The news this week in the banking and fintech world has been the acquisition of Choice Microfinance Bank by Chinese Investor Robin Duah Wei. Wei’s acquisition is interesting because he not only owns a digital advertising company but also mobile digital lenders in Kenya and Nigeria. 

In other words, he is in essence a Fintech company looking to acquire a majority stake (he bought an 85% stake in Choice MFB) in an established microfinance institution that has the regulatory requirements that allow him to catapult his mobile fintech eventually into a bank. This strategy, referred to as vertical integration, allows smaller companies to quickly gain the muscle mass required to compete with incumbents in the market. 

Wei’s strategic move is one we are likely to see more of in the Kenyan fintech space as companies start to grow through mergers and acquisitions of small banks. In the same breadth, the Central Bank also announced the acquisition of 51% shareholding of SMEP Microfinance Bank by Hope Advancement Inc, a charitable institution in the US that has shareholding across multiple microfinance institutions in Africa. The second example is not a fintech acquisition but it shows growing interest in local MFIs and the question to ask is why these acquisitions now and how is this likely to disrupt the marketplace? 

For one, Fintechs are born in the digital age, enabling them to utilise technology and innovation to overcome challenges typically experienced by traditional financial institutions. They start out small and adopt customer-centric approaches early on using user-friendly interfaces and tailored solutions and in most cases, increase financial inclusion for netting in a largely ignored section of the populace by providing financial products and services to the marginalised. They also wield superior data analytic capabilities. 

This can allow them to turn around the operations of small underperforming banks while at the same time overriding the lengthy process to scale and meet the regulatory requirements or establish a market base. Existing fintechs also are able to bring in their experience in digital lending or online payments solutions and compliance as they have invested in and developed superior KYC capabilities. Given the risky nature of digital lending, or making online payments, fintechs invest a lot in KYC and compliance. 

Fintechs also tend to have funding from venture capital or private equity that can allow them to build a strong balance sheet in the small banks and defray any outstanding debt and non-performing loans. This ‘partnership’ allows fintechs to thrive in a different world from their core business and to offer more to clients. 

Finally, fintechs are masters of ‘layering.’ In addition to their core business, Fintechs have mastered the art of offering other related services and this is what even allows them to venture into banking. This is also a result of knowing what additional services their clients may require and being in the position to offer these services. 

Of course, fintechs have their own challenges that they have to face — cybersecurity, data protection and stiff competition. So transitioning to a traditional banking institution can be difficult to navigate. Internationally, there is also the problem of the fintech ecosystem. Other countries have created ecosystems where these fintechs are able to thrive but Kenya still has a long way to go and that is why the Memorandum of Understanding (MOU) between the Association of FinTechs in Kenya, the Kenya Bankers Association, and the Financial Sector Deepening (FSD) programme reflects a collaborative effort to champion the development and adoption of an open finance policy framework. Such collaboration is essential to bring together the expertise and insights of various stakeholders and to ensure that the framework aligns with the needs of the Kenyan financial sector. 

So perhaps the real question is whether older banking institutions are able to fend off the onslaught of smaller fintechs looking for a bigger share of the pie. Are they able to ride the wave of disruption and still keep their market share in a turbulent world and what are they doing about this? 

Some of the insights are borrowed from members of the Digital Disruption Caucus