Lateral Thinking: Samora Kariuki — Open Banking Interview
- What are your views on Open banking in Africa? How will the concept differ here vs other markets?
Open banking is an often-used term but with different implications based on where it is used. In principle, open banking is more of a philosophy as opposed to a specific implementation and it’s based on the markets it’s being implemented in. In Europe and USA, the approach is to enable access to customer information given that most customers have accounts with a traditional institution. The emphasis here is then on the orchestration of bank-owned customer information. Of course, payments are part of this through directives such as PSD2 and infrastructure such as SEPA and Faster Payments.
My view of the African open banking space is that it will be more of payments and accounts infrastructure-led where banks will open up their systems so that Fintechs and non-fintechs can build propositions on top of this. Given the demographic profile in Africa, where median ages are between 17 and 25, then Fintechs or Telcos will own the customer and the role of Open Banking will be to provide financial primitives e.g. payments, credit as a service, and KYC.
2. Do you believe that change in the open banking environment will be regulator or market-led? How will this differ across major African markets?
Market-led but there will be convergence where I suspect the regulator will set standards. Nonetheless, most standards around data and payments have already been set globally e.g. ISO 20022 and GDPR and my view is that local regulators will adopt these standards with some minor customizations.
3. What is the role of the regulator? How would you compare and contrast the approach of CBK vs CBN?
It’s very difficult to compare and contrast. The two markets are completely different. In Kenya, M-Pesa has largely owned retail payments and in function, there’s no lower value payments problem in Kenya. The same can be said about financial inclusion with innovations such as M-Shwari even for savings accounts. In Nigeria on the other hand, the regulator has to manage a bank-led push towards lower value payments, last-mile distribution as well as financial inclusion. They have thus had to work harder than the CBK with innovations such as NIBBS, shared agent network as well as now the e-Naira. This of course with completely different macroeconomic environments. Kenya is more diversified in terms of sources of FX whereas Nigeria is more oil-dependent. This has led to macro issues around FX and the CBN has to manage this. I suspect some of the actions we’ve seen around fintechs offering both crypto and wealth tech are more driven by concerns around capital flight and currency management.
4. Even with a strong regulatory framework can banks frustrate the widespread adoption of common APIs?
In the long term, no. I think banks will shift and move towards open APIs but more primitive based i.e. APIs around payments, account opening, KYC, etc. I don’t think access initiation will be a big deal, particularly in Kenya based on the first answer above. In addition, open banking dives deeper into the infrastructure rather than publishing APIs. There’s an interesting interview where Abdul Hassan of Mono talks about the fact that all published APIs are not the same. At a deeper level, the main issues surround the reliability and scalability of the underlying banking infrastructure. A number of banks have published APIs through platforms such as WS02 and Kong but in the background are monolith legacy systems. This is a lipstick-on-a-pig approach.
5. How are banks across the continent approaching open banking as an opportunity or threat? What factors impact banks’ willingness to share data?
Banks with big retail bases will work hard to ensure that they don’t share customer data and maybe this is where the regulator comes in and enforces this. However, they will most likely respond with a poor API experience for the sake of “complying”. I don’t think this is necessarily an issue given one or two banks per market may create proper BaaS propositions that Fintechs can build on thus obviating the need for access to customer data.
6. You highlighted that the competitive structure of the banking markets could impact how banks treat the opportunity. Could you expound on this?
European markets both UK and continental Europe have big 4 type banking markets where 4 or 5 big universal banks dominate the banking landscape. Given this dominance, it makes sense for regulators to insist on data sharing so that niche propositions can be built by third parties but powered by the data sitting inside banks. Nonetheless, the US, for instance, has thousands of banks all serving specific niches such as banking the military, banking small businesses in Chicago, etc, and thus a regulator-driven model can’t work. In South Africa, you have big four dynamics and thus this approach may work there. In Kenya, a big 4 dynamic is slowly emerging though far from being like the one in Europe. That being said, M-Pesa throws a spanner in the works given that it’s the financial interface for most Kenyans. Nigeria doesn’t have a big four dynamic as well. It thus doesn’t make sense even from a macro perspective to have regulator-driven models.
7. You have previously stated that bank executives have to think about open banking as more than tech but adopt a multidimensional system where they adopt a culture that allows for innovation and supports the mindset of paving a customer journey. Could you expound on this?
Yes, but this is often curtailed by multiple priorities given the nature of universal banking where the bank has a mediocre service for each segment e.g. mediocre retail, corporate, etc. There’s also an issue of path dependence where investments into “channels” in the mid-2010s still need to be repaid and thus banks are not willing to invest in a significant way into open API infrastructure and BaaS.
8. What are the core technical challenges that banks face when adopting common API standards? How much of a challenge is it for banks to update legacy systems to outward-facing fourth-generation models?
