Banking Consolidation in East Africa = FinTech’s Opportunity

During the 2008 financial meltdown my former employer, Tim Draper reminded us, “never let a good crisis go to waste.”

That moment is now for East Africa.

The failure of 3 Kenyan banks in the past year has hastened consolidation in the region. At the same time, Kenyan banks face an ‘Uber’ Moment driven by mobile platforms.

As reported in The Daily Nation, in 2015 Equity Bank did 3x more mobile banking transactions than agency transactions (151m vs. 51m) and received almost 4x more loan applications from phones than physical branches (1.9m vs. 533k). Kenya Commercial Bank (KCB) reported a similar phenomenon with 70% of transactions driven by mobile channels.

For small banks afraid of being left behind, the answer is: Technology.

Today, technology has made it possible to run a bank for a million people with a hundred people. Mobile phones provide customers with convenience and reduce operating costs. Facebook, MPESA and SIM cards enable identity verification and call & SMS logs allow for risk underwriting. The Android marketplace has made acquiring customers cheaper and faster.

Who will innovate?

Unless you were a depositor at one of the failed banks, you needn’t shed tears; Kenya has enough banks, 42 for a population of 44 million (compared to Nigeria’s 22 for its population of 180m and a 10x larger GDP). M&A has started in Kenya, and elsewhere in the region, and there’s a bake-off for what’s left of Kenya’s Chase Bank. Fewer, large banks should bring depositors more security and increase transparency as the bigger banks are publicly traded.

Some local analysts worry that consolidation will decrease competition from small banks, which have been important for innovating and expanding services to low income individuals and SMEs. As @KarenKandie pointed out, only 15 years ago Equity Bank was itself a small lender.

But today, innovators have new tools to leverage: mobile money, social networks, app stores and data science. And the mantle of innovation has been picked up by startups.

Unlike 15 years ago, there are lots of interesting FinTech startups in East Africa: M-Kopa, Branch, Saida, Shield, InVenture, Kopo Kopo, PesaPal, FirstAccess, Umati Capital and PesaZetu to name a few. The region is enjoying a startup renaissance birthed by the distribution and digitization that cheap mobile connectivity and ubiquitous mobile money provide.

Though small by comparison, many of these startups have grown their customer bases at a faster clip then local banks because of the speed and ease of use offered by MPESA and Android. But while growth is enabled by mobile platforms, differentiation and profitability will come from a fuller suite of products and lower costs of capital.

This is where banks can add value.

Bank to the Future

Banks have substantially lower costs of capital than startups and can offer more regulated products like savings and insurance. They also have brands and the ability to cross sell products to their existing customer bases at scale.

Faced with ever larger Kenyan giants like CBA, KCB, Safaricom’s expanding portfolio of financial services and arch rival Equity Bank‘s new JV with Airtel (Equitel), resource-constrained small Kenyan banks should look to FinTech startups to maintain relevance as African banking quickly evolves.

That means invest, acquire, and partner with these new tech startups, many of whom are hungry for debt and equity, and some of whom are attracting substantial capital from US investors while local banks look the other way.

It’s been over a year since AFB acquired Hilda Moraa’s Wezatele, perhaps Kenya’s only real tech acquisition, and yet the available investment landscape has only gotten more interesting. What are the banks waiting for?

As Bernard Moon at SparkLabs Global Ventures described in TechCrunch, FinTech is a global phenomenon and a long-term game, but for incumbent players with a stake in East Africa — the home of mobile money — Nairobi’s FinTech startup community presents a great opportunity to embrace and invest in the future now. Don’t let a good crisis go to waste.