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financial institutions
Training course
June 2019
Session 1: Financial inclusion and digital
financial services’ ecosystem
Digital transformation for financial institutions
June 2019
Session objectives and outline
Session objectives
Understand digital financial services and its role in financial inclusion
Appreciate the role of different players in the ecosystem and evolution so far
Session outline
Overview of digital financial services and its role in financial inclusion
Digital financial services’ ecosystem
Process efficiencies Client relationship Alternative Data and Credit Work flow management Marketing and
Authentication Transactions management Scoring on-boarding
Channel
ATMs/POS Terminal/ kiosk Agent networks Branch Internet Mobile Phone/Apps Staff
Discuss the digital financial services initiatives that have been taken
by your respective financial institution.
Technology
Technology is an enabler to digital financial services as it allows the users to
4 connect to financial inclusion and access services
Financial institutions have seen rapid growth of number of customers, assets and transaction numbers. With
Portfolio growth the ease in online interactivity and payment solutions there is a faster and seamless growth in the financial
institution
Analytics support in many areas, including sales, product design, pricing and underwriting, and the design of
Refined decision making truly amazing customer experiences
On front-end transformation, beyond digital channels, digital tools can augment frontline servicing (for
Enabling straight-through example, with forms on tabs or handheld devices rather than paper forms). Process apps lead to paperless,
processing more efficient work flows
Compete through new products, Digitization can be leveraged to introduce specialized products such as mobile emergency loans. Improvements
better service and competitive in efficiency can also help reduce the cost of sale for most microcredit products, providing opportunities for
pricing more competitive pricing.
On automation, financial institutions can realize up to 40% cost reductions by deploying work-flow tools and self-
Saving on cost and improved service capabilities. Almost two-thirds of EBITDA comes from the impact of digital on the cost base and loss
earnings provisions rather than from revenue uplift, which is why a focus beyond front-end investments is critical
Digital transformation is offering the right combination of: 1) digital solutions/tools, 2) delivered
digitally, 3) riding on digital technology, and 4) providing seamless user experience.
Open APIs
Providers of
Digital Interface Formal Financial
(phones, internet, Services
terminals, POS etc.) Connected banking
Platforms
(pesalink in Kenya)
Customer
Government and
Social Services
Integrated Risk management
Platform
Adapted from ‘A digital Pathway to financial inclusion’, Bill and Melinda Gates Foundation 2012
Service delivery
• End to end transaction
• Utilities, insurance and bill
payments
• Loan initiation and disbursal
Transactions • Real time person to person and
• Service requests person to merchant disbursement
• Origination requests • Integrated mobile payments
• Transaction requests • Loyalty programs
• Account blockage • Other value added services
Information • Authentication
• Sales information
Utility →
• Service information
• Branch locator
• Product information
• Alerts
• Transaction feedback
Complexity →
Client
Marketing and Appraisal and Controls and risk
relationship Transactions
on-boarding analysis management
management
Client Appraisal
Work flow Controls and risk
relationship and Transactions
management management
management analysis
• Lead management • Documentation • Credit scoring • Loan disbursement • Risk mapping –
Back-end • Segmentation and filing • Credit bureau • Loan repayment concentration,
processes • Targeted customer • Responsibility checks • Bill payment portfolio, single
service sharing • Financial analysis • Savings in/out borrower
• Automates offers • E-approvals • Loan utilization • Facility renewals • Control breach
for valuable • Schedules and checks alerts
customers reminders
Traditional Financial
Services
Middleware
Customer Intelligence
Credit centers
Hub and spoke Unstaffed center
Large branches in high Channels connected via video
traffic areas surrounded to remote office for
by small automated credit applications
branches
Internet/portal Banking
Video conferencing Connecting customers to
With expert specialist for financial institution
advice and consultation through secure web
portals
Integrated
product stage
Product
diversification
stage
Basic product
stage
• Service awareness
• Consolidating the market with • Diversifying revenue lines
• Testing adoption and business
Evolution Focus additional mass market value • Meeting segmented lifestyle
case (stickiness,
propositions needs
competitiveness)
What activities would the providers be focused on in each of the product evolution stages?
