Digital banking transformation is no longer an attractive option for banks but crucial for survival

Kuutti Kilpeläinen Senior Investment Manager, Head of Digital Infrastructure and Solutions portfolio kuutti.kilpelainen@finnfund.fi

Financial inclusion aims individuals and businesses to have access to useful and affordable financial products and services that meet their needs. As World Bank highlights, a transaction account is a first step towards broader financial inclusion. Once people have bank accounts, they are more likely to use other financial services, such as credit and insurance. Account holders are more likely to start and expand businesses, manage risk, invest in education or health and weather financial shocks, which can improve the overall quality of their lives.

Digital solutions fill in the gaps

At Finnfund, we have a long history of promoting financial inclusion through our investments in microfinance institutions around the world. Following the increasing adoption of mobile and internet services in emerging and frontier markets, we are seeing digital solutions becoming crucial in filling the gaps in financial inclusion by providing access where it is most needed.

This is also one of the reasons why digital infrastructure and solutions was recently chosen as one of the key sectors that we put special emphasis on: We see digital innovations as a tool needed in order to reach many of the Sustainable Development Goals. Digital banking is a fine example where technology plays a significant role in creating an impact. As an investor, we always assess how future-proof the companies we invest in are and I for one can’t really see a future for a financial institution that doesn’t focus on implementing digital solutions at the core of its business.

According to McKinsey , the number of bank account holders in Africa has increased from 170 million in 2012 to nearly 300 million in 2017. It is forecast to reach 450 million – less than half of the population – by 2022. The positive development is of course good news, but a large part of the population still do not have access to traditional banks and the number of bank branches has not materially changed. Mobile and digital banking are seen as the solution to these problems as they reach more potential customers with lower cost.

The pandemic created a digital boost but we need to keep the speed up

COVID-19 crisis have increased the adoption of digital channels and many governments, especially in emerging markets, have modernized their policy frameworks to support and accelerate the shift towards digital and mobile banking. In many markets, transaction limits have been increased to allow more funds to flow through mobile money and KYC processes have been streamlined. While we have witnessed change in regulation, deregulation is still needed especially in telecoms markets in order to bring handsets and services within the economic reach of more people.

The rapid change in regulation and adoption of digital financial services has created demand for new kind of services and breed disrupting fintech companies challenging the traditional banks. Banks have recognized the revolution that is underway and are adapting the way that customers access their services. Digital banking has transformed from “nice to have” to “must have” in extremely short period of time.

There is ample evidence of the benefits of digital financial services, including greater financial inclusion and stronger GDP growth. We at Finnfund are constantly looking to invest in prominent companies that have the technological capabilities and solutions to bring more people in reach of financial services and improve the quality of lives.

Kuutti Kilpeläinen
Investment Manager, Finnfund