Cyber-risk, which includes data privacy and security, turned out to be the key areas of concern for institutions in their innovation endeavours, according to a 2022 survey by the Central Bank of Kenya(CBK).
The CBK conducts an annual innovation survey to understand the trend and impact of digitization in the banking sector to inform appropriate policy decisions. The aim of these surveys, therefore, is to collect current and forward-looking information on Fintech developments to establish the state of innovation in the Kenyan banking sector.
Findings from the 2022 CBK survey show that 92 per cent of banks and 100 per cent of MFBs identified cyber risk as one of the top three innovation-related concerns. This is similar to the findings of the 2018-2021 CBK Innovation Surveys.
Consistent with the 2021 Innovation Survey, liquidity risk remained the least considered innovation-related risk for banks and MFBs.
More than half of those surveyed, or 57 per cent of Micro Finance Bank(MFBs) and 54 per cent of banks, considered third-party and vendor management risk as one of the top three innovation-related risks.
This correlates with most of the institutions that responded to using an outsourced or collaboration and partnership approach to the development of innovative products. This is lower than 71 per cent of MFBs and 67 per cent of banks in 2021, indicating improvement in the management of third parties.
In terms of the latest technological developments within financial institutions, Application Programming Interface (APIs) have been adopted by most institutions with a 92 per cent and a 79 per cent adoption rate by banks and MFBs, respectively, which aggregate to 89 per cent.
This is followed by Big Data and Data Analytics, Biometrics Technology, and Cloud Computing, with an adoption rate of 57 per cent, 51 per cent, and 47 per cent, respectively across all financial institutions.
APIs describe a system architecture that enables interactions between different software applications via a specified set of protocols.
This allows software applications to communicate with each other to exchange data directly or to access another software application’s functionality, through automated access.
Apart from increased exposure to cyber security and data exposure risks as well as fraud, other product innovation challenges include ever-evolving customer needs, lack of adequate resources to support research, product development, capacity building for staff and customers as well as innovation awareness creation.
Financial institutions also have to deal with competition from other financial institutions and fintechs investing in product innovation, low level of customer education and knowledge of modern technologies, restrictive regulatory requirements on the use of emerging technologies and delays in project implementation due to difficulties in incorporating changes with the various vendors that the institution must partner with.
The CBK survey also notes the lack of a level playing ground presented by unregulated competitors benefitting from regulatory arbitrage, competition for skills amongst financial institutions and other global players like Microsoft, Amazon, and Google, resulting in a scarcity of talent with requisite expertise and experience and increased exposure to third-party vendor risks because of heavy reliance on their technology.
