Is your bank ready for the ‘new normal’?
A bank is a very special institution. When you become a custodian of other people’s money, you become bound by very particular regulatory rules to ensure you do not misuse the privilege. When you lend that money out to others, society must ensure you do not use that power to bring those others to ruin.
Bankers have misused their powers throughout their history. Every so often a bunch of bankers will go rogue. They will divert the money entrusted to them by their depositors to their own ends. They will engage in smoke-and-mirrors games with their figures. They will play fast and loose with accounting rules. They will pay themselves massive bonuses. Eventually they will get caught out and be forced to close. Wounded depositors and shareholders will scream blue murder; society will demand a reckoning; regulators will wake up and start tightening controls. We will all say “never again.” Until the next time.
We are in such a situation in Kenya today. Three banks have been forced into closure or statutory management in recent months. The new sheriff in town, Central Bank of Kenya governor Patrick Njoroge, is taking no prisoners. He has cracked the whip, and promises to keep doing it.
At such a time every bank and banker in the land should stop and take stock. This is not just about those who committed the most egregious breaches of the law and of good practice. Everyone in the industry will be affected by what is to come. It would be wise to pause and think: what should my bank be preparing for?
‘The new normal’ is a phrase often used by Governor Njoroge. He tells us that a good bank now needs to ensure it is built on three pillars: transparency; strong governance; and a robust business model. First, banks have to open themselves to sunlight. You can no longer conduct murky deals behind the curtains. The regulator wants full sight of what you’re up to, long before you create trouble for others. Second, banks need to stop having joke boards and joke directors. Corporate governance needs to evolve beyond naked self-interest and superficial scrutiny. And lastly, we don’t need what the governor terms ‘boda-boda’ thinking: me-too mimicry that makes all banks look the same.
Here’s the thing, though. Please don’t imagine that this stuff is all about one individual, Patrick Njoroge, and will go with him someday. It is indeed the new normal, all around the globe. As a long-standing observer of banks I can confirm that the game needs to be played very differently now – and that we ain’t seen nothing yet.
New technology is causing daily disruptions to banking models – and it hasn’t even got going yet. Wait until you see what blockchain technology will bring in its wake. Ledgers that are fully visible to all parties at all times will not just revolutionize payments systems; they will change the face of regulation and governance too. It’s only a matter of time before every transaction you make will have full, real-time transparency. The era of going back in time to audit things that happened last year will be a forgotten peculiarity. The idea that we have to trust certain worthy individuals to sit on boards to offer meaningful scrutiny may become another anachronism when artificial intelligence algorithms get going.
Similar revolutions will occur on the strategy side. Universal banking is in decline the world over. The all-things-to-all-people bank brand never really worked, and is now under severe assault. Nimble ‘fintech’ firms are eyeing the many legions of fed-up customers, and are beginning to offer banking that follows you around and works for you in your life. Traditional banks in mature economies are closing branches, reducing staff numbers and scrambling to catch up with products that are simple, mobile, contextual and personalized. And if you haven’t been paying attention, that is happening right here in Kenya: witness the astonishing growth in bank products linked to MPesa.
I state it again: this will all happen whether you’re ready for it or not. It would be wise to be ready. If your bank is not tightening its internal controls; not beefing up its governance systems and processes; not deepening its competitive advantage and bonds with customers; and not invoking an action plan for systematic innovation; well, then. Don’t look surprised when the new normal happens and you’re not part of it.
(Sunday Nation, 10 July 2016)