsche Bank, HSBC, BNP Paribas and on and on.

And the natural reaction for all these institutions is to tighten controls, seal loopholes, grow the compliance function and generally create enough bottlenecks internally to ensure regulatory compliance. The winners: audit and compliance teams who rule the roost over every single non-compliant new customer onboarding and new product approval process. The losers: the concept of the big, global monstrosity bank that straddles continents like a financial ash cloud. Compliance is expensive. Non-compliance is astronomically expensive. So it was with great interest that I listened to a talk by a renowned futurist called Neil Jacobson last week.

Neil paints a bleak future for the traditional global bank citing six reasons why there is a perfect storm in the global financial industry. First off, there is trust crisis. Even with pedigree board members, highly experienced (and paid) executives in management as well as world class operating systems and processes, many banks clearly can’t get the back end right. The chase for profit trumped controls many times. Secondly he cites the security and regulatory firestorm. I don’t need to harp on it as the number is clear: $300 billion and counting. Regulators are licking their chomps at the highly lucrative knuckle rapping that they have been undertaking. If nothing else, it’s a back alley way to raising more taxes. Thirdly is a technology tsunami. You don’t have to throw a stone very far today before it lands on a code writer, developing one app or the other as there are so many financial technology companies (fintechs) willing to throw money to anyone who comes up with the best app to help provide access to credit or money transfer. The classic thing is this: with the Internet, it doesn’t matter if that developer is sitting in a bedsitter in Kayole or a one bedroom flat in Silicon Valley. The one with the best solution wins. Visit iHub on Ngong road and see what I’m talking about. Facebook, as a matter of fact, is already running app competitions in Kenya. The demonetization of transactions such as matatu fare, paying for food at a restaurant, receiving payment for supplying milk or vegetables is very quickly democratizing the role of money movement beyond the traditional banking space. And banks are too clunky and too heavily regulated to make the quick changes that fintechs are able to exploit. Which brings me to the fourth reason for the perfect storm: an explosion of new, different and rude competitors who are not members of the “old boys club” (which requires academic and professional pedigree) and are alternative thinkers. At this point Neil introduced the audience to the acronym GAFA -which acronym derisively originates from French media – that stands for Google, Apple, Facebook and Amazon. None of which, with the exception of Apple, existed twenty five years ago and together virtually own the technology space. Three of these powerhouses got together in November 2015 under the auspices of “Financial Innovation Now”. Together with Intuit and PayPal, the other three giants Amazon, Apple and Google put together the coalition to act as a lobby that would help policy makers in Washington D.C. to understand the role of financial innovation in creating a modern financial system that is more secure, accessible and affordable. This is where it gets interesting as they twist the knife into the back of traditional banks, “Financial Innovation Now wants policymakers to understand how new technologies can help solve today’s policy challenges.” In other words, we need lawmakers not to be bottlenecks as we help sort out critical voter issues like access to financial tools and services as well as helping voters to save money and lower costs. Win-win for everyone, except the banks.

Once lawmakers start to understand the benefits of low cost, secure financial solutions that do not require deposit taking mechanisms, it is likely that they will apply a much lower prism of regulatory restrictions that are currently straitjacketing the financial industry. You don’t have to go far: look at the Mpesa functionality and the strict segregation of Mpesa funds from Safaricom deposits which was the regulatory compromise for accepting the service in the first place. Neil’s fifth reason for the financial perfect storm is that pressure from customers, staff, regulators and all stakeholders is growing. And his final reason was the ultimate challenge for all businesses beyond the financial industry: Customers are changing. A study presented at Europe’s Finovate 2015 showed that 30% of today’s workforce is made up of millenials, 85% of who want banking to be disrupted. Have you seen those young people whose eyes are constantly glued to their devices and would rather starve than not have data bundles? The solution is hand held and your solution had better dovetail into their solution.

Closer home, the impact may be less harsh. For now. But our homegrown financial institutions are morphing into regional powerhouses and it won’t be long before a few float to the top of the pan-African heap. The successful ones will be the ones that grow their customer base on the back of technological innovation rather than bricks and mortar. To quote Larry Page, one of the founders of Google: Companies fail because they miss the future.

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Devolution, piracy and banking meet in Mombasa

[vc_row][vc_column width=”2/3″][vc_column_text]I spent the better part of last week down in Mombasa and arrived at three conclusions: firstly, devolution works. Secondly, banking, as we know it in Kenya will have to change or it will die. Thirdly, the ghosts of the Indian Ocean piracy rackets roam freely in Mombasa’s environs.

