Bank of the future will stop charging customers for keeping or moving money —Mukuru

Kato Arnold Mukuru is the Managing Director Head of Frontier Markets Research at EFG Hermes. EFG Hermes is an investment banking and non-banking financial services company, operating in 12 markets across four continents including Africa. In this online interview with CHIMA NWOKOJI, Mukuru suggests areas that future-looking institutions should focus, to survive competition. Excerpts:

How long have you been following business developments in Sub-Saharan Africa and other continents where you operates?

I have 19 years of experience in investment banking in New York, London, Madrid, Lagos and Dubai, the first four years of which were in corporate finance and the last 15 in research, where I covered European, South Asian, African and Middle Eastern banks and insurance stocks. I joined EFG Hermes in mid-2017 as Head of Frontier Research to lead the expansion of our research offering across core frontier markets in Sub-Saharan African and Asia.  The Research teams I managed  have been ranked 1st in Sub-Saharan Africa and among the top three across the frontier universe. Going through notes from panel discussions at the 2019 EFG Hermes One on One conference in Dubai, I have two initial questions.

Should banks invest in own financial technology or collaborate with FinTech startups?

The Fintech firms are challenging the traditional banking model by reducing the cost of distribution and serve. They are fundamentally changing the cost of providing banking services and for this reason banks have no choice but to invest in and alongside these Fintech companies. Having said that, this will not be an overnight process, as customers still want to touch and feel their banks.

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What should a bank of the future be doing today in terms of deposit mobilization and customer service especially in relation to dispense errors from Automated Teller Machines and bank charges (high transaction fees)?

A bank of the future will offer frictionless transaction services. What do I mean by this? I mean that, banks will no longer be in a position to charge customers for keeping or moving their money in the future. In a cashless society, which is the natural evolution of the Fintech transformation, customers will not be willing to pay their bank to hold or use their money. Banks will have to make money off the float and the other financial services it provides such as savings, credit, insurance, wealth management among others.

What are the best ways for banks to tackle cyber-attacks?

Invest in protecting their management information systems (MIS) from future cyber-attacks. There is really no other option.

At the EFG Hermes’ recently concluded 15th Annual One on One Conference, a panel talked about the value of data to the emerging industry; “Data is the new oil” .

What types of data should banks in the Emerging Markets be interested in – to get maximum value?

All customer data, as this will allow you to paint a rather accurate profile of your client. What each client spends on and where he spends it will tell you a lot about the client. This information is very valuable to advertising companies and their end customer, but must be respected and treated with full transparency with the customer. The violation of a customer’s right to data privacy is not going to be tolerated going forward.“EFG Hermes has developed a program to underwrite ride hailing drivers looking to finance a vehicle upgrade even when they don’t own the car. We look at over 25 data point from their cash flow and income to how many hours they work, when they work, and their ratings from their customers.”

Can you offer further explanation on the above statement by Walid Hassouna, CEO, EFG Finance Holding from the same panel?

My understanding of this statement is that, EFG Finance has built algorithms that can predict when a driver will be looking to finance the upgrade of his vehicle based on over 25 data points that they have been able to collect about that driver. This is a good example of how banks and finance companies will be using customer data to know when to offer them a mortgage or a new personal loan. But, I would insist on saying that, banks and finance companies must be careful about what they do with this data. Although they have collected it and used it for a specific purpose, the owner of that data is the customer in my opinion.

What is your assessment of the adoption of open banking in Emerging Markets?

It is coming along well, but is hamstrung by poor infrastructure in a lot of our countries. If you do not have electricity to begin with, all of this cannot happen. In addition to constraints in infrastructure, the penetration of the internet and smart phones are still too low in a number of our markets. Lastly, education is yet another barrier to entry.

In Emerging Markets where most governments fail to use tax revenues effectively in providing adequate infrastructure, when should banks – across Africa and in Nigeria – begin to tap into tax credit opportunities to aid them in providing business enablers like electricity and security?

In my opinion, banks can participate in the provision of infrastructure, but this should be done in partnership with the state to ensure that the infrastructure is not too costly for the masses to use. Banks are for profit organisations and therefore not best positioned to provide public use infrastructure. Rather than trying to work around the governments, my suggestion would be for the citizens to demand for better governance. According to the EFG Hermes 2019 Pulse survey, 41per cent of the respondents said business operators and investors see risk factors arising from political uncertainty while 24per cent were more concerned over changing regulations and a similar percentage over poor consumer confidence. Now that political risk in Nigeria is reduced with the re-election of the incumbent president, what areas or sectors should investors be interested in investing this year Today, the market capitalization of the Nigerian Stock Exchange All Share Index, about N11trillion. It represents only 7 per cent of 2019E GDP (GN155trillion). There is significant scope for this to grow as more segments of the Nigerian economy are reflected in the stock exchange. The examples of industries that are under-represented in the NSE are telecommunications, up-stream oil & gas and agriculture.

In the sectors that are reflected in the NSE, we would note that the market capitalisation of its banks are far too small for the size of the balance sheets that they have built. The potential for consumption growth, given the size of Nigeria’s population means that the consumer sector is still a source of significant long-term alpha. Oil & gas is under-owned by local Nigerian companies and this process should continue to generate significant opportunities. Agriculture needs to come to the capital markets – private capital sees the value in agriculture, but has not vehicles to invest in.