GET
Get Protect
▪ Digital: Remittance, Fundraising ▪ Digital: Freemiums, Wallets,
accounts Micro-insurance
▪ Formal: G2P SPEND ▪ Formal: Mandatory insurance
▪ Informal: Income, Wages, products
Remittances, Loans
PROTECT ▪ Informal: Social
savings/insurance
Product Examples
Remittance (P2P,CICO,International remittances) MPesa
Fundraising Accounts M-Changa
Micro Insurance Linda Jamii
Merchant Payment Lipa na Mpesa
Utility and Bill Payment PayGo
Digital Credit KCB Mpesa, Mshwari, KwikAdvance
P2P Lending Zidisha
Pension Scheme Mbao
Group Savings M-Chama
Mobile-Money Based Government Bonds M-Akiba
School Fee Payments Lipa na Karo
Using technology to
seamlessly match
Point A needs to solutions
Frictionless
security and
authentication
Fueled by big
data and Point B
cognitive Point C
learning
Session outline
Relevance of digital financial services for financial institutions
Impact of digital transformation for financial institutions
Time: 10 minutes
3
Digital transformation is impacting the entire financial sector
For traditional financial services industry to remain relevant, it needs to transform digitally and
adopt technology. To do so, it needs to:
Reinvent its Cultural change and adopting innovation mindset
culture
Meet users’ Users expect affordable pricing, quick and easy recourse, understanding of
expectations the services, efficient processes, and human touch
Manage time Leverage relationships, data, innate customer awareness, and local
and space understanding to develop a high-tech and human touch model
transitions
3
Impact of digital financial services
Enhanced products and services - opening accounts, Reduced Transactional cost - through
mobile top-ups, bill payments, savings, credit, and receive strategic partnerships
pension insurance and remittances
Opportunity to
innovate
Increased efficiency - disbursements ,
Value to the increased client convenience and
Increased loyalty financial security
institution
Reduced operational
costs Increased outreach
To exhaustively discuss DFS for financial institutions, we will look at it from 4 broad categories:
• Increased innovation • KPIs –for DFS product • Institutional change • Technology Devices
(innovative products) and people offering management required –PoS, Mobile
• Increased product DFS product/service • Roles and • Communication
and service sales • Measurement of KPIs responsibilities of key Channels –STK, SMS,
• Speedier product • Monitoring and personnel in USSD, IVR, NFC
development Evaluation integrating DFS to • Platform–Front end
• More competitive • Audit financial institutions applications, Back
products developed end applications,
• KPIs around integrating
developing products applications,
• Authentication
modules –security
system
Changing
branch
networks
Source:: Equity Bank Group Annual Reports from 2005-14, Equity Group
37 All rights reserved. This document is proprietary and confidential.
Digital transformation: Case of Equity Bank (2)
Equity Bank has the largest deployment of banking agents in Kenya. Some key facts and figures include:
Growth in customers and profits (2005-18) Transactions (2005-18, millions per annum)
513.0
28,500 Mobile
26,900
23,958
22,364 22,777
12,834
13,200
ATM
ATM
5%
Agency
12%
Source:: Equity Bank Group Annual Reports from 2005-18, EquityAgency
Mobile (Equitel
Group
15%
Mobile
(Equitel and
App)
Equitel Online
and App) 72%
77%
Equity 3.0
Source:: Equity Bank Group Annual Reports from 2005-14, Equity Group
38 All rights reserved. This document is proprietary and confidential.
Business case for digital transformation
Business case for digital transformation
Operational efficiency
222%
80%
135
20
Cost-to-income ratio
$
differential
1,098
18%
$ 448
New deposits, trillion New loans, billion
Source: IFC case studies, 2017
41 All rights reserved. This document is proprietary and confidential.
There is a business case in digital transformation (contd..)