My visit to Mombasa was primarily to see the market and the distribution of a particular fast moving consumer good (FMCG) that I will hereafter refer to as product X. Since devolution shifted a hitherto unknown sum of money to the coastal counties, there was more money in circulation, as county governments became direct buyers of goods and services within counties. Of course the providers of those goods and services then have more cash with which to hire employees or buy supplies both of which activities means that funds are moving further down the food chain. Employees, for example, now have cash with which to pay rent, buy food and clothing items as well as not-so- discretionary items like airtime. Suppliers of biros, wheelbarrows or condom dispensers to the county governments have to purchase them from a wholesaler, or perhaps a supermarket and more funds go into the system. You catch my drift, I’m sure. Anyway, movement of product X (and many other FMCGs) has grown in the last two years since devolution occurred simply because there’s more cash in circulation. Now how that cash gets into circulation is another story, whether it is through a legitimate procurement or inflated “tenderpreneurship”. The upside is that Nairobi’s position as a primary market becomes increasingly diluted and greater revenue diversification occurs for the manufacturer. In short, it is not only members of county assemblies (MCAs) that have benefitted from devolution funds. Legitimate private businesses have found 46 wider markets within which to focus on. Devolution, from a business perspective, must stay. It is also noteworthy that the movement of product X has moved deeper into the coastal interior following the tourism downturn. As many of the hotels have been closed and the staff laid off, there has been an urban to rural migration that has led to demand for “urban” goods deeper in the coast interior. Distributors have therefore had to reconfigure their distribution routes to follow the market demand.

Which leads me to my second conclusion: the ever growing disruption of banking as we know it. Tracking the coastal distribution of this product in the last 8 weeks, the team found that cash payments had moved from 75% in the beginning of September 2015 to 37% by the beginning of November. Conversely, mobile payments on the Mpesa and Equitel platforms have moved from 17% to 54% in the same 8-week period. The reason? The core distributor had chosen to absorb the mobile payment charges as these were found to be eating into the razor thin margins of the downstream retailers, hence their resistance to using the Mpesa and Equitel payment platforms. If you have ever paid someone using your mobile phone and they tell you the now ubiquitous peculiar Kenyan lingo “na utume ya kutoa” you will know what I am talking about. During the same period, payments using the banking system remained flat at 8%. In short, retail business in the economy has been and will continue to be quick on the uptake for mobile payments as its incredibly safer due to zero cash handling and leaves an electronic trail that can be used to build an indelible, legitimate cash flow history for future borrowing needs. The obvious evolution will be for the absorption of the mobile payments cost further and further up the value chain, ending up at the manufacturer. With these costs absorbed as distribution costs, mobile payment systems will become the primary methodology for movement of money in the FMCG space and the winners will be the banks sitting on the Mpesa float accounts, currently numbering not less than ten as well as Equity Bank.

Finally, to my third conclusion: Driving through Nyali, specifically Links Road that has morphed into the commercial superhighway of a formerly quiet, upmarket neighborhood, one is shocked by the concrete jungle that has emerged. An architectural travesty has arisen, with tall, dull colored buildings juxtaposed with short, squat faceless structures that have numerous “For Sale/To Rent” signs hanging forlornly on their shiny fences. Anecdotal evidence points to proceeds of Somali piracy being used to put up the buildings. It is a clear case of “if you build they are not guaranteed to come.” There are even more empty apartment blocks in Shanzu, standing tall amongst the many boarded up beach hotels and curio shops that have called it quits during Kenya’s devastating tourism downturn.

Real estate continues to provide the fastest way to launder large cash based criminal proceeds. Buying land, then the building materials and labor costs are all cash intensive initiatives that gladly suck liquidity out of the hiding place at the bottom of the criminal’s mattress. Buying finished buildings is even faster. But the music stopped playing on the piracy routes, almost exactly at the same time as the terrorist attacks stepped up in Kenya leading to the economic downturn at the coast. It’s important to note that I am not saying all the buildings that have come up were funded via illegal proceeds, but those that were just added to the grief of the legitimately funded buildings: No tenants.
Which gets me thinking about why the same is not happening in Nairobi. Why does the commercial and residential building stock continue to grow? Outside of insurance type corporates flush with liquidity, and Chinese contractors importing cheap borrowed funds from their banks, who or what is fuelling additional building stock using cash rather than borrowing? It bears noting that overpriced wheelbarrows, biros and hospital gates continue to gain traction and if our the music ever stops playing in the corruption concert, the specter of empty buildings standing forlornly in Nairobi’s mid to upmarket addresses will undoubtedly follow.

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Twitter @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]