Kenyan banks risk losing business to new players

Global management consulting firm McKinsey& Company has warned Kenyan banks to revise their financial strategy amid stiff competition from new players in the market who have disrupted the traditional banking model where banks take in funds from depositors at relatively low interest and loan them to creditors at high interests (financial intermediation).

According to Mckinsey’s eighth annual review of the global banking industry dubbed New rules for an old game: Banks in the changing world of financial intermediation, banks are losing ground to new entrants including Financial Technology companies (fintechs) that offer digital financial services and real estate companies that guarantee depositors better interests as compared to banks.

McKinsey attributes the disruption to growing penetration of smart phones and a high willingness by customers to do their everyday banking digitally, higher pace of innovation and delivery by agile fintechs compared to traditional banks and limited regulation of fintechs by the Central Bank of Kenya (CBK).

“Kenya is seeing even higher levels of disintermediation than other markets, specifically in what the report calls the everyday commerce and transaction layer of the market, which is the area where Safaricom and a wave of new fintech players are focusing,” reads the report.

The report warns that if banks are to maintain their status as the industry’s big boys, they need to move with speed to protect their share. McKinsey argues that with this development, Kenyan lenders have four options.

First, if the banks wish to cling on to the traditional financial intermediation model, they need to fully digitise and optimise the operations.

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The management consulting firm is also advising the Kenyan lenders to focus on specific business segments like Safaricom has done with Lipa na M-Pesa.

“Safaricom, through its Lipa na M-pesa platform, has already captured a significant share of the payments revenue pool, while through M-shwari, Safaricom has a leading share of the rapidly growing digital credit revenue pool. In the Fintech space, there are increasing plays in digital/mobile payments and credit – fintechs have raised over Ksh 30 billion in capital and have over 20 million customers,” reads the report.

McKinsey is also advising the lenders to be the innovative end-to-end ecosystem orchestrator as well as the low-cost “manufacturer”.

However the consulting company has written off an immediate threat saying that the banks still have the advantage in areas where affluent customers and corporates value personalised touch and strong relationships.

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Conclusively, the McKinsey report states Kenyan banks should not rest on their laurels, “Without rapid action, the banks will be further disintermediated in everyday commerce and transactions and face growing competition in high-value pockets of the other intermediation layers,”