Potential opportunities
Source: McKinsey Studies, 2017; Impact from digital transformation, % of net profit
42 All rights reserved. This document is proprietary and confidential.
There is a business case in digital transformation (contd..)
The agent networks in the study were not as efficient as their MNO counterparts, and tend to do fewer
transactions for fewer customers; however, they do have a much higher transaction value than initially
expected and their activity rates are higher than for MNOs
Considerable increase in share of the total customer base registered for the usage of agent banking
Innovative approaches combined with clever product and service offering can enlarge direct channel
revenues and boost the recognition of the DFS channel
$x00,000
$x0,000
$x,000
$x00
$x0
Cashless
Traditional
branch Branch in
store ATM
Agent with
POS terminal Agent with
mobile No
agent
• Technology is fundamental to DFS and to achieve low and variable cost for distribution of
financial services
Reaching scale is difficult, and even when it is reached, objectives may not be realized
because:
High operating costs of digital financial services (at least initially)
Early 2015: Low End 2015: Higher But, total unit costs increased: no
volume, high unit volumes, reduced unit increase in total # transactions, or
costs cost change of cost structure
2016 =
forecast
Digital channels will be more successful at high growth MFIs where the digital channel can increase
transaction volumes
MFIs with lower growth need to: reduce branch costs, or refocus branch activity on higher income sales
and transactions
In summary, digital transformation can and will bring increased benefits to MFIs, but the
journey may be harder and longer than expected!
Learn how to consider the various strategic choices and develop appropriate strategy
Session outline
Why digital transformation?
Strategic options and choices for digital transformation
Time: 5 minutes
Digital
Strategy
Plan Action
Why do you What
How can you
need to opportunities are
transform?
transform? there?
Digital Transformation
Processes Products
What?
Channel (delivery and distribution
People
channel)
Why transform?
? Additional revenue
Financial institutions
must identify ? Improving operational efficiencies
strategic objectives
for digital
? Maximising customer value; expanding outreach
transformation that
fits with the
organization, driving ? Increase effectiveness of operations
them to invest in the
business and rally ? Competitive pressures
people to action
? Emerging segments, market opportunities
How does the transformation objectives align with strategy and business model?
Digital readiness
► To assess where the institution currently is with respect to the digital transformation
review
Digital architecture
► Diagnostic based on existing situation and ► Financial technology which can facilitate ► Integration of systems to deliver the
digital design review the digital vision digital solutions
Based on the review of the case study of Equity Bank, discuss how Equity Bank managed to use
technology to:
• Strategy design for digital transformation,
• Expand its scope to offer financial services to other segments than it traditionally served,
• Increase its scale and outreach,
• Enhance efficiencies of operations, and
• Manage risks effectively.
