For us, Fintech only matters if it is helping Kenyans solve real-world problems or seize genuine opportunities.
FSD Kenya does not have an official “fintech strategy” but much of our work over the last 13 years has been about the use of technology and innovation to deliver more value through financial solutions as a means to stimulate wealth creation and reduce poverty. For us, Fintech only matters if it is helping Kenyans solve real-world problems or seize genuine opportunities.
A plethora of definitions for fintech exist and the term has been used in myriad ways since the 1950’s. I think of “fintech” as the application of innovative business models and technology to improve the delivery of financial services. This definition spans institution types (from traditional banks to the newest and coolest entrants), client segments (from the financially excluded to the hippest millennial) and covers all the “2” payments between people, business and government: P2P, P2B, B2B, P2G, etc. Our work at FSD Kenya has also spanned this diverse fintech landscape.
One of our earliest interventions was policy guidance to enable M-Pesa, a project which emerged from the UK’s Foreign, Commonwealth and Development Office’s (FCDO) Financial Deepening Challenge Fund (FDCF). The “Mobile Micro-Finance” application’s mission was “to enable increased connectivity in the micro-finance sector, by providing a data communications platform that will allow financial institutions to grow.” However, in the true spirit of fintech (even if the term was not yet in common use), M-Pesa pivoted from microfinance repayments to person-to-person payments based on the feedback loop of consumer research and consumer behaviour in the pilot. The research that we supported with Professors Tavneet Suri and Billy Jack confirmed that this “fintech” solution delivered some value to low-income households.
Paybill functionality enabled entities to leverage the platform for payments including utility providers, financial institutions, schools, health providers and other businesses. Consumers liked the convenience of mobile money payments and businesses liked the operational efficiency. But perhaps even more transformational was the opportunity remote mobile payments created for new business models such as the pay as you go energy space.
One of our earliest engagements with newly enabled business models was with Jipange Kusave, a mobile credit and savings offering. Even though the pilot was highly-valued by the users, it was not pursued by the entrepreneurs in part because the business model required savings collection not allowed by an unregulated fintech.
In many ways, the original “Mobile Micro-Finance” concept came full circle as financial institutions linked with M-Pesa to make and receive payments. Once this moved beyond just transactions to more strategic partnerships with banks, it had a dramatic increase on formal financial inclusion. Although the first mobile banking partnership with Equity Bank, M-Kesho, scaled quickly, it lost momentum and saw little use as a pure savings proposition. However, when M-Shwari was launched in partnership with CBA, it opened 9 million accounts and made 20 million loans to almost 3 million customers in just 2 years. One could also argue that it leveraged the key insights from Jipange Kusave as CBA was the financial partner for the pilot.
It would go beyond the length of a blog to cover all FSD Kenya’s work in supporting fintech solutions but here are a few highlights. FSD Kenya has:
- Worked with a large commercial bank and mobile network operator to design a financial solution leveraging technology and consumer insights dubbed Payplan. Although it never launched, the principles were incorporated in other products.
- Studied why merchants were not adopting digital payments with Kopo Kopo through Business primitives research leading to a pilot to lend to merchants based on transaction history.
- Helped the Government of Kenya consider how consumers might use mobile payments to buy treasury instruments resulting in the launch of M-Akiba.
- Ran an experiment with ACRE, an insurtech focused on agriculture, to drive greater adoption of a replanting guarantee.
- Facilitated a flexipay pilot to test the combination of mobile payments and social network financing to keep kids from being sent home from school.
- Tested the potential of digital transport vouchers to increase pre-natal visits and deliveries within clinics.
- Mentored and shared consumer insights with fintechs in partnership with players like Village Capital and the Citi Mobile Challenge.
- Encouraged mobile money operators to move forward with functional interoperability of mobile money payments.
- Provided advisory support for Equitel’s microinsurance
- Created TouchDoh, a smartphone app targeted at Youth with Well Told Story to gamify finances through the personification of money.
- Supported research to explore the emerging impacts of M-Shwari digital credit.
- Digitised informal savings group records with CARE and Software Group through the e-recording
- Provided guidance and research support for the proposed Capital Markets Authority (CMA) regulatory sandbox for fintech.
I like to say that Kenya’s possibility frontier for financial innovation is further than most because of the levels of financial inclusion, the extent of financial infrastructure and an enabling policy environment. On the other hand, this also means that Kenya experiences the challenges, insights and learning before others as we have seen in our emerging work on fintech.
Here are a few observations from our work:
- Cool tech is not enough – fintech also needs a sustainable business model and must meet real consumer needs
- Traditional players can be slow – traditional players, especially banks, can be held back by legacy systems, complex internal approvals, and short-term incentives; this can be especially frustrating for intrapreneurs trying to innovate
- New entrant fintechs face barriers to entry – talent is expensive; regulatory hurdles unclear, uneven access to financial infrastructure, network effects, etc.
- Consumer insights hold untapped potential – new financial solutions are often more based on hunches than real insights from consumers & analysis of the real economy; some innovators are seeing the untapped potential and incorporating it into their work
- Fintech entrepreneurs face capital constraints – entrepreneurs find it difficult to raise the right types of capital at the right time especially working capital debt; this is even harder for local entrepreneurs who often lack the networks and language to attract investment
- Fintech leaves some behind – those without phones (or limited phones), without IDs, far from mobile connectivity and agents, and/or who are illiterate or innumerate do not benefit
- Innovation can get ahead of market conduct principles – the significant gains in financial inclusion notwithstanding, more care is needed to ensure that consumers are given transparent and fair prices and terms and conditions for value-enhancing finance not value extraction
Our upcoming 4th annual lecture, “The inevitable: a glimpse of the future of fintech”, by MODE founder Julian Kyula, inspired me to reflect on our work in fintech. We hope that you will be inspired to join us at the lecture but also on the journey to ensure fintech creates value for Kenya.