The trends and impacts of innovation on the banking sector
By Shantel Nafula
The Kenyan Banking Sector Innovation Survey 2021 conducted in February 2022 by the Central Bank of Kenya shows the country continues to trail blaze in mobile financial services.
The study shows that the banking sector has continued evolving and using emerging technologies. Financial institutions use technology to meet customer expectations for “anytime anywhere” financial services and drive efficiency gains. The Covid-19 pandemic accelerated digitalization by the banking sector.
The survey aimed to collect current and forward-looking information on Fintech developments to establish the state of innovation in the Kenyan banking sector as of December 31, 2021.
On customer-centricity, the CBK research shows that financial institutions, including banks and micro-finance banks (MFB), have been working on implementing the Kenya Banking Sector Charter, which has prompted institutions to innovate products that consider the customer first. All the institutions noted that ideas for product innovation originate from customer feedback.
Other key factors considered by most institutions before innovating a product are scalability, business strategy, competition, regulation, and return on investment.
Seventy-five percent of the respondents indicated that they have a dedicated function that spearheads innovation activities compared to 70 percent in the 2020 Innovation Survey. The innovation units’ major role is to align products and services being developed by the institution with customer needs. About 27 percent of financial institutions surveyed indicated that they had set up innovation hubs to promote innovation activities.
Eighty-seven percent of the commercial banks consider payments, clearing, and settlement services as the most important operations and service areas to innovate in short to medium term strategy compared to 57 percent of MFBs.
The study further reveals that 86 percent of MFBs consider credit, deposit, and capital-raising services as the most important operations and service areas to innovate in short to medium term strategy compared to 64 percent of commercial banks.
“Payments, clearing, and settlement services was the functional area where most banks introduced an innovative product in the period January 1 to December 31, 2021, with 67 percent of the banks innovating in this area compared to 59 percent in 2020,” the report states.
In addition, credit, deposit, and capital-raising services were the functional area where most MFBs introduced an innovative product from January 1 to December 31, 2021.
Ninety-two percent of the institutions have adopted or developed a mobile banking solution (app or USSD) to assist in their administration of banking and customer-relationship services, according to the report.
“30 percent of the institutions noted that credit business is the least digitized area of their institution’s operations. The highlighted areas include loan application, credit appraisal, credit approval, disbursement, and repayment processes.”
Cyber-risk (data privacy and data security risk) was the key risk for institutions in their innovation endeavors, similar to the findings of the 2018-2020 Innovation Surveys. Ninety-two percent of banks and 86 percent of MFBs identified it as one of the top three innovation-related risks.
“71 percent of MFBs and 67 percent of banks consider third party and vendor management risks as the key innovation related risks. This correlates with majority of the institutions who responded to using an outsourced or collaboration and partnership approach to development of innovative products,” said CBK in the report.