Time: 20 minutes
Customer
Centricity
Omni
Risk • Strategies Omni-channel
• Visible executive Channel
Management presence
management Presence
• Optimize all distribution and
sponsorship to digital
delivery channel
transformation
• Robust IT Optimized
infrastructure And
Organizational Re-engineered
• Aligned and strategic
Alignment Processes
partnerships to
deliver on the Customer
promises Engagement
• Efficient processes through end to end
digitization of processes
• Enhanced customer engagement and retention to increase wallet • Enhanced productivity and staff leverage
share
• Digital brand, enhanced reach to customers through use of multiple
channels
• Technology/infrastructure
Leverage • Delivery channels
Competitive
Advantages • Economies of scale
• Regulatory compliance
Compliance
Session outline
Designing financial services with the client in mind
Market segmentation in product design and innovation
Time: 5 minutes
There exists significant opportunities for product level innovation as the existing products
Opportunities for are not sufficient, hence clients are forced to take up semi formal and informal products
innovation as formal financial products do not meet their needs adequately
Leverage existing Financial institutions can benefit from leveraging existing infrastructure and ecosystem
infrastructure and
ecosystem players players to deliver new products and services to clients
Financial institutions may use existing digital data trails to enrich their assessment of
Existing digital data client needs, profiles and segments to innovate products and services
trails
Clients seek to derive additional value from their financial service providers, and in many
Need for value add cases are willing to pay. This brings opportunities to enhance clients’ capabilities as a a
way of innovative services bundled with the products offered
Digital clubbed with an analysis of behavioural patterns may lead to hyper customization
Hyper customization of products and services on the go to meet the specific needs of clients
Attribute Features
Ubiquity Available to all in different locations
Simplicity Ease of use and interaction with the user interface
Security Must inspire confidence among clients and ensure they feel safe
Cost effective Must be competitively priced compared to alternatives
Immediacy Aspect of being real time/
Reliability Customers should be able to access services whenever required with the
platform being capable of delivering as expected
Scalability Innovations must be built to allow for scale up if it is to be sustainable
Address pain points rather than Through market research and customer surveys,
digitizing use cases establish pain points that digitisation can address for a
customer pool
Data
Insights
Customer Analytics
Embrace customer Centricity, Data Analytics
and Deliver on a Digital Platform
Digital
Concept and
Research issue Market research prototype development Pilot test Roll out
Stage 1: Identifying Stage 2: Stage 3: Refining Stage 4: Pilot Step 5: Roll out
a research issue Understanding concept into the test and and operational
clients’ needs prototype. Testing the refinements to integration
product prototype products
Time: 5 minutes
Post market research, the below marketing mix is useful in designing appropriate products:
People
Product How does the financial institution
The features of the loans or accounts
1. 5. provides service? Who is responsible?
How do they treat customers?
Place
2. 6. Processes
Where and how you access/get the
How long it takes to access services?
services – convenience. Does MFB/Bank
How easy or complicated the
ease access through alternative channel?
processes are?
Promotion
Physical Evidence
The way financial institution 7.
communicates its products/ services –
3. The appearance of product documents
and locations where services are
Does it appeal to target segment?
received
Positioning
Price Their values/what they believe in;
The cost of services.
4. 8.
their image. What is the client’s
perception of the institution?
The graph below shows how Safaricom developed products for customers in Kenyan Markets
REVENUE
M-Shwari
Lipa na Mpesa
TIME
Time: 10 minutes
Session outline
Why process re-engineering?
Digitizing and automating front-end processes
Time: 5 minutes
Business Process Re-engineering (BPR) aims at cutting down enterprise costs and process redundancies
on a much broader scale. Reengineering attempts to restructure or wipe out redundancies, and remodel
processes differently
Front- and back-end processes such as customer registrations, loan applications, updates, data
collection/analysis, marketing and communication processes can be digitized
Process re-engineering serves as an entry point for FIs to provide digital services and products
Process re-engineering is not synonymous to digitization. However, some form of digitization goes a long
way to re-engineering processes
Time: 5 minutes
❑ Productivity up by 51% ❑ Turn Around Time (TAT) is a ❑ Origination cost per customer ❑ Portfolio quality increases
❑ Error reduction less by 70% key differentiator in goes down by 60% considerably
❑ Data entry time less by 50% customer’s minds ❑ Improved productivity at all ❑ Chances of selection of bad
❑ Processes 1.5x as many ❑ TAT down by 75% as a result levels clients reduces
loans ❑ Real-time data availability ❑ Elimination of costs such as significantly
❑ Enables low-caliber field and fewer iterations courier and data entry vendor
staff to perform high- ❑ Borrower gets loan on time ❑ Profitability, scope of delivery
quality work of loans at lower interest rate
Group 1 and 2, Case study 1: Sinapi Aba’s Transformation to a Deposit taking savings and loans company
Group 3 and 4, Case Study 2: Buusaa Gonofaa’s Transition from Credit only MFI
Time: 10 minutes
Process automation firms Automate processes and work flows. E.g. Artoo
Client
Marketing and Appraisal and Controls and risk
relationship Transactions
on-boarding analysis management
management
Client Appraisal
Work flow Controls and risk
relationship and Transactions
management management
management analysis
• Lead management • Documentation • Credit scoring • Loan disbursement • Risk mapping –
Back-end • Segmentation and filing • Credit bureau • Loan repayment concentration,
processes • Targeted customer • Responsibility checks • Bill payment portfolio, single
service sharing • Financial analysis • Savings in/out borrower
• Automates offers • E-approvals • Loan utilization • Facility renewals • Control breach
for valuable • Schedules and checks alerts
customers reminders
Credit Officer
GROUP RECOGNITION
Visits trained group with a Conducts the group recognition Advises Credit Officer if the
