That used to be a bank over there

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.

Carol.musyoka@gmail.com
Twitter: @carolmusyoka