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There’s more to banks going digital that just disruption

By Samuel Nderitu | January 24th 2017
Bank of Africa’s Monrovia branch in Nairobi is one of the 12 branches the lender plans to shut down as it seeks to cut costs. [PHOTO: WILBERFORCE OKWIRI/Standard]

Several banks have announced they will no longer open new branches and will now focus on digital banking.

Just last week, Bank of Africa announced it would close 12 of its 42 branches, and move most services to its digital platform. I foresee more banks heading in the same direction.

While some might argue that this development is due to the recently enacted interest rate capping act, in my opinion, the shift to digital banking solutions was going to happen regardless of changes in the interest rates regime.

There have been several pointers to this, with the Central Bank of Kenya’s annual banking supervision reports (2015 and 2014) indicating the number of new branches dropped from 101 in 2014 to 80 in 2015. This number will certainly drop in the 2016 report and into the foreseeable future. Yet, the number of both loan and deposit accounts in 2014 and 2015 continued to grow.

Lost confidence

This shows that the digital shift is no longer the future but the present. It is a worldwide trend and it is just a matter of time before some banks in Kenya transform to be fully digital and branchless.

In Europe, Fidor Bank is a fully digital bank that was founded in 2009 after the global economic crisis. It aims at restoring lost confidence in the banking industry, and currently has 100,000 customers. On its website, the bank says it interacts with customers on social media platforms.

Back to the local scene, even as banks ‘go digital’, how many of them have digital managers? Even more critically, how many have a well-thought-out digital strategy?

In a 2014 global retail banking survey by PwC, 59 per cent of respondents expected the importance of branch banking to diminish significantly by 2020 as customers migrate to digital channels, yet only 16 per cent viewed themselves as very prepared for the transformation.

For a bank to successfully embrace digital banking, there has to be a documented digital strategy, with a clear transition plan from the current mode of operation. The strategy should address the challenges anticipated in the transformation and have strict implementation timelines.

In the survey, senior banking IT executives identified the following as the top six barriers to the success of a digital strategy: complex and legacy core banking systems, regulatory environment, lack of budget, culture of organisation, lack of talent and lack of commitment from the board/CEO.

Digital strategies should, therefore, be aligned to both the IT strategy and the overall business strategy. The strategy should cover all three facets of digital – mobile, Internet and agency banking – and for it to be effective, it must be driven from the top.

There is also need to establish governance structures around the digital strategy at both the board and management level, with a team in place to drive this agenda.

In addition, banks should recruit digital managers that report directly to either CIOs, or even better, CEOs. This will ensure this transformation receives the attention and seriousness it deserves.

The strategy should also capture any investments needed for the transformation. Boards must also ensure adequate funding is provided for the actual implementation of the transformation.

Another aspect that digital strategies should cover is proper project and change management for staff and customers. The digital transformation will result in redundancies or change of roles for most staff, and it is critical to have strong change management policies, including communication plans, to ensure positive adoption.

Information security is a key component. In the global survey, 45 per cent of senior technology executive respondents said the need to secure data is paramount among digital banking challenges. Incorporating risk and compliance in the entire digital lifecycle is crucial. Risk departments in banks must hire talented information security experts, and conduct regular stress tests and vulnerability assessments.

The strategy should ensure the bank has a conducive environment for innovation. Technology evolves fast and what is relevant today may be totally outdated in two years’ time. Without innovation, the strategy will remain just another fancy document gathering dust on the shelves.

In the next few years, the most successful banks will be the ones that respond quickly to customer needs/trends through innovative digital products. Given that digital channels collect a lot of data, banks will need to use data analytics to study customer trends, and use that as a basis for innovation, marketing and decision making.

The writer is a manager with PwC Kenya’s Advisory Technology Practice.

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