tablet test group can be offered a loan
Manager
Group can be recognized or may be asked to go for another round of training
Paper less system, print out can be taken at any stage for required signatures
87 Source: Artoo Analysis All rights reserved. This document is proprietary and confidential.
Impact of digitization on group lending
Positives Negatives
Reduction of transaction cost and improved Field officers (FOs) feel they are losing touch with members
convenience- because of the lack of face-to-face contact
Gathering client data improves It has become harder to solicit character references from
Better avenues of assessing a client’s credit group members
worthiness
Distribution of account statements from house-to-house is
Digitization provides solutions around time-consuming for FOs, in lieu of writing in passbooks at
accounting, human errors and insecurity of
meetings
carrying cash to the financial institutions
Use of multi-authentication of mobile group The opportunity to inform members of changes in policy or
savings solutions minimizes the possibility of new services has reduced as group members do not meet
some personnel taking fraudulent advantage
of their positional powers that is common in Attendance or non attendance of group meetings often
manual paper based transactions serve as an early warning sign of a member intending to
leave without settling their obligations – this channel of
Introduction of digital loan disbursement and
collection of instalments from the group communication is gone
members which is convenient to group Meetings enabled a new FO to meet all group members at
members
once, but now new FOs need individual introductions
instead
88 All rights reserved. This document is proprietary and confidential.
Use of digital field application for individual loan – Case from India
Fills application
with a tablet KYC documents bureau reports
Integrated with credit bureau to automate credit bureau reports in the application
Credit Officer
PRE-SCREENING
Informs client
Views application Approves or
APPROVAL
Paper less system, print out can be taken at any stage for required signatures
89 Source: Artoo Analysis All rights reserved. This document is proprietary and confidential.
Session 6: Delivery channel and distribution
design
Digital transformation for financial institutions
June 2019
Session objectives and outline
Session objectives
Understand the delivery channels and distribution strategic choices
Make sound decision on the way forward on delivery and distribution design
Session outline
Channel evolution
Distribution strategy design
Credit centers
Hub and spoke Unstaffed center
Large branches in high traffic
areas surrounded by small
Channels connected via video to
remote office for credit
automated branches applications
Internet/portal Banking
Video conferencing Connecting customers to
With expert specialist for financial institution through
advice and consultation secure web portals
Omni-
Single Channel Multi- Channel Cross -Channel
Channel
• Customer experiences • Customer sees multiple • Customer sees unified brand • Customer has a holistic
single touch point touch points acting through many touch points brand experience
• FI has single touch points independently • FI has a single view of customer • FI leverages unified view of
• Channel operations exist in but operate in functional silos customer
technical and functional
silos
Evolution
A branch is the typical traditional channel. With the advancement in technology comes other distribution
channels. Some ride on delivery channels like USSD, SMS, App and portal
Other distribution channels include ATMs, internet banking, agency banking, extension/field services,
mobile banking and more recently electronic or mobile wallets
User preference
Customers are continually using more that one retail channel
Building an
Reduce cost of
effective
Cost reaching to Time consuming
distribution
customers
channel is time
consuming
What are the advantages and disadvantages of each of the distribution options shown below?