It’s a huge challenge, particularly for banks in Africa where upgrade cycles are determined by vendors. Some banks are approaching this issue by moving a lot of the logic out of the traditional core banking system and adapting leaner cores. Nonetheless, the approach to technology upgrades needs to change and move towards a first principle-based approach. The issue here is that many bank executives look at the tech from a traditional perspective with an emphasis that it works and that it can process transactions. It’s then thought that later we can add more bells and whistles once we want to do interesting things. From my experience, this never works, once it’s time to add bells and whistles, the system comes apart at the seams. Some big banks in Kenya for instance have integration middleware that interfaces with the core banking platforms. The more channels you add and the more customizations you do the more complex your system is. In some cases, branch tellers struggle to process transactions given that the channels are overloading the core banking system with a deluge of transactions. Banks should start with the use cases and the core should be based on what you want to achieve in the long term. Given that modern cores allow for componentization, then business use cases can be activated as and when needed. Thus indeed, technical challenges are quite significant. Given this context, you can tell how difficult open API initiatives will be. If Fintech wants to integrate into a typical bank, typically they have to know members at the EXCO level who can open the doors for them to access APIs.
9. In your experience are bank executives in Africa positioned to completely revamp their tech stack and are there any native African focussed fintechs such as Mambu that have in your opinion built a composable banking solution that could provide a cost-effective plug and play system?
The tech stack has multiple components, from KYC, Onboarding, payments tech, reg tech, etc. Each has to be considered differently given that systems nowadays are componentized and glued together using APIs. The likes of Mambu are just part of the solution but to be fair, traditional vendors such as Temenos, Finacle, and Finastra have upgraded their offerings significantly. The issue sometimes is cost. The revamping of tech is being done but the biggest issue is how this revamping is being framed. In principle, you should start on a clean slate and then slowly move the functionality into a modern stack. For many years, over 20–30 years, the first thing you did when you were launching a bank was to acquire a CBS. This is slowly changing, now what you need to do is to think about how your tech stack will enable you to serve your customers with the CBS being the last consideration. Consider, for instance, Vooma by KCB which is powered by a Huawei mobile money platform that handles ledgers and payments whilst combining a Sopra platform for lending given that Huawei does not have a lending offer. Vooma is thus a bank but the tech stack looks completely different than a traditional bank. Huawei (the digital platform) is bigger and more dominant within the stack than Sopra which is a traditional CBS vendor.
10. Which fintech companies have you seen that get you excited about helping banks adopt the open banking system?
There is quite a number including Mono, Okra, Pngme, and the likes that are all approaching this differently. Companies such as Churpy are very interesting given that they are approaching Corporate pain points such as accounts receivable management. I’d like to see a company like Smile Identity launch an open banking model where they combine identity data and financial data to enable a full identity “passport” that enables people to travel across fintechs and get customized services.
11. How do you see the evolution of open banking enabling the emergence of new business models?
I think financial primitives such as payments, identity, and store of value enabled by banks will power Fintechs in a big way. This could eventually lead to the demise of Telco-based mobile money. For instance, agency banking could be done by a Fintech company that enables instant payments between bank accounts enabled by a partner bank that handles the payments rails. There are so many opportunities in areas such as e-commerce, credit, SME banking, etc.
12. With the wave of funding for digital/neo banks do you feel that the liberation of customer data better enables them to challenge incumbents?
There’s very little to be liberated. The fintechs will be targeting millennials and gen-z who are largely unbanked and those who have thin banking data.In any case, a lot of the useful data e.g. payroll data may even exist in other data sources such as ERPs.
13. What advantages do new entrants have due to their lack of technical debt?
Technical debt is largely a timing issue, you can’t exist for more than 2 years and not have technical debt. Of course, the initial advantage is speed and time to market. However, this is largely dependent on how you execute over time.
14. Do you see many incumbents launching digital-only outlets or adopting a hybrid structure?
I think there’ll be a hybrid structure. As I mentioned, there are two problems. One path dependence is where previous investments determine how future investments will be made. Many bank executives still want to sweat out the investments in “channels” done over the last 5 or so years. Another problem is the focus on universal banking. When you look at the global banking space, the banks that have done tech properly (bar DBS) are niche banks. Goldman for instance hasn’t touched retail and thus they’re much better able to focus from an executive perspective on BaaS. Same as players such as Cross River and in Africa, Providius bank. CBA in Kenya was largely corporate and high net worth and that’s why they were able to partner with Safaricom and give this the focus it deserves. One of the issues with the big 4 in each market is that the management is managing too many business lines to give the tech the focus it deserves.
15. What of the smaller banks, do you see a world where they become the pipes for digital banks providing deposits and licenses, and will the regulators allow such a partnership?
The biggest opportunity actually lies with the smaller banks. I’m more bullish about this given that they have fewer legacy assets to write off and can thus pivot successfully into BaaS and partner banking. In Africa though, smaller banks have traditionally been owned by industrial groups with their focus being on banking a specific industrial group. It may be that they should be acquired and converted into pure BaaS plays. The successful partner banks in the US are all small banks such as Lincoln financial.
