What should Startups Learn from Africa Bank Failures

By Mbwana Alliy  |  April 11, 2016

 

End of last week we saw Chase Bank in Kenya, taken into receivership by the Central Bank. There is plenty of good reading from both a local and international perspective and I am sure we will learn more in the coming weeks and months- its an important story to follow especially if you are operating in the “financial services” or “fintech” sector in East Africa and as we know, most choose Kenya as a testing ground particularly building ontop of M-PESA for everything from payments, lending to remittance. But in spite of the mobile money success we should be reminded that a stable banking sector in a country is important- even M-PESA itself relies on banks to function.

I wouldn’t be writing this post if it was just any bank, after all there have been 3 bank failures in the last year in Kenya and we should expect more or consolidation as I believe there are too many in Kenya. You might even interpret Barclays’ broader exit out of Africa as a recognition they couldn’t focus on the continent given their global scope and intense the competition despite their strong brand. There are plenty of strong banks in Kenya, Equity Bank has proven itself to be solid as well as innovative. What makes Chase Bank interesting is that it was a preferred banking partner of many fintech startups operating in Kenya– they had build some good API integration with Safaricom’s M-PESA for instance that I know remittance companies and lending companies were using to get broader distribution within Kenya. In asking Kenyan startups in our portfolio over the weekend, at least one startup had their operating account with Chase Bank affected and one has had a client’s account with Chase and owes about 300,000/- to the startup. So the impact is both revenue/payments and assets- many Kenyans and businesses will know someone indirectly affected.

Should Bank stability affect startups ability to innovate in Kenya?

Some say the need for stability is an excuse for banks to not innovate and offer poor customer service whilst others like myself would say that stability in banking services is important for startups. This is especially true when in the last year all sorts of banks from Barclays, Chase to Interswitch have been setting up “fintech” hubs, funds or both to position themselves in the global fintech scene. Africa focused fintech startups need the banks as partners to reach scale or just comply with regulations across the continent.

With over 40 banks in Kenya, I believe we might have more bank consolidation and even failures to come – its important not to gamble your startup’s chances of success by not understanding the implications of working with any bank. I am particularly worried of startups that spend endless amounts of time in business development with banks who don’t really have the DNA, never mind systems and culture to innovate or move quickly and waste startups valuable time.

Bank Account for Asset stability and Operating to Innovate

  • The biggest advice I have for African startups is to assess the risks of using a bank like any other partner or investor. Work with a top tier bank if you need assets such as investors funds or hard earnt revenue protected that have strict controls- and sometimes this might not even be in your home country- for example a bank account in Zimbabwe is probably more risk than one in Kenya which is in turn more risk than one in Mauritius and then again one in USA (Govt offers protection with FDIC). I have nothing against Zimbabwe or Kenya, there are good startups operating there- they have more of a chance if their funds are in stable bank accounts just like good roads and electricity are important for operating a business (it can be viewed as infrastructure- more on this in a future post when we talk about our partnership with Stripe)
  • You can then open an account for operating if your tier one bank is not giving you the services you need (good forex, bank fees, online payments, APIs etc…) to operate or can move faster but make periodic transfers back to the safer bank (net of paying any local taxes if collecting revenue locally and moving money overseas). This might be a bank such as Chase that is more mid tier and had a reputation of working with startups on innovative solutions- but if it does run into trouble its not your main assets.

Do you have a CFO (seriously)?

The above advise is very basic and for some companies things might get a lot more complicated- in fact once you are a Series A funded startup and maybe operating in more than one country you may end up having multiple entities and accounts and the next best advise is to make sure you hire a competent CFO or outsourced CFO that can handle your business. This should also be a good time to upgrade other important and related aspects of your business- your Governance structure and protocols which will include financial. Doing so before things go wrong will not only protect you but enhance your startups reputation with investors for further funding- but more importantly, protect assets in an often risky African environment.

  • Mwesigwa Daniel

    You raise a very strong argument and make a valid call for focus on CFOs and actionable ways to mitigate risk. Unfortunately, looks like we don’t have the cases of “too big to fail” banks that governments would do everything possible to save. Like the big 6 American banks that were bailed out during the credit crunch. Nonetheless, it’s rare to find local banks that are pro-innovation, and not just veiled to look modern. I mean having open and accessible APIs and integrating several financial systems. This raises a question. Would the option of having virtual bank accounts in “stable” banks in Europe and America offer fall-back solutions for startups? Since, it’s been argued that fintech needs to work hand in hand with traditional banks for scale.

    My argument is if fintech startups’ liquid assets are safe somewhere (e.g Capital One Bank), then with the help of automated systems, services would be offered to any part of the world. Perhaps I am being too lofty.