ATM/Web Mobile
Branch Field staff Agent device
interface device/Apps
Time: 10 minutes
1-5
Transactions
Regular User
Client habitually uses
the digital banking
service
Trial
Client tries the
service but
infrequently
Knowledge
Customer
knows the
Understanding steps to
Customer understands transact
how digital finance
Awareness: can be of use to them Regular Users
Client has heard
about digital finance 6 – 10 > 15
Unaware: transactions
10 – 15 transactions
transactions
and knows what it
Client has never
can offer
heard of digital
finance
99 All rights reserved. This document is proprietary and confidential.
Onboarding customers – Especially oral customers (1)
Create image
alternatives for Support 3+ digit
address book numerals with cash
entries equivalents that
users can easily
count
NFC application
Complex channels
Internet banking interface
In app
marketing Web portal
interface
Mobile app interface
USSD menus
Basic channels
IVR application
Customer authentication
Complex channels
cycle for customers
complex channels
In app
marketing Web portal Internet banking interface
interface
Mobile app interface
IVR application
Customer authentication
Complex channels
Email newsletters
CRM
In-app mobile
marketing Personalized content marketing
Social media
marketing Online reviews ATM ads
Phone calls
Sales meeting
Blogs
SMS blast SMS blast
TV and newspaper
Discuss lessons from success and failures in regards to risks for digital transformation
Session outline
Why manage risks?
Emerging risks from digital transformation
Risk management framework and approaches for digital transformation of financial institutions
Effective approaches to managing risks for financial institutions
Time: 5 minutes
108 All rights reserved. This document is proprietary and confidential.
Why manage risk?
Enhance strategic decision making Lowers future cost of mitigation Understand investment cost
Strategic risk Technology risk Partnership risk Operational risk Financial risk
Regulatory/
Credit decisioning Alternative data
legal risk Political risk Reputational risk
risk risk
Customers Partners
Fraud Risk
Operational Risk, Impersonation, Identity theft, counterfeit, Extortion
Technology Risk
Operational risk, Transaction risk, IT risk, channel failure, user interface Reputation
“Risks” are by-
products of all
Agent Network Risk the other risks
Operational, Liquidity, Theft, Unavailability, Financial losses
Regulatory Risk
Compliance, legal
In plenary:
What risks do you think your organisation is more likely to run into when going digital and why?
Time: 5 minutes
Ranking or
Recognition of Responding to Resourcing
evaluation of
risks significant risks controls
risks
Session outline
Project and change management
Internal organization and innovation to implement digital transformation
Time: 10 minutes
Change has to be managed in a structured and controlled manner for the benefits to be
realized
Prepare Implement
Time: 10 minutes
Project and change to focus on improved business functionality and optimize business processes
Partner selection based on capacities, skills and experience of change management
Flexibility in approach
Engaging the key stakeholders such as the board and management, policy makers, service providers such
as technology partners, channel partners, and all staff
Defining the end vision collaboratively to bring all stakeholders onboard
Communicate the benefits of digital transformation and its impact to all stakeholders
Addressing key issues such as
• Attaining organizational goals
• Optimizing cost of utilizing technology
• Shift in operations
• Handling anticipated risks
• Managing competition reaction –next steps post digitization
• Monitoring and evaluating progress
• Reporting
Channels Manager • Provide technical support on channel related issues in line with the financial institution’s strategy
Finance Manager • Reviews financial reports to evaluate the viability of the digitization
Marketing Manager • Prepares marketing plan for digitization process and resulting products
HR/Training • Hiring and training staff in line with the digitization project
Operations
• Policies and procedures documentation
Management
Audit and Internal
• Monitoring the digitization process for risks and relevant mitigation strategy
control
Norming stage
Adaptation and integration stage